How to Prosper in 2018
If you haven’t met your profit target for 2017 – there are ways to make up for it in 2018.
For franchisees, it is often easier to make more profit by controlling costs, than by selling more. If you operate on a margin of, say, 10%, you have to sell ten times the value of any wasted expenditure. It’s no surprise some of the world’s richest people have taken this principle to heart. Warren Buffet, for instance, lives in the same house he bought in 1958, which only cost him $31,500 (about R416 000). Most successful companies do the same, embracing frugal habits, and placing almost the same amount of focus on reducing their costs as they do on driving sales.
There are several key areas that franchisees need to concentrate on when trying to find ways to reduce costs and ensure smooth-running operations. However, many of these are time-consuming and require attention to detail – hence they are all too often put on the back-burner. This is not wise, as neglecting such areas could have far-reaching negative consequences for the operation.
Franchise owners should adopt five simple rules to boost their business profitability:
Compile a business plan
Have a carefully structured business plan. It is an indispensable business management tool for checking if the correct procedures and processes are being followed when it comes to expenditure, and whether the business is meeting its goals and sales targets; and whether the service or product is performing according to annual forecasts. This continuous process is aimed at interrogating all aspects of the business and achieving the best possible outcome.
Control your costs
Conducting a budgeting process allows franchisees to identify when costs are higher than expected, and then to do something about it. One important cost saving strategy is to get several quotes and to shop around. Renegotiate contracts annually, because even though you may believe you have the best value-for-money supplier, they may have come in cheap to get your business, with the idea of thereafter pushing up the price automatically by, say, 10% a year, unless watched. Renewal discussions done in a disciplined manner typically results in a reduction of costs.
Constantly monitor profits
As a small business owner, it is easy to let management of accounts slip. If you are a contract-work franchise, and don’t have a costing structure in place, you may under-quote clients or invoice the incorrect amount. When you short-change your business, profit margins will sadly diminish. The franchisee has to take a hands-on role in the business and keep track of costs and profits. Even if accounting is alien to you, it is the heart of your business: get on top of the management accounting data – balance sheet, cashflow, and income statement. You need to know how to interpret the financial data to establish whether you are making the correct profit or not.
Look at the structure of your business
Many small business owners are paying about 18 percentage points more income tax than they need to, according to tax experts. This stems from ignorance of tax law. For instance, the average owner is not aware that his franchise business may qualify for the small business corporation tax rate – and that it is far less than the corporate tax rate of 28%. To qualify for this lower rate of tax:
- the company director has to be the sole director of that business only and no other
- the firm’s annual turnover must be less than R20 million, and
- the business cannot have investments anywhere of more than 20% derived from gross income or capital gains.
Medium to large corporates can afford to have tax and accounting specialists to attend to such matters, but in smaller businesses such as franchises the owner usually single-handedly attends to all matters on a do-it-yourself basis. Tax is something they would rather avoid even though it is often one of the biggest overheads in a business. There are aggressive tax practitioners who claim to save clients millions – perfectly legally.
Watch your administration
Administration is a matter of discipline rather than rocket science. Businesses seldom fail to do the front office activities, but rather what happens in the backroom where their finance and administration systems are not at the same level of professionalism as their marketing and operations. Most businesses fail because of poor cash flow. It is worth considering outsourcing this activity to professionals which have the resources and systems to identify company wastage and cut costs, freeing up cash flow. Some franchisors go the extra mile and offer a benchmarking service, where key indicators are benchmarked against the group average, showing the franchisees where his/her business is not performing in line with the norm.