In this blog I’m going to talk about something that should be close to the heart of all business owners, whether franchisees or not.
I wrote a couple of weeks ago about the relative importance of sales and expenses when thinking about business growth.
In general terms, sales is definitely the most important driver of business growth. You can increase sales by an unlimited amount, but costs can only be reduced by a maximum of 100%.
But in my experience, too many business owners are seduced by the sales number in isolation. Increasing sales = good, decreasing sales = bad and that’s it. But it’s rarely that simple.
Here’s a story to illustrate what I mean. A client’s business has suffered a decline in sales over the past few years. However, profit has steadily increased during the same period.
The client and I have an ongoing disagreement over whether this is good news or bad news. Is the business in decline or is it actually growing?
I’m pretty happy with the situation but my client isn’t. You can see the problem, and I suppose it comes down to how you define growth.
The history here is that this business is one where a bit of favourable press coverage can make a massive difference to revenue.
Some years ago, before my time, this happened and sales went through the roof. The client, believing this to be the start of something big, scaled up the business to cope with its growth.
However, the industry the business is in is notoriously fickle, and once the press coverage ceased, sales started to decline back to where they were before.
Unfortunately, an almost complete lack of reliable management information meant that the client didn’t notice that staff costs in particular were at boom levels still. A couple of years of eye-watering losses followed.
To cut a long story short, I turned up and we instituted a fairly fierce programme of rationalisation (ie, getting rid of surplus people, mainly).
During this time, sales continued to fall, but the cost base was so bloated that we more than compensated for that in reduced expenditure.
So whilst sales fell, profit increased and the bank account crept up.
Sales have now stabilised and the business has an infrastructure more suited to what is, rather than what it was. It’s an ongoing project.
The moral of the story is – don’t be seduced by sales numbers on their own. They mean nothing in isolation.
You have to understand the whole financial picture. Remember the accountants’ favourite:
Sales is vanity; profit is sanity; cash is reality
It’s almost a one-line instruction in how to manage a business. Always keep it in mind.
It’s nothing new – Charles Dickens was no slouch when it came to business and you can’t fault Mr Micawber’s advice to David Copperfield:
“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
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Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.