Going Up?

Philip Morrison of Franchise Accountants helps franchise owners and buyers ride the rollercoaster of inflation

After a long period of stability, many countries – including New Zealand – are entering a new period of inflation. This impacts consumer spending and has a knock-on effect to business owners. So what can franchisors, franchisees and franchise buyers do about it?

Pumping money into the economy over the lockdown years helped stimulate the economy and dodge a recession, but caused inflationary pressure. Supply chain issues and the Russian oil crisis have further exacerbated the situation. It means almost every item we consume that is imported will cost more.

What are the consequences?

Price increases put pressure on the cost of living, wages go up to compensate, the cost of production rises, and prices have to rise further. Although the Reserve Bank is using its monetary policy to reduce demand for goods and services and rein in inflationary pressures, this will take time. The Reserve Bank doesn’t want to stall economic activity by choking demand too much and heading into recession. Retaining ‘business confidence’ is important to encourage investment, create employment and stimulate economic growth.

How does this impact business owners?

Running a business in inflationary times requires focus on four key areas:

1. Margin erosion

Supply chain pressures have seen a raft of price increases being passed on. Franchise systems tend to have contracted supplier arrangements in place which can mitigate some of the timing of price increases, at least until the time comes for renewal. Even then, group buying should give franchisees an advantage over independents.

Labour shortages in some sectors have also seen some businesses offer above market rates and people moving jobs for higher wages. All these elements contribute to pressure on wages and the cost structures of business. Managing timely price increases is key to mitigate margin erosion.

2. Cashflow pressure

Cashflow is the life blood of any business, so it’s important to revisit the areas that lock up cash in your business. Can you reduce stock holding to just the levels essential to operate your business? Review your accounts receivable – are your trading terms being adhered to and customers paying you on time? Focus on credit management or offer prompt payment terms.

Reduce debt levels where you can: eg. review hire purchase agreements. Do you need to arrange additional funding to cover lengthening payment times from customers? Consult your accountant and bank.

3. Sales

Whilst pressure is on to move prices to recover rising wage and supplier costs and mitigate margin erosion, you still need to remain competitive and retain customers. Contraction of demand means softer sales, and possible shopping around on price. It’s a fine balance, so bring your customers with you on the journey: give them due warning of increases, explain the reasons, and reward loyalty.

Review how and what you advertise. Devise offers that promote your most profitable products or services; draw in more customers; or strengthen relationships with existing clients.

4. Profitability

Maintaining profit levels is fundamental to operating a viable and sustainable business. Take a ‘lean’ approach and cut out any unnecessary expenses, such as subscriptions or lifestyle spending. Is your social media spending really producing sales, or just feel-good clicks?

Buying a franchise in inflationary times

Despite the clickbait headlines, now is actually a good time to purchase a franchise – as long as you’re careful. It will pay you to undertake a detailed sensitivity analysis as to the impact of inflation on the business, its viability, profitability and sustainability.

If finance is required, your bank will require analysis on the numbers to support debt servicing. It’s fair to say that banks are taking a more conservative approach, which should be seen as a positive – they will only want to support viable businesses.

This is why you should seek out experienced franchise advisors who can provide the right level of expertise to help you make good decisions and appropriate investments.

New or established?

Well-funded businesses have a higher chance of success and sustainability compared to highly-geared businesses, so the less debt you have, the better. This may mean looking at the type of franchise you purchase with a more critical lens: comparing a new start-up franchise with an already-established franchise, assessing risk versus reward, and debt levels versus debt servicing capacity.

Working capital

You also need adequate working capital to fund the time difference between when you pay the costs of delivering services and products in your business compared with when you get paid for them. In ‘cash’ businesses such as cafés, you get paid before you pay wages and suppliers – a definite bonus. See more about working capital at www.franchise.co.nz/articles/1872

The franchise advantage

Inflationary times impose more disciplines on business owners. Knowing the numbers that count and having good reporting systems to be able to monitor key performance metrics is vital. Well-run franchise systems have these reporting systems in place, as well as franchise support staff to provide expert advice. Add group buying power, collective marketing and efficient systems, and a franchise can offer better value than ever.

For both established franchisees and new business buyers, reviewing the numbers now can make all the difference to how you ride the rollercoaster of inflation. Consult a specialist accountant to reduce the risks and make the most of the opportunities.

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Franchise Accountants

www.franchiseaccountants.co.nz

Contact Philip Morrison

P 0800 555 80 20 M 021 22 99 657

pmorrison@franchiseaccountants.co.nz