Westpac - Measure Your Progress

Your franchise business is similar to your body: to keep it healthy, you have to keep monitoring it and adjusting what you do. To do this, you need to measure trends over time and compare your performance against that of other franchisees and the industry. But there is another source of information readily available to you as well - your financial statements. By calculating key financial ratios from these, you can see at a glance how healthy your business is and where you need to do some work.

Taken together, the income statement and balance sheet represent as complete a financial picture of your company as it’s possible to get. So let’s take your financial information and develop a set of measurements that will allow us to monitor both your current position and your progress. We will do this through the development of a series of financial relationships, or ratios. Remember, a ratio is nothing more than one number in relation to another. A ratio doesn’t care about the absolute size; it only cares about the relationship. And it’s this relationship we will use to measure and manage your financial effectiveness.

The question arises as to which relationships to measure. There are many possibilities and I have chosen to use the KISS (Keep it Short and Simple) principle - that is, enough to get the job done, but not so much as to become confusing. The accompanying table has three basic parts: the name of the ratio, how it is derived, and what it measures.

Taking Action

For starters, let’s explain the action steps.

1. You need at least three years’ financial statements.
2. Set out your statements in a spreadsheet - put all the financial data on one sheet, side-by-side, by year.  
3. Use the same spreadsheet format to calculate your financial ratios.

Take a few minutes to read the ratios in the table. Note how the ratios are broken down into three functional areas: balance sheet ratios, profitability ratios and asset management ratios. We will be looking to develop financial “balance”, as no lone ratio is the entire story. Taken together, we can begin analysing your performance - and, more importantly, planning for the future. You can’t fix current problems or spot developing ones unless you know where to look. The process I’m describing is an efficient, effective method to keep your finger on the pulse of your company.

In general, there are three ways to use these ratios to analyse your business: first, to compare your current performance to your performance in prior years (trends). You should be looking for ratios to be maintained or improved year-by-year. If they decline, make sure you find out the reasons why and have plans in place for future improvement.

Second, to compare your present performance to others in your own franchise system and then the industry (benchmarking). It is one of the huge advantages of a being a franchisee that you should be able to compare the ratios you are achieving against those of other franchisees in your own system. If these are not already available to all franchisees, talk to your franchisor. They should also be able to provide industry benchmarks that enable you to compare how your franchise is doing compared to other businesses in the same industry. These figures would also be used by astute franchisors to set a strategy that ensures that their franchise system remains competitive.

Third, use ratios to compare actual achievements to your plans in developing a workable operating strategy. All businesses operate with limited resources, management, capital and time, so you need to make the most of them.

Sound financial planning and control will not, by itself, make you successful. However, it will often keep you in business long enough for your technical expertise to create success. Without it, you don’t know where you’ve been, or where you’re going. With it, you have a fundamental guide to follow in planning a course for your business.

This article is taken from Franchise New Zealand magazine volume 15 issue 4

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