All businesses operate in a competitive environment, and times of change can often mean margin squeeze and reduced profitability. Franchise businesses are no different, and sometimes also face their own unique challenges when it comes to what factors might be (or seem to be) outside of the control of the franchisee.
That having been said, maximising profitability remains a crucial goal for all franchise owners, certainly as much as it is for the owner of any independent business. There are obviously two sides to the profitability equation, in this article we’ll focus on the cost side (which is usually a little more empirical than those things which drive the revenue line).
Effective cost management is a key pillar of profitability, over time costs often increase almost unnoticed, and it’s only through a focussed review that we may find costs that can be reduced, or expenses that are no longer adding value to the business that they once were.
With a strategic approach to cost-saving, franchise owners can enhance their bottom line while maintaining the quality of their products and services. In this article, we’ll explore some actionable strategies for cost management, most of which could be applied to any businesses.
- Conduct a Comprehensive Cost Analysis
Before attempting to implement any cost-saving measures, it’s essential for franchise owners to conduct a comprehensive analysis of their expenses. This analysis should cover all aspects of the business, including overheads, raw materials, labour costs, and operational expenses. By gaining a clear understanding of where money is being spent, franchise owners can identify areas for potential savings.
Check these items against your budget (you do have a budget, right?), and look at where costs have increased over time. It can be tempting to only look at large costs and to categorise everything else as ‘too small to make a difference’, but even small savings can add up when grouped together.
- Negotiate Favourable Terms with Suppliers
Good supplier relationships are critical to the success of any business, franchise businesses included. There may be some goods or services that must be supplied by the franchisor (but even that supply can sometimes be negotiated). Never has the saying ‘don’t ask, don’t get’ been more true, suppliers will seldom volunteer a discount!
Network with other franchisees in the hunt for a better deal, and consider the value that your collective purchasing power has. Look around for alternative suppliers but remember, loyalty can have benefits (and reminding your existing suppliers of your loyalty may lead to a cost saving!).
Remember also to consider quality impacts on your business from any supply. You might find a cheaper internet provider, but do they have the uptime or bandwidth you need? For food supply quality is vital, but it’s always worth looking around and sometimes it’s worth giving the alternative a chance, particularly if the risk of change is low.
The utopia is a strong supplier relationship, delivering value to both parties, with consistently competitive pricing, and sustained quality, leading to improved profit margins. It might sound simple, but there’s a reason why the cost of not looking around occasionally is often called the ‘lazy tax’, most of us just don’t do it.
- Optimise Your Labour Costs
Labour costs often represent a significant portion of a franchise’s expenses, and in the current climate good staff can be very hard to find.
One way to optimise labour costs is to focus on your workforce management and efficiency. For many small businesses the biggest challenges revolve around ensuring that staffing levels align to customer demand. Make sure you have a thorough understanding of your busy periods, and that any down time is used productively. For some businesses performance-based incentives can also help to drive behaviour and productivity.
You might also look at cross training your employees to ensure that they can step into different roles as demand requires. Remember, many team members rate variety and responsibility as key things that attract them to a role.
Don’t ignore the bigger picture! Like most major business costs, your employee expense is about value and ‘true cost’, not just the sticker price. You might have less expensive individual staff but perhaps you need more of them, or your costs are increased due to high staff turnover. Incentives targeted at retaining good staff are often much less expensive in the long run than dealing with the costs of a new hire.
- Embrace Technology Integration & Automation
There are new technologies emerging all the time, offering numerous opportunities for cost savings and efficiency improvements.
Talk to your franchisor about key items on the technology roadmap for the network (and if they don’t have one, ask them why not). Point-of-sale systems, inventory management software, and automated ordering systems can help minimise waste, track inventory levels accurately, and reduce administrative overheads. If the franchisor mandates or provides specific technology for your business, then make sure you provide them with feedback around what works and what doesn’t so that they can drive improvements.
If there are technology solutions available that you haven’t implemented, consider whether now is the right time to do so. Yes, there might be upfront capital costs to implementing new technology, but those costs can usually be spread over time, often giving an immediate net gain!
Investing in technology solutions tailored to the specific needs of the franchise can yield long-term cost savings and enhance your operational efficiency.
- Continuously Monitor and Improve Cost Management Strategies
They used to say the painters on the Sydney Harbour Bridge would work from one end to the other, and when they were finished, they’d just go back and start again.
Cost management is an ongoing process for any business, requiring constant evaluation and improvement. Franchise owners should regularly review their existing costs, and also measure the results of any initiatives put in place to try to reduce costs. If an initiative isn’t saving you the money you expected, dig deeper and find out why.
It can also help to involve your team in cost saving initiatives, talk to them about areas of waste in the business and consider incentivising and recognising their cost saving ideas.
Effective cost management is about keeping your eye on the ball and adapting to the changing needs of your business and the environment in which you operate. With a cycle of continuous improvement, you can keep your business, and your margins, in tip top condition.
So, to sum it all up… break down your cost review into categories, review each one in detail, look for strategies to reduce costs, but also to increase value, and monitor your results. It all sounds so simple, but like everything of course the payoff comes from doing the work.
Phil Chaplin the Chief Executive Officer of the CFI Finance Group, a specialist finance company servicing the franchise, accommodation, and fitness sectors as well as small businesses more broadly across Australia and New Zealand.
Phil has over 20 years’ experience in providing finance to businesses across Australia and New Zealand and has managed finance companies in the private banking sectors, he is a former chair of the Equipment Finance division of AFIA.