Budgeting for Retail Franchises

In the current economic climate, it’s important to focus on business planning and financial budgeting to help ensure that retailers have the net worth and liquidity to survive. John Roberts, CounterBooks MD explains how to stay ahead of the game


For a retail franchise, where the day-to-day financial decisions are taken by the franchisee, it is vital for the franchisor and franchisee to agree on a business plan annually and to draw up a budget arising out of the plan. As an independent businessman the franchisee can subsequently decide to run the business along different lines but with a plan agreed up front. The franchisor can measure the impact of those decisions and the risks they might have for the brand.

The business plan will outline:

  • Changes that you want to happen in the year
  • Changes to your market, customers and competition
  • People issues
  • Objectives and goals for the year
  • Financial outcome from the plan – the budget.

Any retail franchise that doesn’t have a business plan is planning to fail. So why is it so important? Business plans help franchise owners to concentrate their resources on improving revenue, minimising costs, and increasing ROI while at the same time ensuring a satisfactory level of liquidity to allow the business to pay its bills on time.

Key elements of the budget:

Operating Profit

  • Category sales volumes
  • Category gross margins
  • Labour costs
  • Franchise costs
  • Other fixed costs / overheads
  • Seasonality

Cash flow projection

  • Stock levels
  • Card reimbursements
  • Vat and other tax payments
  • Other creditor terms
  • Capital expenditure
  • Retailer drawings
  • Finance facilities
  • Seasonality

Actual results in both profit and cash terms should be compared to budget throughout the year. By these means the franchise owner and franchisor should be able to capitalise on favourable trends and take action to address problem areas.

Budgeting Do’s

  • Look at historical sales trends. POS systems should provide the seasonal data. Remember, high levels of stock do not necessarily result in higher profits and may result in a cash shortage.
  • Use the budget to incorporate incentives i.e. sales promotions. For example Spar launched a ‘Fresh for Less’ promotional offer in November to help boost sales in fresh foods. Factor in the increased sales but also the impact on margin.
  • Review your budget and plan regularly. The key is being flexible, checking actual expenditure and income in comparison to budget and analyse any trends. If a major competitor opens an outlet next door it could have severe implications.

Why it’s important for franchisors

Insight & Predictability

An MIS system that collects financial information in a standard format from all franchise owners will be invaluable to the franchisor in determining whether actual results are coming out in accordance with plan or whether remedial action needs to be taken.

Benchmarking

Compare actual performance to budget of franchise owners within the network to identify good / poor performance. Obtain a consolidated view of the entire network profitability and benchmark against the competition.

Improved risk management

Reports for the franchisor that show the net worth and liquidity of each franchisee are vital to assess the stores at risk.

CounterBooks, a leading online retail accounting system, integrates with many point of sale and back office systems, reports on actual against budget and gives retail franchisors an up to date overview of the financial status of their whole network thereby improving performance and managing risk.

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