This post originally appeared on Entrepreneur.com - #Growing Your Business
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“So, how’s your business performing.”
“Well, you know how they say most businesses close in the first year? It’s been 18 months and we’re still here!”
“David” came to me for business coaching for his retail franchise. It was very clear from our intake session that he had no idea how his business was doing. It felt good to him. There was some money in the bank. He was busy. But he really had no clue about whether he was growing or heading towards bankruptcy.
David’s not alone. I meet so many intelligent franchisees who are feeling their way forward without data. Some owners are too busy to worry about accounting. Others have poor bookkeeping habits. One franchisee I coached was nine months behind on his QuickBooks entries. He evaluated business performance based on his bank account balance. Another franchisee I worked with admitted she was too ashamed to stay on top of her numbers. She already knew they wouldn’t be good and didn’t want to deal with it.
Ten years in as a franchisee myself with Edible Arrangements, I know what it’s like to be busy. Financial data entry is important, but not urgent. It’s easy to put it off. I also know that sick feeling of running a report and having to confront poor performance. So much of my work with franchisees is on the emotional side of running the business. It’s easy to hide from that by focusing on operations. Hard work feels good.
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Growing a business requires transitioning from the emotional to the objective. I don’t encourage positivity in my clients. I encourage clarity. Seeing things as they are. Numbers don’t lie. They also don’t judge. You need measurable key performance indicators (KPIs) to know the truth about what’s really going on.
Never before has data been so readily available to franchisees. Modern POS systems, good accounting software and diligent data entry habits give you access to a treasure trove of information in seconds. Monitoring this data is vital to plugging holes and seizing opportunities. Pilots don’t wait until the end of a flight look at their instruments. They check them constantly to ensure flight efficiency and safety. Franchisees should be watching their numbers with an equal amount of concentration.
Here are a few KPIs to monitor to ensure your business is healthy.
This is the most basic measurement of a business. It matters a great deal to your franchisor. They use it to rank you and to calculate their royalty. While gross sales are certainly one meaningful indicator of performance, there’s a lot this number alone doesn’t tell you, such as sales trends, where sales are coming from and, most importantly, how much profit you’re making (or money you’re losing). Gross sales mean very little without other KPIs to provide context.
This is a comparison of your sales performance to a different time period. This tells you if your business is growing, shrinking and at what rate. Like gross sales, context matters. A franchise that goes from $300,000 to $360,000 has grown by 20 percent. A franchise that goes from $800,000 to $920,000 has grown by 15 percent. As gross sales increase, it’s harder to grow at the same percentage, even when the increase in dollars is larger. Twenty percent is bigger than 15 percent, but a $120,000 increase in sales is twice as much as a $60,000 increase. But is a business grossing $920,000 necessarily better than one grossing $360,000? You really can’t say until you see their expenses.
This commonly shared metric is only moderately useful, primarily because it’s based on gross sales. Who knows if those top franchisees are making a profit? Unless you know their expenses, you can’t assess how good a business they really have. I guarantee you rankings would look very different if they were based on unit profitably.
Having said that, something is driving sales for highly ranked locations. If it’s their location, there’s not much you can do with that information. But it may also be their marketing, their upselling or some other factor you can replicate. Pay attention to who’s at the top and look to them for ideas.
Spending is the opposite of selling. Monitoring expenses is critical to ensure profitability. They say that “a penny saved is a penny earned.” But in franchising, you pay a royalty on earnings. That means a penny saved is worth more than a penny earned. But you can only save if you actually know your costs.
Many franchisees don’t. I recently coached a franchisee who operated without a P&L. Not only was he unaware of what he was spending, he was equally in the dark about how much he should be spending.
I helped him develop a profit plan. We created benchmarks for what he should be spending on each expense as a percentage of sales. He wanted to make a minimum profit of 10 percent. That meant our benchmarks were limited to 90 percent of what he was taking in. So we went down the list of expenses, determining what he should be spending and comparing it to what he was spending. Royalties were a fixed 10 percenr. Industry standard for marketing was also 10 percent. He was at half that. We looked at labor, cost of goods, rent and every other expense. In real time, he was spending 102 percent of gross sales. That meant he was operating at a loss – even though he was ranked in the top 50% of franchisees in his system. To meet his goals, he’d have to spend more on marketing while still reducing overall expenses by 12 percent of gross sales.
Offense is more glamourous in sports, but most coaches will tell you that defense wins games. Cost control is the defense of business. Make the investments you need to boost sales and serve customers, but watch your output closely.
It’s important to know how many people you’re serving and how many times you’ve served them. Repeat business means you’re providing good service. New business means your marketing is working. (It may also mean you’re providing good service and your customers are telling their friends.) You always need to bring in new customers and turn them into regulars.
Ticket Average/Sales Per Employee
Most franchisees count transactions, but they don’t always look at how much each customer is spending. Sales can be deep as well as wide. More customers are great, but bigger sales per customer are just as good. You need to focus on both. Market more to bring in customers. Sell more to increase ticket average. Also look at ticket average per employee to see who needs help and who can provide it.
Customer Lifetime Value and Customer Acquisition Cost
Once you know your customer count, how often they come and how much they spend (on average), you can use these numbers along with expenses to calculate a customer’s lifetime value (CLV). How much net profit does one customer bring into your business over time? Your CLV is an important number to know, especially when planning marketing campaigns. That amount should be less than your customer acquisition cost (CAC), which is how much you paid to win each customer. For example, if you have a frozen yogurt franchise and you determine that on average, one customer brings in $100 of profit over time, that’s your CLV. If a marketing strategy will cost you $5,000, you need to bring in 50 customers to break even. (In this case your CAC is $100, the same as your CLV.) If your marketing brings in 75 customers, your CAC is $67. That’s a lifetime profit of $33 per customer after paying for the marketing.
“How’d you hear about us?” Tabulating your customers’ answers to this question is important to find out where they’re coming from. It’s the only way to know if a marketing campaign is working. This question also sheds light on your customer service. As service improves, more customers will say they heard about you from a friend, an online review or that they’ve used you before.
Great customer service increases customer count as well as ticket average. It’s single-handedly the best way to grow your business. It’s how I built mine. I wasn’t very good at marketing my franchises, but I made customer service a top priority. That got us top sales.
Like other elements of your operation, you can measure customer satisfaction. There are plenty of tools to do this, such as the Net Promoter Score®, Customer Satisfaction Score (CSAT) or Customer Effort Score (CES). You can also monitor your online reviews. Of course, the real measurements of customer service are repeat transactions, word-of-mouth and actual increases in sales.
Once when keynoting for a quick-service restaurant franchise, I put up a slide that showed a numeric correlation between online customer reviews and online employee job ratings for five separate competing brands. Happy employees provide better service. That means you should monitor and measure your team’s level of satisfaction. Be careful about making assumptions, especially about your best employees. They’re professionals. They’re great at performing well and looking happy while searching for another job. Talk to your team and conduct surveys that allow you to measure their level of satisfaction over time.
There are countless stats in sports, but the only one that really matters is the final score. In business, the only KPI that really matters is profit. It’s your North Star. It’s the reason to be in business. The other stats are just sub-indicators of how things are progressing and what needs to happen. You respond to these indicators to know how to adjust operations and to improve your margins. Every KPI must be looked at with profit in mind.
These metrics are just the tip of the iceberg. If you’re a data head and you love percentages and ratios, there’s no shortage of numbers to crunch. Most franchisees are too busy. Don’t worry. With good habits and technology, it shouldn’t take more than a few minutes a day to input the data and run the reports you need.
You’re working hard. Keep track of the numbers to make sure you’re working smart.