You own a multi-unit franchise and have a handle on your quarterly financials with a comprehensive profit and loss statement (P&L). Your business revenue, costs and expenses are clearly organized, and you can rattle off accurate numbers when asked. But do you know where that money is coming from (or going), and why?
Whether or not you fall into the 60% of small business owners who are unsure of the financial state of their business, it’s important to understand the difference between a P&L and unit-level profitability to ensure your franchise’s financial success.
What is a Profit & Loss Statement?
The biggest question you have as a franchise owner is, “Did we make money this month?”
A P&L answers that question. It’s where you record how much your business makes and spends, as well as the total profit over a set period, usually monthly or annually. You can identify financial trends, control costs and guide pricing strategies for your business with this statement.
These statements can be customized for your specific needs, but they generally include:
- Revenue
- All income from sales and services
- Cost of goods sold
- What it costs to produce your product or service
- Gross profit
- Revenue minus cost of goods sold
- Operating expenses
- Rent, payroll, marketing, royalty fees, technology, etc.
- Net profit
- What’s left after all expenses are considered
Why is a Profit & Loss Statement Not Enough?
While a P&L can help you make informed decisions about spending and hiring, spot trends, track fees that are impacting your bottom line, prepare for tax season and identify where to cut costs and increase profit, it doesn’t show you the full financial picture of your franchise.
Your P&L provides an absolute number—the money your business earns after expenses. However, that’s not where you should stop measuring your franchise’s financial state. Going a step further into profitability will help you measure efficiency. It is a relative measure, usually expressed through ratios that show how effectively your business turns profit into revenue.
The profitability data you gather can be used to demonstrate your business’s strong performance and growth potential to relevant stakeholders, helping you secure funding, build trust and attract strategic partners.
Why You Need Unit-Level Profitability
Unit-level profitability provides the complete financial picture of each franchise location, isolating all revenue and expenses to determine your true cash flow. It identifies, measures, tracks and manages your business’s performance at the unit level, so you not only understand how much money you have but also where it comes from and whether the economic models at individual locations are successful or need work.
Why the Two Tell a Different Story
Your P&L presents financial performance at the entity level and includes all operating expenses, administrative overhead, depreciation, interest and other costs. This helps you understand total business performance.
Unit-level profitability narrows the focus on your individual locations, examining revenue generated by each location and the direct costs required to operate it.
Because one report looks at the big picture and the other looks at the economics of each location, it is possible for the overall business to appear less profitable even when individual units are doing well, or for the opposite to be true.
For example, your franchise may have strong-performing locations. However, your overall P&L still looks weak due to startup costs, corporate overhead, technology investments or other expenses that support the broader business rather than a specific unit.
On the other hand, a healthy-looking P&L can sometimes mask problems at the location level if a few strong units are carrying weaker ones. When you focus on unit-level profitability instead of only on your P&L, you can discover problems before they get out of hand or identify growth opportunities you couldn’t see before.
How RKL Fits into the Equation
RKL’s franchise experts partner with you to help turn your financial data into clearer, more useful decision-making. While a standard P&L is important, many franchise businesses need more visibility into what is happening at the unit level to understand performance, spot issues early and plan for growth.
RKL can help you develop more meaningful reporting by identifying the right unit-level metrics, improving how costs are categorized and allocated and building reporting processes that make it easier to compare locations consistently.
RKL Virtual’s franchise experts are here to help you navigate the complexities of your multi-unit franchise’s financial circumstances. Contact an advisor today to see how we can help your franchise grow.
