So why Franchise audit?

‘Under-reporting or under-declaring of sales by franchisees is rife in the franchise industry…’ This is a bold statement. But is it true?

Based on US auditors research, approximately 15% to 20% of franchise locations are underreporting sales by 15% or more. As a result, locating and correcting underreporting behaviour can increase MSF revenue up to 4% annually. So if franchise msf revenue is £1M, on average £40k additional revenue can be generated.

Indeed, further evidence from the US franchise market, where franchise or royalty auditing is more widespread than in the UK, suggests that a program of audits across the franchise network will derive greater results and greater support from the network, than one off specifically targeted audits against franchises known to be under declaring sales.

Our own findings show that all franchisors receive a boost in returns when an auditor is introduced to the network; creating an amnesty environment, as the individual franchisees attempt to bring their records to good order. Indeed, most franchisees welcome a Franchise Audit program being implemented. It levels the playing field and ensures all franchisees are held to the same obligations. And in terms of the actual results of an audit; on average 95% of the cost of the audit is recovered in full, by fees detected in the audit process.

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It all seemed like such a good idea….

People buy franchises because they are persuaded, they will make money, they will improve their work/life balance and because they want to run their own business.

Two to three years on. How many franchisees feel that their original aspirations have been fulfilled?

I suspect if you carried out a survey; the answer would be relatively few. But then we are in the depths of the biggest downturn in 80 years. You would expect that many would be suffering. And so they are…

But why?  Franchisors go to great lengths to promote the viability of their franchise proposition. They will tell you that within two to three years you will be generating £x sales and £s profit. They will advise that they will support you all the way and will assist you in the marketing process throughout the lifetime of an agreement.  

Of course most franchisors do support their franchise network very effectively and with realistic projected levels of income sold to the prospective franchisee as part of the recruitment process. The anticipated levels of turnover and support are being achieved. But there are also some franchisors whose projections were maybe unrealistic and the support promised to help the franchisee through the myriad and complexities of actual day to day business is sadly missing. Franchisees who acquired a franchise from one of these franchisors could well find themselves in a bit of a mess.

But of course that is not the whole story. It is frequently the franchisee who gets it wrong…  How many franchisees’ start off with the best intentions and then over time decide that their way is the better way and deviate away from the proven franchise system?  We know there are many as that is what the franchisors tell us. One estimate (from a US based franchise consultant) put this at a third of every franchisors network. That is a third of every network attempting to buck the system, to find their own way of doing  things and of course many of those also attempt to avoid declaring all they have sold, with a view to avoid paying all their fees.

Can you imagine that happening at McDonalds? Control of your franchise network, as well as supporting and nurturing them is one of the biggest challenges that franchisors face. Many franchisors have good and effective controls in place to prevent a franchisee going off the rails, but some don’t and it is these franchisors who will have the biggest problems…

So who is to blame? There is no simple answer. It may be the franchisor who has failed in their obligation to support their franchisees. It may be that their sales projections were unrealistic, or that they are simply not paying enough attention to who is declaring what and why some franchises are just not performing as well as they should be. Moreover, it may be the franchisee who just feels they are cleverer than the franchisor; that they can buck the system or that they can make a little extra on the sly.

In both these cases, the franchisor is left to pick up the pieces…

 Chris Burton is the Principal Advisor at CBCS. (www.cbcservices.org) CBCS specialise in Franchise Auditing, Support and Franchisee financial training.

 

 

 

Is your business one of the ‘Walking Dead’?

This extended downturn has now been with us for nearly 6 years and despite recent figures from the ONS (Office of National Statistics) suggesting that UK PLC avoided a double dip recession last year;  at best we have bumped along the bottom and we are years away from achieving the levels of GDP which we sustained in early 2008.

We must not be negative though. We have seen how important good news is at providing that much needed feelgood factor which actually helps to buoy the economy. Whilst we are not looking at Chinese or Indian rates of growth, we can at least look forward to sustained growth over the next few years.

That is good news for the country, but not necessarily great for the individual companies, whose very existence may well be governed by whether they are still supported  by their bankers. These are the ‘walking dead’, a term used quite widely in the last eighteen months (and indeed by me) and one which has come to encompass those businesses, who are only still in existence because their bank have not yet pulled the plug…

Are you one of these businesses?

Typically, you will have extended your overdraft facility with your bank, perhaps several times over the last few years and you have tried to arrange for a loan from your bank to pay off the overdraft and they have refused to provide one and now they wont extend the overdraft anymore and you need more money, because your creditors are growing at a faster rate than your sales. And you cannot generate significant additional sales, because you have not got the marketing budget to go out there and increase your sales.

Waiting for the green shoots of recovery?

This puts you right on the edge, every single day, and at several critical times throughout the month, dependant on on so many external factors to allow you to pay those most important creditors. Yes, you know the ones, your wages bill, PAYE and your key suppliers. And you can’t think about anything else, apart from cash-flow, cash-flow, cash-flow.

It is either a constant spiral of decline or you are just treading water, waiting for the next bad issue to set you down still further… Should you still be trading? Probably not, but this is not just about the here and now, it is about the company’s future prospects and of course your staff. And business owners and directors make critical decisions like these every single day. 

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Thankfully, most companies decide to continue and for now many of them will reside fairly and squarely within the ‘Walking Dead Zone’;  keeping the bank and your critical creditors happy and hoping your sales grow strongly enough to show you that there just may be light at the end of the tunnel.

But is this enough? Is there anything else you could be doing that could preserve your business, your staff’s livelihood and reduce your business from its mountain of debt? You could try to change your bank and apply for finance or an overdraft facility from a new bank… But this is unlikely to be successful  in the current climate.

You could consider entering into an Corporate Voluntary Arrangement (CVA) and allow an insolvency practitioner (IP) to help you clear your debts with the agreement of your creditors. At least this would cast light at the end of the tunnel. You would be severely restricted in terms of how you trade, but your debt ratios would be going down and within a few years you could actually be debt free. You would be more ‘wounded than dead’.

If all else fails and you still want to keep the essence of your business going you could, enter into a pre-pack administration  This is where an IP places your business in administration, but a new leaner version of your business rises from the ashes ( sometimes known as  Phoenix from the ashes administration), but this is dependant on you being able to 1) Find funds to acquire the phoenix business from administration and 2) Being able to persuade your key creditors and indeed your customers that this is a positive thing and that continuing to trade with the new business would be a good business decision. This is a complex move and even after your new company rises into the sky and begins to trade debt free and as a new entity your business may still be rife with problems. You won’t be able to get credit, your critical suppliers will want cash in hand and even your customers will treat your every move with suspicion.  if you can get through this though and you begin to grow your business again, your new business will be free from encumbrances and you will now be ‘walking tall.’ Fail to secure enough new business however and you may end up back where you started.

The truth is there is no easy answer. Doing nothing and just standing still is almost certainly the worst thing you can do. But which avenue should you take and do you want to stay one of of the ‘Walking Dead’?…

 

Have you totted up how much you pay your Accountant lately?

At CBCS, we recognise that many small and medium sized businesses pay too much for their year end and day to day accounting. Frequently the process is unnecessarily complicated and drawn out over many weeks as your accountants carry out their checks and balances and their in-depth final analysis of your accounts. Much of this is not needed and this means your charges are probably considerably greater than they should be.

Of course, as small and medium sized companies can usually file abbreviated accounts at Companies House, there is no need for an audit. Your accounts can be prepared directly from your accounting records, saving a considerable number of accounting man hours and saving you a small fortune.

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CBCS offer a range of Financial Management, Accounting and Bookkeeping services designed to make life easier for you. We can deliver your accounts quickly and accurately to prescribed deadlines and for a fraction of the price that you may pay an established high street accounting practice.

Our standard Bookkeeping and Year End Accounting service is a case in point. This is suitable for small Ltd companies; who need their year end processing and verification that their records are being administered correctly.  In addition this package offers the development of templates to assist the small business owner with their basic monthly accounting requirements, together with assistance in preparing cash-flow forecasts, bank reconciliation, tax calculations for year end and PAYE and the generation of standard reports from your accounting software. We can also assist you with your payroll day to day and year end obligations.

This package is designed to help you at year end and throughout the year. It provides a basic but complete service in addition to your year end requirements.  The total cost and hours to be billed are agreed in advance and are usually in the range £500 to £1,500 per year. These modest costs are designed to save you money… You do not need to spend thousand of pounds on your year end accounting.

A Personal Note:

As a former Financial Controller of a large UK franchisor, I have seen first hand how difficult it is for franchisees and licensees to look after their finances whilst trying to grow their businesses within their specified areas.

I started CBCS, 3 years ago and have continued to work in the SME and franchise industry ever since. I have helped many businesses bring their finances back to good order, be it by assisting with cash-flow management, helping them with their year end accounts, or helping them to prepare their finances for a funding presentation etc…

Full details of all of our services are on our websites:

http://www.cbcservices.org.

http://promptcash.co.uk

 

 

Franchise Audit – Can you afford not to?

Spare a thought for your poor franchisees…

In this economic climate, times are tough for all of us. We all have to tighten our belts and your franchisees in particular have to scrutinise the spending of every penny. When trading is poor and the bank balance is shrinking fast; people do the strangest things. They start to think about where they can save it, which bills can they delay paying or who can they avoid paying….  Where can they hide the money, so that they don’t have to declare it? Suddenly those healthy and consistent sales returns from your franchisees can lower dramatically…

Does this sound familiar?

The problems that cash strapped or profit starved businesses face is very common. There is hardly a network of franchisees in the country where this is not an issue. It is highly likely that your business is suffering diminished returns as a result.

So how do you resolve this?

The obvious route is to chase the franchisee hard and question why their returns have reduced so markedly… But if they are trying to hide this information from you in the first place, this is unlikely to be successful. There is another solution.

Appointing a third party auditor to visit your randomly selected franchisees, will have a two-fold effect. On the one hand; just by announcing that an auditor has been appointed will result in a 3% increase in sales declared (US auditor source) and that is even before the auditor has visited. On the other, following an audit, on average we recover sufficient undeclared revenue to cover 95% of our fees, which are by the way, just £500 per audit (standard price, subject to variation).  

Our auditing visits are designed to make the franchisee feel comfortable about our attendance. We want them to feel that there is a mutual benefit to our being there and that we can genuinely assist them with their problems as well as uncover issues which need to be reported. Often this creates an opportunity for the franchisee to come clean and to make a fresh start with you; with any highlighted issues which you can assist with coming to the fore.

We offer a variety of different auditing solutions. The ‘Standard audit’ involves a maximum five hour visit to their premises, alternatively, we can carry out a ‘Take Away ‘Audit (where we visit, remove the files and return them once the audit is completed) or a ‘Virtual’ Audit (where records are passed to us on-line) We also offer a Franchisee Business Review service, where you are picking up the cost of our assisting your franchisee, we carry out an audit behind the scene. We even offer an International auditing service; often your overseas franchisees are the worst offenders! In each case, we will then generate a report to you within 48 hrs of the audit.

The report will highlight issues which the franchisee needs to address and of course undisclosed sales. You can then approach the franchisee and request payment of your missing fees.  We can take on the role of ‘Enforcer’, should this be required, where we will chase the franchisee to make payment, based on the findings in our report. 

Our latest offering is the Franchise Return and Document Collection Service:

How many of your franchisees fail to submit their returns on time and how many fail to submit year end financials or copies of VAT returns submitted as part of their franchise agreement contractual obligations. 

 

The returns or declarations are critical to your business as of course is the MSF or royalty itself. We offer a polite e-mail driven collection service that reminds the franchisee of their obligations. 

But even if your franchisees send their returns and fees in on time, do you know how well their business is doing? You can carry out a franchise audit or a franchisee business review through ourselves of course, but for a more cost effective solution, we can chase the year end submission of year end accounts and/or copies of their quarterly VAT returns. For as little as £25 per franchisee we can collect and submit these directly to you. We can also collate and cross reference against their submitted returns, highlighting immediately and showing franchisees where further investigation and potentially an audit or review may be appropriate. 

Of course much of this is dependant on your franchise agreement and on what authority you have to access your franchisees financial records. Assuming this authority is in place, you can feel comfortable that engaging the services of CBCS to carry out your auditing requirements will result in increase revenue. 

CBCS offer the complete package of auditing and financial support and training solutions for your franchisees. We can be there at the outset, providing training as part of your new franchisee training course, we can provide additional financial training for your existing franchises and of course we can be sourced as a provider of support for the franchisee’s financial and administrative issues.

Do your franchisees fail to send their year end accounts to you?

As a Franchise Auditor, I come across quiet a few franchisees who yes, mis-declare their franchise returns, but many who fail to send copies of their year end accounts to you, the franchisor. In many cases (and where it is a stipulation of their franchise agreement), they fail to submit copies of their VAT returns too.

Just wondering whether this a common complaint and whether this is a concern for you?

I am thinking about starting a collection service which for a nominal fee ( perhaps £25 per franchisee) we chase and collate this info. This would be is an alternative to the more expensive franchise audit and could involve cross-referencing with MSF/?Royalty Fees submitted to check if there is a potential issue?

Franchise audit – 6 good reasons to start auditing today.

Why should you outsource your franchise auditing?

1) Improved Revenue and Profitability. Auditing encourages your franchises to declare their revenues correctly; where previously you may have missed out on fees and profit.

 2) Outsourcing to a trusted and professional business partner, takes away the contradiction between you and your franchisees. We carry out the audit, as per the franchise agreement, allowing you to carry on supporting your franchise network, without the ‘we don’t trust you contradiction.’

3) The temptation to generate additional undeclared income for a franchisee is enormous, especially in these troubled times. It they know you are watching them; they are far less likely to try to defraud you.

4) The benefit of a partnership between the auditor and the franchisor creates a greater understanding of the requirements of both the franchisee and the franchisor. The auditing process frequently highlights areas where improvements can be made to the benefit of both of the franchise parties.

5) Cost. It need not cost you anything. If you can identify franchisees who you suspect our under-declaring, you can recover the cost of one or even multiple audits from just one visit.

6) Critical Mass. If your business is growing, the chances are that you are using your franchise recruitment fess to support your business. When you achieve Critical Mass, the revenue derived from your management service fees will reach a point where your business is self sustaining and gross profit from each and every new franchisee will go straight to your bottom line. If you audit you increase the prospect of achieving Critical Mass faster.

Outsourcing your audit to CBCS, gives you consistent and unbiased results; allowing you, the franchisor to concentrate on providing support to your franchisees. We would work in partnership with you to establish a bespoke audit method, which would work best with your franchisees and provide you with the reassurance that your franchisees were in compliance.

Because we can tailor services to suit you and because we are small, we can achieve all this at a surprisingly low cost to you and that’s the crunch in these difficult times.

Would you like to know more?

Please contact me directly on 07759 248490/01428 743932 or via e-mail at chrisburton@cbcservices.org. Alternatively you can access our website at http://www.cbcservices.org and complete our on-line form.

We look forward to hearing from you.

Are you a UK Franchisor with international Franchisees? Are you concerned that they are not disclosing their sales properly and are you missing out on MSF or royalty revenue?

This is a potential minefield, with language, cultural and geographical barriers. To be honest it is very difficult to police and potentially very costly.
In most case the first port of call would be your master franchise within the country or countries concerned. There are two issues here:
1) Are they collecting sales data and revenues correctly/effectively?
2) Are they passing the info and funds to you as they should be?
If they are responsible for collecting information and funds on your behalf then any costs associated with verifying that figures are correct should be covered by them… Yes, but that still effects you in the long run…
At CBCS, we recognise that auditing internationally, particularly in developing countries is often not considered because the main cost to the Franchisor is not the audit fees, it is travel. And yet frequently your international franchisees are the worst offenders when it comes to disclosing their revenue and royalties correctly. So how do you get round this…?

The biggest cost is frequently travelling to and from the destination country (particularly long-haul). Why would you pay for someone to travel business class, when economy is just as acceptable? If you can travel economy when you go on holiday with your family, surely you can when you are on business? Then there is the cost of hotels and transport to and from the various franchisee destinations. Again, there is no need to occupy two floors of the Presidential Palace, when the Holiday Inn will suffice and is why not take advantage of trains and buses rather than hire cars, taxis and flying? Strict control of a business trip that involves multiple sites will reduce your cost markedly and can turn this into a viable option.

international business travel can be expensive…

And what of the other obstacles mentioned above: language, cultural, even local business ethical issues. Language will always be a barrier if one party or the other does not speak the same one with any fluency. You have to assume that as a UK Franchisor, your franchisees, be they in Kansas City or Outer Mongolia will have some understanding of English. So mostly this is not an issue; communication can be more challenging, but not impossible. Cultural differences are easy enough too. An understanding and willingness to comply with local cultural and business ethics is part of preparing for a trip to another country. Again preparation is key.
The additional preparation and the challenges of working in another country make international franchise auditing more complicated than the domestic version. As a result costs for audit and of course travel will be a little higher, but the returns could well be higher too.
CBCS offer a full range of Franchise auditing and business review services both domestically and internationally. Please give us a call or e-mail us, if you wish to discuss this potentially difficult area in more detail. We will treat each case individually and can tailor an auditing package designed specifically for your franchise operation and of course to the individual countries involved.

Danny Alexander has suggested the UK will not enter a triple dip recession. Fine, if that proves to be the case, but ‘bumping along the bottom is just as dangerous. And the ‘Walking Dead’ are still out there, waiting to secure their unsuspecting prey. It could be you if you don’t prepare for them…

All Things Financial

All the hard work has been done. You products and services are selling and you have new clients on board…. All you have to do is provide your service or supply the product and everyone is happy. All you have to do now is get paid…

Most of your clients are paying you on time, some even within terms. The majority of the others have a good reason for not paying you. But why is one client in particular not paying you? Will they ever pay you?

Hopefully if the value of the business generated form this new client justifies the cost, you have already done a credit check on their business and you have reviewed and set a specific credit limit based on the clients buying expectation and your assessment of their credit report. But is that the whole story?

The media has this week been awash with stories about the strength ( or lack…

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A new client. Are they the ‘Walking Dead’? How much do you really know about them?

All the hard work has been done. You products and services are selling and you have new clients on board…. All you have to do is provide your service or supply the product and everyone is happy. All you have to do now is get paid…

Most of your clients are paying you on time, some even within terms. The majority of the others have a good reason for not paying you. But why is one client in particular not paying you? Will they ever pay you?

Hopefully if the value of the business generated form this new client justifies the cost, you have already done a credit check on their business and you have reviewed and set a specific credit limit based on the clients buying expectation and your assessment of their credit report. But is that the whole story?

The media has this week been awash with stories about the strength ( or lack of) the UK economy. At best UK PLC is bouncing along the bottom. At worse we will shortly enter a period of recession again… a triple dip recession. It is difficult to say, let alone comprehend the damage this is doing to thousands of UK companies. the news on the continent remains bad and if the ‘fiscal cliff’ edge is reached in the USA and Obama and the Republicans cannot settle their differences, the whole  world will suffer… again! It all looks a bit gloomy…

Recent press coverage has highlighted the number of companies in the UK who are just about breaking even and staying afloat, because they are managing to continue to pay their loans and charges. These businesses are existing… They cannot invest and grow as all their money is tied up in working capital. They are the ‘walking dead’… Still alive just, but not a good credit risk.

So how do you know who these companies are.? Well there are lots of them, which in itself means it is prudent to tie down your credit decision policy to ensure that your risk to bad debt is limited. There are certain signs you can look out for when assessing a new clients credit report:

*Lower or reduced net profits (relative to the size of the company) or near to break even, or those companies who have made a loss.

* Persistent loss making companies, who remain in existence as a ‘going concern’.

* High Gearing. This is the percentage of loans,charges debenture and other debt showing on the balance sheet under long term creditors. If this is too high, it shows an over reliance on external funding. ie. they cannot support themselves.

Companies like these are the ‘walking dead’. They can of course still obtain credit from you and a whole host of other creditors. If they overstretch themselves  they wont pay you, they will pay the people they have to pay first; the business critical debt, the loans, HMRC and their staff.

It follows of course that the longer you leave a debt to fester, the more chance it will not be paid.  How long will it before  the directors of the company or one of their creditors decides enough is enough and the company and your debtor is forced into administration….

All companies suffer from bad debt. It is not unique. All you can do as a business owner or manager is do as much as you can in advance to ensure you limit the value of of business you pick up from one of the ‘walking dead’ companies. If you do pick up high credit risk business, do your research, apply strict credit limits, enforce them and then follow good credit collection techniques to ensure your debtor knows that you are a priority too. Then when the debt is paid, look for business elsewhere…