Franchising a business offers great opportunities even for first-time franchisors. You can get a business up and running immediately while benefiting from an established system that has likely overcome many start-up mistakes, like spending on unnecessary expenses.
However, while most franchise companies provide manuals, training programs and other support services, your control over all your finances as a franchisor could still lead you into a financial pitfall.
Small mistakes add up over time to the point that it could take a toll on your finances. On the other hand, avoiding bad spending decisions and keeping your finances in order can improve the profitability of your franchise business and will even allow you to bank on valuable expenses and growth opportunities.
To help you avoid a serious franchise pitfall, here are 6 things that you shouldn’t spend money on:
1. High Lease Agreement
A commercial lease is one of the biggest investments in your business. There are things you will have to keep in mind when signing up for a lease space. First, the base rent (the minimum amount of rent that is due under terms of a lease), should be as low as possible in the beginning. Negotiate to get at least free rent for some initial months of the contract when your business is only starting and ROI is not yet achieved. Likewise, you will also have to negotiate a cap on the escalation clauses that will continually increase throughout your term. While it may be legal and common, it still could be one of the biggest money traps for you.
Negotiate. Learn how to negotiate to avoid the expensive cost of lease and to ensure that you will be able to afford the ongoing base rent.
Sign up for short term lease. It is best to play safe by avoiding long-term obligations until you are certain of how your business will work.
Look into flexible options. A multi-year lease may not be the best choice especially if there could be a significant portion of the term where your space will be underused.
Seek expert advice. Get advice from experts who can help you address your weaknesses which the other party could use to their advantage.
2. Contracts without Bid Proposal
Contracts without bid proposal can often cost you more than what you should spend for renovation. While many assume that construction costs are fixed and contractor rates are the same, a bid proposal guarantees that a specific amount of work will be accomplished for a price agreed upon. You can be confident that the cost will not exceed your budget. Without it, there would be no way for you to establish the overall cost of a project which could often cost overspending for setting up your business. It is the basis on which many construction companies are hired to serve as the primary contractor on a project.
3. Large Inventory and Supplies
Inventory and supplies are often disguised as a small purchase item. But the truth is, they are a major expense for most businesses. Maintaining the right amount of inventory and gaining over its associated costs can be tricky and hard to achieve. Failing to stock enough of the high-demand items may lead to unmet customer demands. Likewise, if you are stocking an excess number of other items, you might end up being overstocked. Either way, you lose sales while unnecessary expenses are way above your profit.
Know what’s in stock. The most effective way to reduce inventory costs is to count everything in stock. This will help you avoid unnecessary expenses, make the most of your purchases, and likewise identify the supplies that need to be replenished.
Overstocking is a costly mistake. Do not be tempted to overstock anticipating a spike in the demand for a particular item. Oftentimes it leads to unnecessary cost overruns.
Make slow-moving items desirable. Identify the merchandise that sells the fastest as well as those that don’t sell well. With the right strategy like conducting a promo sale, you can sell items that are usually slow moving.
Perform regular stock inventory. This will help you determine the right quantities to purchase and avoid falling into large-volume discount baits that will only add up to your piling inventory.
Set-up reorder alerts. Running out of popular items would mean losses. But you can prevent this by setting up alerts so you can reorder before your supply runs out.
4. Overpriced Business Equipment
For most businesses, equipment is their highest-value asset since you cannot operate without it. Sometimes, equipment can be very expensive and you often ask yourself how you can avail one. But, there are always more affordable alternatives to do so like leasing your equipment to reduce your expenses on tools. There may be risks involved with buying used items, but there are always steps to minimize them. For one, you can ask for a warranty. Finding a reputable source and putting it to the test to see how the equipment performs will secure your investment. You may also consider different financing options like loans or leases with your purchase to conserve your capital for other business expenses.
5. Unnecessary Marketing Costs
Marketing is one of the most important aspects of business management. However, it is also one of those that usually take up most of your investment. As a franchisor, you have already been laid out with a marketing plan for you to follow and all that’s left is for you to avoid committing costly mistakes. If you feel you can do more than that, you can also opt for other tactics like shifting advertising to the Internet or replacing print with electronic. This way, you are also foraying into the benefits of digital media marketing which are proven cost-effective while targeting a wider audience.
Stick with what works. One of the effective ways to marketing include sticking with what works. While a fresh approach could draw more people in, it is often more expensive than focusing on client retention. In fact, a study shows that about 70 percent of businesses claim that it’s cheaper to retain customers and improve customer service and engagement.
Create a flaw-free marketing strategy. Consider a strategic campaign that will help identify what could be improved and what can be eliminated in your strategy. Through this, you can avoid mistakes that could later take a toll on you financially.
6. Excessive Labor Costs
Labor is the largest ongoing expense for a business. Whether your enterprise is overstaffed or understaffed, both can add up to tremendous spending over the course of a year. Without the right number of staff your business will be inefficient. On the other hand, hiring staff beyond your requirements would mean extra spending without getting your expected returns.
It is important to be keen in assessing the manpower you need. You must be able to foresee the path that your business is taking in order to prepare for growth and the adjustments that come with it. Not only will that spare you from unnecessary expenses, it will also help you implement changes that will result to improvements, as well as significant and noticeable financial results.
These examples represent the most common unnecessary expenditures you can avoid. Identifying areas where you spend more than you should is the key to keep things running smoothly without the fear of being bankrupt. It is best to consult a franchise expert to help you through your franchising journey.
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