All Things Financial

“Beware of little expenses. A small leak will sink a great ship”.
—Benjamin Franklin

Setting up to be a successful business is no easy feat. It requires guts, hard work, and a good
system, particularly when it comes to financial management. Running a successful business
means that you now have even more responsibilities on your shoulders than you ever did as
an employee. Your employees are dependent on you, and any decision that you take will not
only affect you, but your team as well. Good leaders should always evaluate every decision
they make with thought and caution, particularly when it involves handling business finances.

I want to start by talking about capital, and specifically the capital required to go into business.
I can speak with experience about being undercapitalised myself. In a number of the franchise
businesses that I worked in, franchisees were undercapitalised. It can have an impact on the
business, and the mental and financial state of the business owners concerned.

Every business needs the capital to get started. The problem entrepreneurs and business
owners, have is that they are optimistic and only see the best possible scenarios. They can
often go into business undercapitalised by underestimating the true costs of operating, while
overestimating the sales their business may generate.

The starting point for any business is the creation of a financial model and financial plan. The
business model can be broken into three parts to determine the financial requirements and
decisions that need to be made:

  1. Cost of goods: everything it takes to make something: design, raw materials,
    manufacturing, labour, and so on.
  2. Cost of sales: everything it takes to sell that product: marketing, distribution, delivering a
    service, and processing the sale.
  3. Pricing and payment: how and what the customer pays: pricing strategy, payment
    methods, payment timing, and so on.

Once you have determined the business model, which is how you are going to make money,
you need to determine how much it is going to cost to establish the business. To do this, the
business owner needs to create a financial modelling tool that combines the set up costs and
the ongoing costs (cost of goods and sales) factoring in the pricing and payment strategy.

Now, you can build the financial model and see what it’s going to take to get a return on your
investment in time and money.

To be profitable in business, it is important to know what your break-even point is. Your
break-even point is the point at which total revenue equals total costs or expenses. At this
point, there is no profit or loss—in other words, you ‘break even’.

The formula is:
Break Even = Fixed Costs________________________________________
Point Total sales revenue – Cost to make product
(Contribution Margin)

To better explain what all of this means, let’s look at a breakdown of the formula components:

Fixed costs.
Fixed costs are not affected by the number of items sold. Fixed costs are required to be paid
regardless of the sales generated. Examples include rent, fixed wages and salary, lease costs
and loan repayments, contracts entered into, and legal and accounting costs. Fixed costs also
include fees paid for services like graphic design, advertising, and PR.

Variable costs.
Variable costs are those that vary with sales, such as wages, utilities, and cost of goods and
materials used in production of the finished product that is sold to customers.

Contribution margin.
The contribution margin is calculated by subtracting the variable costs from the selling price.
Any money left after that represents your net profit.

Contribution margin ratio.
This figure is usually expressed as a percentage. It’s calculated by subtracting your fixed costs
from your contribution margin.

Profit earned following your break even.
Once your sales amount equals your fixed and variable costs, you have reached the breakeven point.

Good financial management is the key to the success of every business, but in particular a
franchise system.

Good financial management results in a better return on investment (ROI).

Here is a rough guide:
• Businesses under $100,000 may take 12 to 24 months.
• Businesses from $180,000 to $400,000 may take 2.5 to 3.5 years.
• Businesses from $500,000 to $850,000 may take around four years.
• Businesses over $1m may take five or more years.

For those considering franchising as a model for growth or business entry, franchisees typically
spend seven years in a network which, if they are successful, allows them to realise ample
goodwill value upon the sale of their business.