Is Your Business Succeeding? These Are the Metrics to Watch
Apr 17, 2018
By Brian Judge, Smoothie King Chief Financial Officer
For franchisees without strong finance backgrounds, it can be tough to make heads or tails of detailed profit and loss (P&L) statements. These statements, however, are a valuable tool for evaluating how your business is performing, comparing it to similar businesses and determining what steps could make your location more successful.
I know that for many people, staring at a P&L statement is about as exciting as watching paint dry. Many franchisees are often big-picture thinkers with great business instincts who aren’t as interested in the minutiae. But, they won’t miss an opportunity to make their businesses more profitable, and that’s exactly what smart accounting can help you do.
How Can Franchisors Help?
That got us wondering: Why don’t franchisors do more to help franchisees make the most of their P&L statements? After all, more successful franchises are a win-win for owners and corporate. This question drove us to offer more support to franchisees who want to dive deeper into their business metrics – a strategic goal for any business owner.
We started collecting high-level, 15-line P&Ls from franchisees so that, together, we could discuss and analyze the different components. If franchisees needed assistance preparing the statement, we helped them get on track. Once we had a collection of P&Ls from different types of locations in different markets, we made them anonymous and let franchisees look at their P&Ls side by side with comparable stores.
What we learned is that open communication about business metrics between franchisors and franchisees is essential to help increase franchisee profitability and build a healthy system.
When Should I Start Thinking About Metrics?
Ideally, franchisees should be thinking about profits and losses before they set foot in their stores. For example, many owners don’t make projections for what their costs and sales will be as they navigate the site selection process. While the franchisor generally helps with site selection, it’s ultimately the franchisee’s name on the lease, so it’s crucial to weigh the cost of rent and utilities given projected sales.
Smoothie King franchisees don’t have to fend for themselves here. Our home-office team helps owners ask the right questions as part of general site selection guidance – How many smoothies would I need to sell each month to afford this rent? What’s my breakeven point? Getting an early start on projected metrics helps set owners up for success.
What Metrics Should I Focus On?
Focus first on your business’s EBITDA, or earnings before interest, taxes, depreciation and amortization. This metric removes the effect of financing and accounting decisions, which lets you easily compare your EBITDA to that of another store. A comparable store will have a similar market and type of location – in-line, drive-thru, et cetera.
Once you’ve compared your EBITDA, start looking at ratios like cost of labor and cost of goods as percentages of sales. If a comparable location has a ratio a few percentage points lower than yours, that’s an opportunity to replicate their model and improve your profitability.
Lastly, look at year-to-year same-store sales numbers. This metric helps measure the efficacy of unit-level marketing and sales efforts. In other words, it tells you if you’re hustling hard enough. If your store’s year-to-year sales increase isn’t keeping pace with comparable stores, it’s time to take a hard look and figure out why.
If you’re struggling to put together a P&L statement and find these metrics, consider hiring an accountant. This investment is hugely helpful when you get the numbers you need to help start maximizing profitability.
All in all, here’s my advice: Your profits and losses exist whether or not you pay attention to them, so work to take the opportunity to leverage them and make your business healthier. Smoothie King facilitates this by encouraging open communication about finance and accounting and offering support to franchisees.
Metrics might not be glamorous, but they’re key to taking your business to the next level.