Franchise Study Shows Importance of Good Financial Reporting: Net Operating Income Up 35%, Revenue Up 17%
Austin, TX, February 12, 2013 --(PR.com
)-- A recent study on the value of “operational accounting” to small businesses, including franchisees, yielded some astounding conclusions:
1. Net Operating Income margin increased by 35%.
2. Revenue grew 17%.
Data was collected from 110 quick-serve restaurants, all part of the same franchise network. The methodology is summarized below.
But first, what is operational accounting, and how does it differ from what most small and mid-size businesses actually do? Operational accounting is simply good accounting. Good accounting is nothing more than having current, accurate financial and operating data in a format that is understandable and usable.
Usable for what? For running your business better and more profitably.
Usability starts with having an accurate and consistent chart of accounts. Then it requires inputting and accessing current financial data, both top line and by line item. For multi-unit operations, the ability to consolidate data and compare data unit-by-unit dramatically increases usability.
Back to the study.
66% of the 110 QSR locations provided meaningful information. Average revenue was just over $615,000. NOI averaged $42,000. Cost of goods averaged just under 41%, and labor costs were just under 20%. These 73 locations served as the benchmark to test against.
40% of the 110 locations provided accounting information (accrual-based profit-and-loss statements) that was incomplete, inconsistent, and/or did not meet generally accepted accounting standards. (Group 1)
13.6% of the 110 locations provided accounting information that met generally accepted accounting standards, but was not consistent. (Group 2)
52.6% of the locations provided accounting information that was complete, consistent, and met generally accepted accounting standards. (Group 3)
Groups 2 and 3 comprised the benchmark group.
A subset of Group 3 was used for comparison against the benchmark, to eliminate the possibility that the locations using quality accounting were doing so because they had the highest revenues. This Group 3 subset of 11 locations replicated the market demographics of the entire 110-unit franchise network.
The comparison produced eye-opening results.
Over a 6-month period, Group 3’s NOI margin (as a percentage of total revenue) was 35% higher than the benchmark group’s. Actual NOI (dollar amount) was 58% higher.
Benchmark Group NOI margin: 6.86% Actual NOI: $42,226.27
Group 3 subset NOI margin: 9.31% Actual NOI: $67,029.73
Most of the improvement came from general and administrative expense. Labor was 1.28% more favorable.
A franchisee would have to generate an additional $220,000 in revenue to achieve the same result that was derived from reducing expenses.
Another surprise was the 17% increase in total net revenue.
Benchmark Group revenue: $615,425.25
Group 3 subset revenue: $720,231.48
The franchisees in Group 3 said that better accounting information helped them make better decisions on how to allocate sales and marketing resources. They knew which products to emphasize and which channels to use to maximize sales. They were able to calculate their marketing ROI, which in turn produced higher sales with the same expenditure.
The quality-accounting franchisees also added that, because they had accurate and timely information, they could make quick decisions to take advantage of opportunities as they arose – and they avoided impulse programs that they knew would not drive the right products in the right channels.
Bottom line: the franchisees that tracked their financial data consistently, completely, and accurately far outperformed even the larger group of franchisees that had acceptable accounting information. The financially-diligent franchisees produced higher revenue and were significantly more profitable.
Better information leads to better decisions. Better decisions result in a better bottom line.
For a franchise network, significant value accrues to the franchisees and the franchisor. Franchisees realize immediate benefits, with more profits to expand or distribute. The franchisor brings in more royalties and more franchisees (as it becomes more attractive versus other, less-profitable franchises). The franchisor also makes itself more valuable in an acquisition scenario.
For non-franchise businesses, the value is just as clear. Multi-unit businesses, in particular, should see tangible benefits across the enterprise, including growing advantages over the competition.
This study shines light on another huge problem for many businesses, whether they are part of a franchise network or not: a significant percentage of them operate on the fly, with no meaningful financial/operating information on which to base decisions. This subset views accounting as an end-of-year, tax-return issue. The potential for this group to benefit from a mindshift toward operating with current, consistent, complete, and accurate financial data – simply good operational accounting – is enormous. Failing units can be saved, and then continually moved up the performance scale.
Good operational accounting and reporting – and using that data to run better at both the unit and enterprise levels – is an extremely powerful management “secret” that is unknown or unappreciated by far too many businesses. Those that understand and implement this best practice will reap the rewards.
Qvinci Software makes it easy. Watch the video and run the test drive on their homepage. SOLO is free, MULTI is $4.95/month, and their most powerful application, ENTERPRISE, is $14.95/month. Pricing is per location.
The study described above was undertaken by eProcessPros, a service company focused on addressing critical accounting, finance and technology issues for the entrepreneur-based business, including integrated business tools to help franchisors, franchisees and multi-unit small business managers improve operational efficiency and increase profitability. The study is reproduced here and summarized with the permission of eProcessPros.
About Qvinci Software:
Qvinci Software is the creator of Qvinci®, an industry-leading, cloud-based solution that automatically syncs and consolidates an unlimited number of QuickBooks® files and other data, wherever located, in seconds, in an enterprise-class interface that gives the user a vast array of tools to analyze and act on the data, for better decisions and competitive advantage. Intuit® has selected Qvinci® as the financial reporting/business intelligence application for its Franchise Solution Program.
2-minute explainer: http://www.qvinci.com/intro
Test drive: http://bit.ly/QvinciDemo (live sample account)
James Wallace at email@example.com or 512-585-6019
(not affiliated with Qvinci Software)