Unlock the key to franchisee profitability with the Breakeven Formula
By Centre Contributor
Do your franchisees know how to easily calculate, understand and set their breakeven point? Unfortunately, many franchisees are consumed with confusion around issues of financial management and are more likely to wonder “where did all my profit go?”.
The Breakeven Formula is one of the most effective tools for franchisees and franchise management professionals to boost their financial management skills and performance and will be a key focus of the upcoming Franchisee Financial Essentials Workshop and Franchise Financial Sustainability Masterclass.
Hosted by David Campbell of Avatar Consulting, in conjunction with the Asia Pacific Centre for Franchising Excellence, the practical two-day workshop and four-day masterclass will outline simple frameworks for franchisees and franchisors to better understand the key numbers that underpin franchise businesses.
Central to this education is highlighting the Breakeven Formula as a crucial signpost in powering long-term franchisee profitability.In the lead-up to the next Franchisee Financial Essentials Workshop, David Campbell explains the principles behind the Breakeven Formula in the latest instalment in his 5-Part Series on ‘Understanding Profitability in Franchise Businesses'.
The Breakeven Formula is one of the most powerful management tools for any business, but unfortunately the majority of franchisees and franchise support personnel lack a real understanding of the process and its many applications.
Not only will the Breakeven Formula calculate the sales required to cover a certain level of fixed costs it can be used to calculate a specific range of targets in order to release the sought profit required. While franchisees and business owners can generally tell you how much trading surplus they require to meet all obligations, they struggle to then translate that number into business targets.
The formula for breakeven is: Fixed Costs / Contribution Margin % = Breakeven Sales
Fixed Costs are all the costs that must be met every month – rent, labour, insurance, interest etc. but not including variable costs such as COGs and % royalty fees.
Contribution Margin is in simple terms the gross margin % less the % royalty and marketing fees.
To calculate targets add the desired profit to fixed costs and divide by the contribution margin.
Fixed Costs + Sought Profit / Contribution Margin % = Target Sales
Sought Profit encompasses the ROI objectives and the Franchisees personal obligations.
Calculating a sales target based on desired Franchisee return is a powerful engagement tool.
Breakeven can also demonstrate the impact of tactical planning such as discounting – reducing margin or increasing the staff roster by calculating the additional sales required in order to maintain the profit target.
This can be very helpful in testing proposed strategies and tactics. Once you have the breakeven sales target the next step is to calculate the spool up rate.In other words, how long will the business take to build sufficient volumes to firstly achieve breakeven and then the profit target.
Until breakeven is achieved and then the profit component to meet personal obligations, the business will need access to additional working capital to fund its operations until the sales target is achieved.The slower the spool up, the more working capital that will be required.
The Breakeven Formula is always one of the most popular sessions at the Franchisee Financial Essentials Workshop and Franchise Financial Sustainability Masterclass. Other key topics covered at the workshop and masterclass include: return on investment, generating sales, expenses, and margin.
The next Franchisee Financial Essentials Workshop to be held in Brisbane is on 14-15 September 2017. The next Franchise Financial Sustainability Masterclass is in Brisbane on 5,6,25,26 October 2017.
Who Should Attend The Workshops: Franchisees, Operations/Field Managers, Area Managers, Pre-entry Franchisees and Small Business Owners focussed on improving business profitability.
Who Should Attend The Masterclasses: Franchisors, CFOs, GMs, Directors, Senior Management, State Managers and Operations/Field Managers focussed on improving franchise group profitability.
Don’t miss this opportunity to train yourself or your management team with the finance tools and techniques to make franchise businesses more profitable.
For more on David Campbells finance techniques please review the articles below and watch David's 5-part Series on YouTube 'Understanding Profitability in Franchise Businesses' @franchiseuni.
'How to Optimise Franchisee Returns' series:Part One: How to Optimise franchisee returns - Return on Investment
Part Two: How to Optimise Franchisee Returns – the Breakeven Formula
Part Three: How to Optimise Franchisee Returns – Generating Sales
Part Four: How to Optimise Franchisee Returns – Margin
Part Five: How to Optimise Franchisee Returns – Expenses
Have you enjoyed this series? Did you find it helpful? We want to hear from you – send us your feedback via firstname.lastname@example.org.
Finance Training for Franchisees
Get the templates and learn the techniques to ensure your franchise business becomes financially sustainable at our Franchisee Financial Essentials Workshop in Brisbane.
Finance Training for Franchisors (Management)
Get the templates and learn the techniques to help franchisees become financially sustainable at our Franchise Finance Sustainability Masterclass in Brisbane.
*David Campbell is the Director of Avatar Consulting and currently works with the Asia-Pacific Centre for Franchising Excellence to facilitate our franchise finance workshops and masterclasses.