Many franchisees don’t know how to read or use their profit and loss statement to grow their business. Many franchisees are too embarrassed to ask the question of their franchisor/head office team or their accountant about how to read their profit and loss or how to use it. I see this all the time, so if this is you, don’t panic – there are lots of you in the same boat!
If you haven’t worked out already, I like to keep things simple and the when looking at a P&L statement, this should be the same – keep it simple.
I find the easiest way to use your P&L is to turn everything into percentages and to be honest, most accounting software packages can even print your P&L with the percentages worked out for you which will save you a lot of time and effort. If it can’t, then grab a calculator and start working them out.
What should the percentage be?
I think there are two major things you need to look at. Your expenses (each of them) as a percentage of your total turnover/revenue is the first one. The second one is each type of income as a percentage of your total turnover/revenue. Think like a quick service restaurant, you might have your sales divided into drinks, sides and mains and you can work out what percentage of your revenue is from each of these items. Or in the same instance you might work it out for what percentage of your revenue comes from the breakfast period, lunch period and the dinner period of your days.
Working on percentages works for the simple fact that as you increase your turnover/revenue, the percentages will not really change all that much.
Let me give you an example.
If you work out that your staffing costs are about 20% of your revenue, then if you add an extra $10,000 to your revenue, then your staffing costs should go up by about $2,000. That is the staffing costs remain at about 20% of your turnover/revenue, even when the revenue increases.
It allows you to keep control on your costs/expenses as you grow your business. I always recommend you should have a couple of expenses that you track weekly that could have a major impact on your profitability if not monitored. Like staffing costs. If your staffing costs are normally 30% of your revenue and you are averaging $10,000 a week, then $3,000 go on staffing costs. Now if your profit margin is just 10% ($1,000) and in a week your staffing costs ‘blow out’ to 35% of your revenue, then you have just spent an extra $500 on staff. This has halved your profit from $1,000 to $500, just because of 5% more on staff which in itself wouldn’t appear to be a lot, but it is if it is reducing your profit by half!
Seeing the percentages of your expenses can also help you reduce expenses. Many people try and reduce the ‘big’ expenses (say staff costs) but this can be detrimental to your business. Say if you cut your staffing costs too much, then you don’t have enough staff on the floor to give the quality of service you need to have your customers to keep coming back to you. This could kill your business.
Instead start with the small expenses. Of course if you have a major expense that is just over the top, cut it back, but if you look for lots of 1% improvements in your business, that can make a big impact when all added together. If you find ten expenses that you can cut just 1% off – that is take it from being say 5% of your revenue going to that expense down to 4% of your revenue going to that expense – over ten expenses, that has just added 10% of your revenue to your profit! Good thing right?
I have franchisees that negotiate better merchant deals with their bank or a better lease with their landlord or better phone deals with their phone providers. They look at expenses that are just not necessary in their business or maybe get a new lease on their car or even downsize their car. It is amazing how little bits here and there can add up to a whole lot more being added to your profit margin.
Now of course I recommend that you don’t just look at your expenses, but also look at your sales. That is why I suggest you break your sales down into different areas or product lines so you can see where your turnover/revenue is coming from.
Say in the example above you notice that just 15% of your revenue is coming from the breakfast period. That says to me you have an opportunity to grow your breakfast revenue. You could be bringing in more people for breakfast.
You could also do the reverse and say that 50% of your revenue is coming in from your dinner service, so what else could you offer to those at dinner to increase your revenue. Imagine you added garlic bread to your dinner service (this is a simple example!) and started to suggest it to your customers. What if 50% of your business added just $2 to their food bill? What could this do to your revenue?
You can also see if certain product lines or sales items are more profitable than others. What if you were selling three products – A, B and C. What if you were selling more of product A than B, but B was actually a more profitable product than A on it’s own? Is that an indicator that maybe you need to train your team on the benefits of product B for the customer because that will also be more profitable for you? Of course, use your morals here. If product A is of more benefit to the customers, don’t push them into product B just for your profit levels – you will not have a good, long term business if you are just always pushing for the buck!
So look at both ends, not just one thing. Lots of little things across the board will add up really fast. Percentages on your P&L work on so many levels and to boot, it is easier to do and see how things are changing, especially if your revenue is changing and hopefully going up!
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