Taking a fresh look at franchise financials in the new financial year

Businesses that run according to a proven system, such as franchises, are at risk of becoming stale and failing to identify potential improvement opportunities that can enhance the bottom line unless they regularly undertake a wholesale review of the business.

RSM Bird Cameron advises franchisors to take four key steps at the beginning of the new financial year.

1. Review employee remuneration

April 2015 saw a temporary increase in the fringe benefits tax (FBT) rate from 47 per cent to 49 per cent, which impacted small businesses. If your franchise has employees, you may need to reconsider your FBT arrangements in light of this increase for the new financial year, if you haven’t already.

The increase prevents people earning over $180,000 from salary sacrificing into fringe benefits to avoid paying the temporary two per cent debt levy. Competitive salary packages are often the key to success for small businesses. They let employers attract the right talent, minimise staff turnover and increase productivity. There are many different possibilities and options to offer as salary sacrifices, including vehicles, healthcare, school fees, entertainment and cheap loans.

For employees on packages under $180,000 per annum, it may be beneficial to provide remuneration via salary and allowances rather than fringe benefits. Employees will then be taxed at the normal marginal rate, which will be much lower than that FBT rate of 49 per cent. The increase in FBT means that employers should reconsider all current fringe benefits arrangements. If not passed onto the employees, this will result in additional costs to the employer. Employers should review their salary packaging arrangements with their staff to  limit the impact of the additional cost and ensure that any arrangement is still as beneficial as possible, for both the employee and the employer.

2. Profit improvement

Increasing profits should always be a key aim for the business but the beginning of the new financial year is a good time to review specific changes that can be made to help boost the bottom line.

For example:

• Improve market penetration – selling more of the products and services you already offer to existing customers and markets relies on building deeper relationships with customers and proving the value of your offering. To do this effectively, your sales team should review their current customer lists to see what additional products and services might be appropriate, then work to upsell and crosssell accordingly. Even small improvements can lead to significant profit gains.

• Expand into new markets and products/services – selling to new markets or adding new products can increase sales but may also involve additional investment and costs. It is important to do due diligence to ensure the expansion is commercially attractive and provide an acceptable return on investment.

• Diversify – selling new products and services to new customers and markets is ideal for an entrepreneurial franchise. Diversification can let franchises tap into a much broader potential customer base as well as trial new products. However, it can be risky and it requires a significant investment of time and money up front. If both the products and the market are new, this heightens the risk of success. Careful planning and sound financial advice are needed to help the current business operations continue to work smoothly while the diversification takes place.

3. Improve your cash flow

A positive cash flow is key to keeping a business running: without it the business cannot pay suppliers or employees. Cash flow is always important but it is especially important when credit is expensive or difficult to obtain.

There is a fine balance when it comes to cash flow. Too much cash on hand means that cash is not working for the business so it needs to be put into investments or a deposit account. Too little cash means the business will need to look at alternative ways to pay suppliers, such as loans.

Good cash flow management requires access to good information, discipline to following collection processes and good management decisionmaking. RSM Bird Cameron has identified 10 ways to improve cash flow:

1. Prepare a cash flow forecast and plan for potential delays.

2. Consider discounts for early payments, encouraging customers to pay sooner.

3. Conversely, take the maximum allowable time before paying bills to keep the cash on hand for as long as possible, then pay regular suppliers first to generate goodwill.

4. Pay the most important debts first, not the biggest.

5. Invest in a high-interest bearing account if you have surplus funds.

6. Issue invoices as soon as possible and follow up promptly.

7. Offer payment options, emphasising direct debit.

8. If working on longer-term projects, split the payments so you’re not waiting until the end to get paid.

9. It takes cash to have stock on hand, so ensure cash isn’t wasted on holding too much stock. Monitor stock levels closely and focus on offering better-selling, higher-margin items.

10. Link sales commissions to invoices paid rather than revenue billed.

4. Prepare for growth

Business growth is the goal of any franchisor and franchisee, but the growth must be directed towards what will add the greatest value to the business. It’s about growth for profits sake not simply just growth. Unplanned and uncontrolled growth can cause problems for organisations that are not well-prepared.

Growth becomes essential when there is a limited market size for existing products or services. As the business starts to reach that market limit, the return and security that can be offered by the business declines, making growth and diversification the only options for sustainability.

When business owners accept that growth is required, they must also accept that they may need to fulfil a different role. Owners that were previously focused on operational and customer service functions must shift their priorities towards marketing, planning, management and personnel oversight instead. This can be a difficult change and transition to make, especially for owners without experience in these areas. Franchisors can support franchisees in this shift by providing training and education.

Businesses that have successfully navigated the growth pathway share six common traits:

1. They have set clear objectives for growth.

2. They have examined the marketplace more broadly than just their own immediate environment and identified gaps and opportunities.

3. They have offered new products and service levels that have exceeded the market’s expectations.

4. They have differentiated themselves clearly and are prepared to adjust to meet customer demands.

5. They recognise the essential role of marketing and the sales process to connect and engage with customers.

6. They have established a team of employees and advisors who provide support, innovation, counsel and ideas that help drive the business towards its new objectives.

Andrew Graham is the national head of business solutions for RSM Bird Cameron. With more than 20 years’ experience, Andrew has a proven record of strategy development and  managing growth to deliver substantial improvements to business. Andrew works closely with his clients to deliver results and outcomes that make a real difference to their business and personal goals.

For more information contact:

T: 07 3221 7888
W: www.rsmi.com.au