Running a successful franchise and making tonnes of money should go hand in hand – however, in our world of COVID, high inflation, low consumer sentiment and increased competition, it’s harder than ever to turn your business from a cash-eating monster into a profit-making machine.
Imagine if there were 7 levers to endless profits – a simple framework to master your money as a franchisee and grow without solely relying on more leads!
Over the last 15 years, I’ve had the pleasure of working with thousands of business owners. Over this time I had the opportunity of seeing the inner workings of their financial models and I quickly identified that the top 5% of businesses all operated their businesses differently to the bottom 95%.
- They focused on the top 20% of their target market
We can’t be all things to all people and in times of higher competition, we need to be the apple juice to everyone else’s apples. In other words, if you’re seen as a commodity or a transaction, you’re typically always going to compete on price.
Focus on your highest value prospects, illustrate your value and make price a logical byproduct of getting the results your clients want.
- They increase price regularly and consistently
Increasing prices can feel a bit ick, however, in times of high inflation, rising wages costs and supply constraints, we need to adjust if we’re going to thrive.
The truth is, the more you charge, the more profitable your business is. This means you can serve your clients better, hire more staff and better scale your business.
We did a study across our 1,000 clients and worked out that with an average 67% gross profit margin, if they increased their price by 20% they could work with 23% less clients and make the same amount of profit with less work.
- Direct costs/Cost of sales control
As a business owner, understanding your cost to serve is critical to both service pricing and sustainable delivery. The reality is that most business owners just guess the cost and time required to deliver their products and services and in turn, have loss leading income streams that are costing them tens of thousands in lost profit.
If we can understand the direct costs associated with our revenue streams such as contractors, direct wages and materials, we can then look for ways to increase our gross profit margin which translates into a direct impact to cash-flow.
- Operating expenses and fixed costs
As business owners we often experience what we call ‘Cash-flow creep’ which is the phenomenon where our income increases and our business expenses increase proportionately (and sometimes exponentially!).
What we need is a framework that allows us to systematically review our operating expenses, trim the fat and ensure we can run a lean business that focuses on profit and cash-flow above all else.
A simple behavioural framework we use is called ‘flipping the formula’. This is based on a principle known as Parkinson’s Law which states that we all use the means we have available – in short, the more money we have, the more money we spend.
Instead of the normal business formula of revenue – expenses = profit
We flip the formula to revenue – profit = expenses
- Understand your cash conversion cycle pt 1 – accounts receivable
Accounting can be complex and our accountants don’t make it any easier for us. They use a method known as accrual accounting which assumes invoiced income has been received on your profit and loss, placing this on the balance sheet which no one ever looks at!
This is why so many business owners complain about the disconnect between their financial statements and their bank balance!
The problem is that most business owners don’t understand three important aspects of their finances – starting with the days it takes for them to get paid.
Work out on average the days it takes from when you sign up a client until you bank the cash or from when you send an invoice to when it gets paid.
- Pt 2 – Work In Progress/Pipeline Days
The next important financial metric is the days it takes you to complete work or sign on a client. This can also be known as WIP or inventory days – in other words, how long is work sitting in progress before you can even invoice or charge for it.
This is critical as the shorter your WIP days, the faster you can collect cash.
- Pt 3 – Accounts Payable Days
This is how long it takes you to pay your own suppliers and bills. The ideal scenario is that we want to ensure you bank revenue from your clients before you have to pay your bills.
This isn’t possible for all businesses, however, if you are in a business that needs to incur costs before you get paid, you need to be laser focused on your cash-flow to ensure you have enough working capital to pay the bills while you wait to get paid.
By leveraging these 7 levers we’ve seen business owners increase their cash and profit by 15-20% on average, ensure they build their emergency war chest to navigate these uncertain times and use these profits to build more wealth.
This all comes down to having the right knowledge and mindset, taking the right action and reaping the financial rewards.
Jackson Millan – The Wealth Mentor
CEO of Aureus Financial
Aureus Financial specialises in helping 6-7 figure service businesses maximise their profit, improve their cash-flow and systematically turn business profit into personal wealth. Grab our best selling books, worksheets and 40 point performance scorecard at www.wealthhealthcheck.com.au
