How to Measure Franchise Success With Your Income StatementWhen you master the income statement, you'll be well on your way to running a profitable business.
The following excerpt is from franchise expert Mark Siebert's bookThe Multiplier Model.Buy it now.
When I hold exploratory meetings with clients, I typically ask about various items on theprofit and loss(P&L) — also called an income statement — without actually referring to the document itself. I'll usually ask about the cost of goods sold, their labor,or some other charge.
Here's how the responses candrastically differ:
- "Type A" business owners usually give me a very specific number — often down to the decimal point.
- "Type B" owners usually give me a range — sometimes narrow and sometimes not.
- "Type C" owners may simply give me a shrug.
So where do you fall on the list?
The components of your income statement
The P&L is essentially broken into three component parts:
- Revenue (sales)
- Expenses (costs)
- Profits or losses (In other words: income, which equals revenue minus expenses.)
Essentially, a P&L can help you understandseveral important principlesthat you should grasp from the start of opening your business.
Understanding your potential revenue
On the revenue side, you need to understand how you willgenerate sales. You should ask yourself some basic,yet important, questions.
- Do you expect repeat customers?
- Will you sell add-ons?
- Will there be a membership component?
- Will your revenue grow over time?
- Will you run into capacity issues?
Related:The 9 Provisions Every Franchise Agreement Needs to Have — and What They Mean
Diving into your expenses
On theexpenses side, it's crucial tounderstand the relationshipbetween your fixed expenses and your variable expenses.
- Fixed expensesrepresent thecosts you'll have every month, regardless of whether you make a sale. Your rent and the salaries you pay staff are good examples of fixed expenses.
- Variable expensesrepresent the costs you only incurwith a sale. By subtracting your variable expenses from your selling price, you get your contribution per sale.
Start making calculations
Once you grasp fixed and variable expenses, you can calculate a hypotheticalbreak-even pointfor your business bymaking certain assumptionsabout pricing and variable costs.
Simply divide your fixed expenses by your contribution per sale, and you can get a better idea of how many sales you'll need to make to break even.
If you want to achieve a certainlevel of profitability, add that profit to your fixed expenses and recalculate. Then you'll know what level of sales you'll need to achieve to get there.
Related:These Are the Top 200 Global Franchise Brands in 2023
The complexity behind income statements
The vast majority of businesses don't selljust one productor service. Plus, each product or service will have its own associated price. And the price for each product or service will not have a consistent margin either.
For example, take a fast-food restaurant, where you can buy a burger for $1 and a large soft drink for $1.50. You can easily see that the cost of different products is not consistent across every product sold. So the "product" you sell and the "price" of that product will actually depend onyour product mix, and perhaps on value pricing or discounting as well.
Then there arelabor costs. In some businesses, where labor is hired on an as-needed basis to complete a job, production labor is all a variable cost. In other businesses, somelabor functions are overheadand some may be partially overhead and partially variable.
Again, using a food-service operation as an example, during the slowest times of each shift, you can never havefewer than one employeein an open restaurant. But you will need to increase your staffing to meetyour service requirementsat different parts of the day, on different days of the week, or even depending on different weather patterns. So while you will treat restaurant laboras a variable cost, at least some portion of it is essentially "fixed."
一旦你开始考虑一些细节— like credit card processing fees or shipping and handling costs — a "simple" income statement becomes much more complex.
Related:Is Franchising Right For You? Ask Yourself These 9 Questions to Find Out.
Take your time
Thismay sound incredibly dauntingif you haven't done it before — but once you get used to it, the process becomes second nature. And once that comfort sets in, you'll be well on your way to running aprofitable businessand making day-to-day decisions to improve or solidify your bottom line.
Get started withThe Multiplier Model
Going from small business to successful startup to scalable growth takes more than just good luck. It takes a system. Over the last 34 years, franchising consultant and growth expert Mark Siebert has been sought out by more than 70,000 executives looking to expand their companies. Out of those 70,000, only 5,000 had the right systems in place to go from successful to scalable. InThe Multiplier Model, Siebert discusses the factors that determine if an entrepreneur is ready to scale their venture — and the best ways to get started.Read more.
