How To Develop A Budget For Your Franchise
If this is your first time purchasing a franchise or you are not exactly financially savvy, constructing a budget for your franchise in all likelihood sounds a little daunting. But, if you want to run a profitable franchise, it is one of the most important tasks of your planning process that you need to do on an ongoing basis. Managing your finances is imperative and a budget helps you comprehend, exactly how much you have the funds for.
Learning how to construct a budget for your franchise is one of the essentials for any new franchisee to have to deal with. An excellent franchise budget and monitoring the actual performance against the budget is one of the foundations of managing your finances.
Having at least an idea of what it will cost you to not only launch your franchise but also run your franchise every month will help you make sure that you start out with adequate funds in order to be successful and not to fall into a pit of debt. If you decide to get a franchise loan or you decide to look for investors, you can be assured that they will want to see a concise budget for your franchise.
You do not need to feel any sort of pressure. We get that numbers aren’t everyone’s forte, however, a budget does not need to be complicated or confusing to be helpful.
Here are our suggestions for developing a franchise budget.
When To Set Your Budget
It is a good idea to develop a budget each year. Many franchisees like to set their budget at the beginning of the financial year or the calendar year. Your annual budget can be divided up into 12 months or into quarters.
Lots of franchisees also develop a month-to-month budget, especially if there are a lot of expenses each month that need to be closely monitored. This will also help to identify trends in your business.
Projecting Income and Profits For Your Franchise
When projecting potential income, it is important to take holidays and seasonality trends into account as this may impact your income for the period. You need to monitor your cost of sales and gross profit margins. By adding your planned profit to the budget, you can plan ahead in terms of estimated
When considering purchasing a franchise, one of your first questions will more than likely be “How much money can I make?” Although it is in all likelihood the biggest concern for potential franchisees, it’s also one of the hardest to predict due to the fact that there are so many variables involved. Franchisors can determine what your franchise will cost you, generally with ease, however it is difficult to determine your exact income regardless of how great a franchisor’s success is. The franchisor is required by law to give you a disclosure document with financial projections (income and expenditure) levels for at least the first year of trade and they will be able to assist you to adapt the budget/projection for your area and based on expenditure variables that influence the profits.
When trading for at least a year, you as the franchisee will notice certain trade patterns and trend and change in sales levels throughout the year. This will assist you in planning for the following year in consultation with your franchisor or field service consultant.
You need to maintain a consistent cost of sales and gross profit margin; the franchisor will be able to give you the ideal benchmark. If you deviate from the benchmark investigation will need to be done to determine what has impacted the results and how to rectify the situation.
For example, in a fast-food franchise the cost of sales is 40% and the gross profit margin 40%, see the example below
Minus Cost of sales (40%) R40
Equals Gross profit (60%) R60
The average gross profit calculated above do not equal profit. After you have worked out your expenses in your budget and deduct those costs from your average gross profit you can get an idea of what your net profit/earnings could be.
You’d need to consider that not all franchises would earn the same, a few things would affect your potential success like the rent in different locations that a franchisee would need to pay which would be negotiated with a landlord as well as the franchise’s presence is in that particular area. It also relies on the skills of the franchisee and how well running the franchise is executed.
Ongoing Business Expenses You Can Expect
When you are a franchisee, you will have a great number of ongoing expenses. You’re not likely to know what they all are before you are operating the business but the franchise disclosure document will guide you and additional research will be valuable e.g. online template or having discussions with existing franchisees and the franchisor. Bear in mind your expenses will incur an annual increase and you can budget for this in line with inflation (7%)
Here is a general list of ongoing expenses to give you an idea on what to include in your budget:
Most franchise businesses require stock, and it will be one of your biggest expenses. It’s advisable to order stock in accordance with the franchisor guidelines and the market need in your area. Stock is an interesting item, even though you are paying for stock this does not go into your ongoing expenses on the budget template. Any stock purchases are a saleable asset and are allocated in your asset and liability statement. However, it does impact your cost of sales.
Below is an example of how you can calculate your cost of sales for the first month:
Opening stock: R0
Plus stock purchased: R100
Minus closing stock: R60
Equals Cost of Sales: R40
To get the cost of sales percentage, see the example below:
Cost of Sales: R40
Divided by Sales: R100
Multiplied by 100 to get the percentage (%): 40%
It will be the value of the cost consumed into the sales
By doing these calculations it will also help you with your stocktake management and to ensure your margins remain consistent.
Every business requires staff to run effectively, and the staff need to be compensated fairly and in line with industry guidelines. The franchisor can provide guidance on salaries for various positions in the franchise. Obviously, the more employees, the higher the payroll. You are not guaranteed to make a personal income in the first few months of launching your franchise, so when you create your budget for the first 12 months of operation, be realistic in your expectations and what the business can afford, rule of thumb is that a franchisee needs to draw a market related salary for a management position.
Paying yourself is just as important as being able to pay your franchise debts, as you need to also pay expenses in your personal capacity. You may begin by paying yourself much less if you have cash in savings to assist with your private expenses, and then increase your earnings as the franchise can afford it. Having a budget for your franchise offers you a clear image of what it will take to launch and develop the franchise successfully.
3. Marketing and Advertising
National marketing generally comes at the expense of a percentage of your monthly turnover. Local marketing is at your own extra expense and the franchisor will provide proven marketing strategies and templates to use and, in most cases, the marketing and advertising material is readily available. Ask the franchisor for guidance on local marketing campaigns for your area
4. Management Service or Royalty Fees
The ongoing fee in franchising after the franchise fee is the royalty fee payable to the franchisor throughout the term of the agreement. It is generally a percentage of your sales, and is for the use of the franchisor’s intellectual property and ongoing support from the field service consultant.
If your franchise needs premises to operate from, you will incur monthly rental fees along with utilities like electricity and water.
If you are like most franchisees, you got a franchise loan for a portion of your upfront costs (usually 50%) when you purchased your franchise. That means you will have monthly loan repayment to add to your expenses. Luckily, this payment is not going to last forever so when you have settled this expense then you have some extra flexible income.
7. Other Expenses Could Include:
- Accounting fees
- Bank charges
- General expenditure
- Legal fees
- Motor Vehicle expenses
- Repairs and maintenance
- Training & development
- Telephone & communications
And while it is true that there are lots of expenses to consider when operating a business/franchise, as long as you make an informed and smart choice on the franchise to invest your money in, they’ll be significantly less than your sales numbers. And that is the goal. Bear in mind that you are in this for the long run and the business should be sustainable and viable for years to come. The return on investment should be carefully considered when developing your budget.