Financial Sustainability

When people have less money to spend, it has a knock-on effect. For business owners, it impacts profitability, viability and financial sustainability. What worked before may not work quite as well now. 

That may sound depressing, but it’s a cycle that will pass. For franchisors and franchisees, the key is to shape your business for long-term financial sustainability so that you get through any downturn and are in a position to make the most of the upswing when it happens. Here are some tips on what to consider in a number of critical areas.

Skills retention

There’s a reason why some people refer to employees as ‘Human Capital’ – a business is often only as good as its staff. Retaining key team members can be essential to the ongoing sustainability of any business, so invest in training and upskilling your people. They are the ones that know the operation and have day-to-day contact with customers, building loyalty. People like to deal with people they know and trust.

You might be surprised to get this advice from an accountant, but I recall a café owner who decided to retrench a popular customer-facing team and lost a lot of customers. Sales plummeted and that café owner lasted just six months before exiting.

And remember that replacing staff may adversely impact service levels and incur significant costs through recruiting and retraining.

Customer engagement

During periods of economic contraction, you and your competitors will all be fighting for a larger slice of a smaller pie. Accordingly, it’s a good time to get closer to your customers and understand their current needs. If you stop connecting with them, you may lose them.

The key to sustainable business is valuing your customers – literally. What is the lifetime value of a customer? How much does it cost to replace a customer? Make sure you keep close to customers who provide repeat business and provide the recurring income that enables your business to be financially sustainable.

Find the gaps in the market

One result of being closer to customers is that you identify trends in the market. Often, when one segment is decreasing, another one is growing. If the market has changed, you have to adapt.

Franchisees, unlike independent small business owners, should have the advantage of development and leadership from the franchisor and its field support team to identify necessary changes, but they have to be open to it.

The classic management book Who Moved My Cheese? by Spencer Johnson is worth reading. Don’t buy into negativity, and watch your mind set – there is always more cheese, you’ve just got to go and look for it.    

Manage your margins

Effective margin management is essential to business sustainability. Inflation on products, services, wages, suppliers and freight, place pressure on margins. By moving prices little and often as required, you can help maintain profitability while retaining customers.

This is another area where franchisees have an advantage. Benchmarking within a franchise helps identify achievable margins and costs as Key Performance Indicators (KPIs). Use those KPI’s to fine-tune your business and free up profits and cashflow.

Be cashflow-minded

Identify areas of your business that lock up cashflow – eg. in a retail business, that would include stock levels and customer credit policies. The number one KPI in retail is stock turn – the amount of time it takes to turn the stock on the shelf into cash.

Franchisees, be vigilant on credit management and use just-in-time stock management to reduce the cash you have tied up at any time. Franchisors, work with suppliers to improve distribution and ordering processes to help with this.

Financial sustainability

With interest rates having risen above the historic lows we had all got used to, the increased cost of finance has a knock-on effect both to businesses and personally.

Structuring your business for financial sustainability requires business owners to be more in touch with the numbers and apply financial disciplines. For example, rolling forecasting/cashflow projections show the financial road ahead and allow you to plan accordingly.

Fundamentally, know the breakeven point of your business – what level of sales you need to make each month to pay the wages, suppliers, landlord, service the loan, and pay yourself. If you don’t already know, reach out to your accountant to guide you.

With the aid of the KPIs and your advisors, identify ways to lower your breakeven point, such as:

• Rationalise business processes to reduce costs.
• Restructure finance costs.
• Sell surplus assets and recapitalise.
• Defer major discretionary spends.
• Negotiate improved payment terms with suppliers.
• Improve margins by reconfiguring services/product bundles (eg. offering combos).
• Clear slow or obsolete stock.
• Increase productivity by upskilling and reinvesting in plant & equipment.
• Restrain personal spending that may put pressure on business cashflow to fund.
• Focus spending on areas that make or save you money (eg. training, maintenance, marketing), not things that are nice to have.

Conclusion

The economy always goes in cycles and good businesses know how to ride through them. Know the cycle you are in now, and adjust accordingly.

Seek advice and refine strategies for financial sustainability. Use all the advantages franchising offers, and consult an experienced accountant who understands your business and industry. Remember, good advice pays, not costs.   

This advice is of a general nature only and expert advice should be sought to get the right advice for your specific situation.

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We welcome links from other websites to this article. Please note that this article is copyright © Eden Exchange NZ Holdings Limited, Franchise New Zealand magazine and Franchise New Zealand On Line. While it may be downloaded for personal use, no part may be reproduced on any other website, in electronic or printed form or in any other form whatsoever.