Filling the franchisee skills gap

Franchisor training will teach you everything you need to know to be a successful franchisee right? Not quite. Business management skills are a key driver of franchisee success, yet many franchisees lack skills in this area, and it’s an area not often addressed in franchisor training. Why are business management skills essential for franchisees? Research reveals a significant number of franchisees have no previous business experience before entering franchising. This is why the support provided by the franchisor is often one of the key selling points of buying into a franchise, instead of starting an independent small business. Yet, what many franchisees don’t realise is there is often a gap between the training provided by the franchisor and the business management skills required by a franchisee to be successful. Most franchisor training focuses on the operational aspects of the franchise – how to use the computer systems, operate franchise equipment and the day-to-day running of the business – so the franchisee understands how to correctly follow the system. However, franchisees still require business management skills to be effective business owners. Elements such as how to prepare cash flow forecasts and budgets, marketing basics, managing and recruiting staff and identifying opportunities for growth are a few examples of areas that often don’t get covered in franchisor training. These are skills a large number of franchisees often lack, yet they are equally essential to franchisee success as following the operational side of the business. Here’s a look at two of these skills in more detail and why they are important: Franchisee break-even Franchisees need to be able to understand the break-even point for the business to be able to assess whether they have enough capital to cover business expenses until sales build up enough to cover operating expenses, and then start to exceed the operating costs of the business. Many franchisees have no idea what this figure is, which makes it impossible to plan around, or accurately assess your business performance. Franchisees should not only know what their break-even point is, but also an idea of when they are likely to reach this point. When calculating their break-even point franchisees need to take into consideration fixed and variable costs. Fixed costs are those that remain the same regardless of the actual activity of the business. Examples of fixed costs include rent, leasing and labour costs. Labour costs are based on what would be the minimal costs of staffing needed to run the business. Variable costs on the other hand are costs that are incurred when a sale is made, such as the costs of replacing the goods (or inventory) sold, or materials consumed to perform the services, depending on the type of franchise. Understanding the relationship between fixed and variable costs, price and the proportion of each sale that is actually profit (otherwise known as contribution margin) can help franchisees create and improve cash flow by ensuring the products and services are priced profitably. It also helps the franchisee to estimate the number of goods or services that need to be sold in order to break-even, and achieve their target level of profitability. Hiring and managing staff As a franchisee’s business grows they may need to hire or increase the number of staff they employ, depending on the nature of the business. A franchisee which employs staff generally has a greater capacity to expand their business into multiple outlets by leveraging off the expertise and skills of their staff. However, before embarking on the long, costly and time-consuming journey to employ staff, a franchisee should determine what costs will be involved in employing someone, and if the cost of the employee is outweighed by the increased productivity or revenue they are able to bring to the business. The net benefit to the business is calculated by totalling the estimated annual costs of the employee and comparing this against: • the increased gross profit to be delivered by the employee; or • the increased gross profit made available as a result of other staff working more effectively with the support of the employee; or • decreases in other costs to the business as a result of the employee’s appointment (such as the cost of outsourcing). These annual costs may include a variety of items including wages, superannuation, equipment, workers compensation insurance and payroll tax to name a few. Franchisees also need to be aware many categories of staff will have an applicable industry award which determines their rate of pay and other conditions of work. These awards are outlined on the Fair Work Australia website (www.fwa.gov.au) and provide franchisees with the information they must know to comply with their legal obligations as employers. Last year there were a number of reports of franchisees underpaying staff and penalties for non-compliance can be severe. Ignorance of the law is no protection and our research reveals a number of franchisors don’t provide this type of support so franchisees need to educate themselves in this area. Managing cash flow when employing staff A common mistake by franchisees when employing staff is a failure to allocate sufficient cash for employee tax and superannuation costs, as well as holiday and long-service entitlements. The longer the employee’s pay cycle, the more significant the cash flow implications can become too. For example, if the gross payment to all staff is $10,000 per week, then roughly 30 per cent of this (i.e. the prevailing tax rate for annual incomes above $34,000) will be withheld as Pay As You Go (PAYG) tax which the business must remit to the Australian Taxation Office (ATO) with each Business Activity Statement (BAS). Each week the business pays the net (i.e. after tax) wages to staff of $7,000 per week. If the PAYG tax is $3,000 per week (i.e. 30 per cent of $10,000) and the business lodges its BAS quarterly, then after 12 weeks the amount payable to the ATO will be $36,000 PLUS the balance of any excess of GST collected over GST paid for the period. Additionally, the business will incur a nine per cent superannuation levy for all staff who earn more than $400 per month, and assuming all staff exceed this threshold, this amounts to $900 per week or $10,800 for the quarter. If a franchisee has not made provision for these payments by setting aside the PAYG tax, GST and superannuation liability each pay period, the total of all three payable together can have dire effects on cash flow. Additionally, full time staff accrue holiday leave at the rate of four weeks per annum (unless specified otherwise by a relevant award) and therefore holiday pay is also due when staff take leave. The effect on cash flow can be fatal if these expenses are not allocated in advance. Filling the franchisee skills gap Many franchisees lack the skills and knowhow to effectively manage their business. With the few examples above it’s easy to see how quickly a franchisee could fall into trouble. To help address the franchisee business management skills shortfall, the Asia-Pacific Centre for Franchising Excellence is launching a short online course. The Franchise Business Management Essentials eClasses addresses these areas, as well as preparing budgets, managing growth and profitability, franchise conflict resolution and even maximising profit when exiting the business, and more. The six Franchise Business Management Essentials eClass modules are designed with a combination of video and written content, practical activities to help franchisees with their business planning and management, as well as short assessment quizzes to test understanding. Professor Lorelle Frazer is Director of Griffith University’s Asia-Pacific Centre for Franchising Excellence and was the first person in Australia to achieve a PhD in franchising. She’s been researching franchising for more than 15 years and her research is regularly used to inform sector policy and education. The Asia-Pacific Centre for Franchising Excellence aims to drive franchise sector best practice through practical, independent research and education. To find out more visit: Web: www.franchise.edu.au/business-management-essentials