What does it take to make a profit?
In accounting vernacular “profit” may be defined as owner “discretionary income”, “net profit margin”, “the bottom line” or Earnings Before Interest, Taxes and Amortization (E.B.I.T.A. ). Have you reviewed a Profit and Loss statement before? If so you’ll understand that it usually contains income or gross revenue at the top. Next, is subtracted the cost of goods sold and fixed expenses. The last numbers are the bottom line or profits.
What makes defining profit so elusive is the way franchise operators, their accountants and CPAs report and manipulate expenses. Some franchise operators do not pay themselves a salary nor do they take a draw. So, their bottom line profit would be higher. This affects the way their taxes are reported. Customarily franchise operators are encouraged to pay themselves a wage, so their bottom line profit would be lower, but accurately reflect how much bottom line profit the business actually made. This method affects the amount of taxable income they would report to the IRS.
Savvy entrepreneurs and franchise operators understand that cash is king. So, they use profits generated from their business to purchase new equipment, such another outfitted van, this preserves their capital and the business grows. It does lower the official bottom line profit for tax purposes. For our franchisees, this will likely involve buying another service vehicle or hiring a new technician before they really need them.
Here is a chart reflecting the wide range of net profit margins that franchisees experience across all brand and systems.
|Poor Franchise Net Margin||5%|
|Average Franchise Net Margin||10%|
|Strong Franchise Net Margin||20%|
|Outstanding Franchise Net Margin||30%|
|Rare Franchise Net Margin||40%+|
As you interview current franchise operators you’ll ask them about their numbers, expenses and net profit margins. This is a key aspect of learning about our brand and answering two of the most vital questions? “Does this system work and can I make money doing it?” This is an essential part of the franchise awarding process.
Key Point to Remember – Our franchise investigation process is designed to help you get the facts and get the numbers. All you have to do is follow the system!