When it comes to managing a franchise, budgets and financing are everything. In the beginning, branches often run on thin margins, and upgrades and company growth require incredible planning and management.
Budget allocation is a big part of financial planning for franchises, and it’s something prospective franchise buyers must master to create a successful branch. As there are many different factors to consider and monitor, this is easier said than done. If you want to improve your budget allocation while running a franchise, you need to have a good plan. Here are some pointers to help you get started with this process.
Why create a franchise budget?
The first question a franchise buyer might ask is why they would need to budget at all? After all, plenty of businesses set budgets that they over or underestimate and these predictions can fall flat. At the same time, a big part of getting into franchising is being able to set rules and regulating one’s business with absolute freedom.
While budgeting may not seem like an absolute necessity, experts suggest that it’s crucial for the success of a franchise. A budgeting plan allows franchisees to track the progress of their businesses and introduce changes. When expenses and revenues go up, comparing them to the budget and making adjustments is incredibly helpful.
When should you set your budget?
Dedicating a budget for your franchise can be a delicate process. Because of this, timing it properly is crucial. It’s recommended that you do this at the beginning of the financial or calendar year for the best possible results. The way you divide your budget can have an influence as well. A good idea would be to divide it up into monthly or quarterly segments. This allows you to track needs and progress throughout the year.
If your franchise has a large number of expenses monthly, you might want to develop a month-to-month budgeting system. This would make it easier to closely monitor expenses and potential budgeting issues. It also helps with identifying general financial trends in the business.
Working out a business budget
One of the most critical tools in your toolbelt for crafting a budget is common sense. Before you can begin crafting a budget, you need to look at potential revenue realistically. There’s no reason to predict that you’ll make a certain amount if the franchise made far less in the past years. It’s hard to anticipate changes in markets and customer needs, but there are certain metrics you can use to predict accurately.
You should always plot your expenses against projected revenues. There are many metrics to take into account when it comes to revenue, such as fixed, variable, and semi-variable ones. These will allow you to determine a gross profit margin that will bring you closer to a realistic and efficient budget. If you’re new to the franchising business, you’ll likely receive a lot of information from the franchise owner. Their input can help you determine a realistic budget for the first year.
Beginner franchise budgeting
As we’ve mentioned, figuring out a budgeting plan after starting your first franchise can be somewhat difficult, especially if you don’t have a lot of experience with business financing. Even if you have the support of a franchise owner like Starbucks or McDonald’s, individual franchises can still be challenging to maintain financially.
If you’re struggling to form and maintain a consistent budget, it’s recommended that you consult a financial advisor. There are many that specialise in the intricacies of franchise financing, which makes them especially well equipped to help in these situations. Choosing a reliable and trustworthy franchise is another good way to get a good start in the industry. Many prospective entrepreneurs choose well-known brands like Starbucks and ChaTime for their first ventures. These companies tend to offer better instructions and support for first-time franchisees compared to other brands. As a result, calculating and forming a budget becomes a much simpler task.
Important parts of a budget
There are several key parts of a budget that you need to pay attention to. These include sales, profits, and total costs and expenses. One of the best ways to predict annual revenue is to look at sales figures from previous years, as they cover all money that’s coming into the franchise. Since this metric only gives you an estimation, you should be conservative with your predictions to avoid disappointment and underbudgeting.
How do you gauge the effectiveness of your financial strategy? An effective way to do this would be to monitor other businesses in the industry and make comparisons. If you run a coffee or tea outlet, you might want to check out similar franchises in the area. Compare their prices and sales figures with your own if possible. Not only will this provide useful insight into successful business models and practices, but it will also help improve the accuracy of your financial estimates. With this additional information, you can create a more effective budgeting plan.
Conclusion
Building a budget is one of the most important first steps for any new franchisee. Managing finances in a franchise is complicated enough, but doing so without a budget turns it into a near-impossible task. If you want to see your franchise branch succeed and expand, you must determine your budget and allocate it efficiently. Consider some of the pointers we’ve mentioned above, and see if there are any improvements you can make to your budget allocation.