How to Create a Realistic Franchise Restaurant Budget

Creating a realistic franchise restaurant budget is one of the most important ways you can ensure financial success. A budget will help you identify areas where you need to improve or issues that you’re not prepared for. Are you including ongoing franchise fees like royalties in your expenses or have they been left out of the budget?

Franchise accounting can help you develop a great budget. If you’ve created a budget before, that’s great—but you need to do it again. Your franchise accounting budget should be reviewed at least twice a month, if not weekly. Here’s how to create your most accurate budget yet.

Include Startup Costs

Disclaimer: of course, if you’re past the starting line you can skip this section. But, despite the fact that they won’t apply to everyone, startup costs are worth including due to their importance early on in the franchise budgeting process.

The startup costs for a franchise restaurant unit are much different than startup costs for say, a website design firm. For the latter, you need a laptop and a space to work out of. The cost of starting a franchise restaurant is much higher. You’ll have to invest in a franchise unit that allows you to use the established brand trademarks and operating system, as well as training and marketing. It’s a worthwhile investment, but it needs to be considered carefully.

When you’re first starting out, look at various options for franchise units. Some are less expensive than others and some brands do provide incentives. Most franchise restaurant owners find themselves taking out a loan or going into some sort of debt in order to handle the startup costs. As long as any startup costs continue to impact your business, they should be included in your budget. Any debt repayments should go under the expenses column so you can see how much money you’re losing each month to debt.

Ensure You Have Enough Cash Flow

Too many new businesses fail due to a lack of cash flow. If you don’t have enough cash running through your business, you’ll find yourself falling short on your expenses with not enough income generated to pull you through. Because of this, your cash flow statement is one of the more important parts of your franchise restaurant’s budget. Your cash flow reflects your company’s liquidity, not profitability. It shows you where your money is going and where it is coming from.

If you’re gauging your franchise restaurants overall health via your cash flow statement, a healthy restaurant should be bringing in more money than you’re spending. It sounds simple, but without accurate franchise accounting, more money could be slipping through your fingers than you realize. Great franchise accounting tracks every expense receipt and every penny of income. A lack of cash flow can cripple your restaurant surprisingly fast. Staying on top of your cash flow statement is an important function of a weekly budget review. If you go too long without reviewing your budget, you could find yourself with more issues than you realized.

Keep an Eye on Expenses

The expenses of a franchise restaurant are broad and varied. You have to consider payroll, rent, food supplies, marketing fees, software fees, and even the upkeep of the building you’re in. As a franchise restaurant owner, it’s difficult to keep track of every little expense. Unfortunately, franchise accounting demands that you do.

An inaccurate expense sheet can cripple your cash flow, as stated above, and can lead to increased debt. One of your most important metrics to track for your expense sheet is the prime cost. Prime cost is the combination of the total cost of payroll and all related expenses, as well as the total cost of all sales. These two areas represent some of your largest expenses that can change rapidly.

Track Income Growth

Tracking your income growth isn’t just how many sales you’ve made. It’s a combination of controllable and net income. Controllable income represents how efficiently your franchise restaurant is run. Are you losing money because of a slowdown in the production line? After all, people go to fast casual restaurants for fast food. If your franchise restaurant is too slow, you’ll lose business.

Net income isn’t just a valuable metric to look at, it’s an important metric for comparison to previous periods to track growth or decline. An experienced franchise accounting professional can help you evaluate whether your restaurant is growing, stagnating, or losing money. Closely analyzing your net income can help you to decide if you should take actions to promote growth or prevent decline.

Don’t Forget Ongoing Franchise Fees

Here’s what often gets left out of too many budgets or just looped in as an expense: ongoing franchise fees. These fees include marketing and advertising royalties which range about 5% of gross revenues. However, this can vary based on which franchise you’re working with. There could also be more fees for regional marketing and advertising, as well as branding, trademark fees, attorneys, and more.

Ongoing franchise fees should be marked as separate from expenses because they have different caveats than your average payroll costs. You want to track if they’re going up and down and ensure that you’re not being overcharged for anything. It’s a good idea to work with a franchise accounting professional who understands fees related to franchise restaurants specifically. Your average accountant may not be aware of some of the costs related to running a franchise unit.

If you’re trying to decide between hiring an internal accountant or taking the route of outsourced franchise accounting, download this whitepaper: “The True Price of Internal Accounting for a Franchise.” It’ll help you make the right franchise accounting choice for your franchise restaurant.