Management guru Peter Drucker is famous for proclaiming, “You can’t improve what you don’t measure.” Wise words. But to derive any benefit from that wisdom in your business, you first need to know what to measure in the first place.
Measure what’s irrelevant, and your measurements won’t matter. Try to measure too much, and you can lose sight of what’s truly important.
So how do you choose the right franchise performance metrics to track?
For that, we turn to a practice known as “benchmarking.” Benchmarking is an essential part of franchise accounting and is one of the only ways you can tell if your business is growing, improving and performing better over time.
Benchmarking simply means selecting metrics or key performance indicators (KPIs) and measuring how those metrics change. One basic example is how many customers you served last month versus this month.
If you’re not benchmarking, it’s important to start now because if you’re not, chances are you’re not getting the most out of your business.
Here are five tips to help kick-start or boost your benchmarking efforts.
Know Your Audience
The first step in identifying the metrics you’ll want to track is knowing for whom you’re benchmarking. The people reading your franchise financial statements will vary depending on how it’s capitalized.
While banks will almost always be among the most important audiences, they have their own metrics with pre-determined formulas and covenants. Additional audiences may be franchisors, investors or other stakeholders in your business.
Some industries or franchisors may dictate their own set of metrics that you must track, while others — mostly newer concepts or brands — won’t have any requirements at all. If you fall into that category, you’ll want to huddle with your advisors to determine which metrics are most important to the growth of your business.
Know Your Purpose
You’re not benchmarking in a vacuum. There’s a reason for doing it. Your growth goals and intentions dictate which metrics you’ll track. This means selecting metrics based on your growth strategy, your intentions for the business and your lifecycle stage.
The most basic determination you need to make is whether you’re growing your franchise to sell soon or treating it like an investment you plan to hold for the long term.
If you’re looking for a quick sale and an exit, you’ll want to track things like:
- Nonrecurring expenses
- Adjusted EBITDA (expenses before interest, taxes, depreciation and amortization)
- Customer, guest or transaction counts
- Users or subscribers
Of course, this is a non-exhaustive list. And yours may differ slightly depending on your industry and franchise model.
If you’re holding onto your franchise for the long term, cash flow and taxable income are important metrics to benchmark, especially because these metrics can sometimes appear to be in direct competition with one another.
Finally, your franchisor may have a set of KPIs they want you to track. These will generally focus on metrics like financial ratios and profitability indicators.
Know Your Industry & Business Model
The industry in which you operate can also have a huge impact on the metrics you track. A franchise that earns revenue through memberships will benefit from tracking a different set of metrics than a franchise that earns nonrecurring revenue, like from the sale of individual products.
Membership-based franchises should consider the following metrics:
- New member conversion rate
- ROI advertising spends (i.e., how much is it costing you to sign up a new member vs. how much that member is worth)
- Number of services you’re selling per member
- Number of first-time clients
- Number of members lost (churn)
Franchises in this category tend to focus on top-line revenue and growing their member base over time.
On the other hand, a franchise with nonrecurring revenue should consider these metrics:
- Transaction/guest count
- Average check per transaction
- Average cash flow per transaction (i.e., how much of each total transaction makes its way down to the bottom line)
- Contribution margin per transaction
- How much of every dollar brought in makes its way to the bottom line (this helps evaluate how profitable your sales growth is — the higher contribution per transaction rate, the better off you are)
Know Your Locations
If you have multiple businesses in multiple locations, tracking profitability by location is a must — mainly because each location is likely operating as a unique business entity.
Location benchmarking can also help you spot trends early enough to do something about them — deal with small problems before they become bigger problems, and catch opportunities quickly so you can fully capitalize on them.
Location benchmarking can help you determine things like:
- A need for more square footage
- Whether certain areas (i.e., the city or the suburbs) may be more profitable than others
- Opportunities for future locations based on per-capita metrics
- Whether or not oversaturation is a good idea
- Sales mix (i.e., in-restaurant vs. drive-through sales)
- Staffing needs
- And more
Location benchmarking also helps you more accurately test profitability by a store’s maturity, as well as the growth rates of locations during various economic conditions and phases of growth.
Know Where to Go for Guidance
To sum up, benchmarking is vital for your success as a franchisee. But we understand that knowing what metrics to track can be confusing. That’s why we’re here to help.
RKL Virtual Management Solutions helps owners like you use benchmarking and other tools to get better insights from their franchise accounting and financial data. Reach out to your advisor or contact us using the form below. We can review your financials to help you maximize the benefits you get from your benchmarking efforts.