The following excerpt is from franchise expert Mark Siebert’s book <\/i>The Multiplier Model. <\/i>Buy it now<\/i><\/a>.<\/i><\/p>\n When I hold exploratory meetings with clients, I typically ask about various items on the profit and loss<\/a> (P&L) \u2014 also called an income statement \u2014 without actually referring to the document itself. I’ll usually ask about the cost of goods sold, their labor, or some other charge<\/a>.<\/p>\n Here’s how the responses can drastically differ<\/a>: Type A” business owners usually give me a very specific number \u2014 often down to the decimal point. “Type B” owners usually give me a range \u2014 sometimes narrow and sometimes not. “Type C” owners may simply give me a shrug. So where do you fall on the list?<\/p>\n Related: Considering franchise ownership? Get started now to find your personalized list of franchises that match your lifestyle, interests and budget.<\/a><\/b><\/p>\n The P&L is essentially broken into three parts:<\/p>\n Essentially, a P&L can help you understand several important principles<\/a> that you should grasp from the start of opening your business.<\/p>\n Related: These Women-Founded Franchises Surpassed a Major Milestone \u2014 Against the Odds. Here’s How They Did It.<\/a><\/b><\/p>\n On the revenue side, you need to understand how you will generate sales<\/a>. You should ask yourself some basic, yet important, questions<\/a>.<\/p>\n Related: <\/b>The 9 Provisions Every Franchise Agreement Needs to Have \u2014 and What They Mean<\/a><\/b><\/p>\n On the expenses side<\/a>, it’s crucial to understand<\/a> the relationship between your fixed expenses and your variable expenses.<\/p>\n Related: Greg Flynn Owns 1,245 Restaurants and Makes $2 Billion A Year. Here’s How He Did It.<\/a><\/b><\/p>\n Once you grasp fixed and variable expenses, you can calculate a hypothetical break-even point<\/a> for your business by making certain assumptions<\/a> about pricing and variable costs.<\/p>\n Simply divide your fixed expenses by your contribution per sale, and you can get a better idea of how many sales you’ll need to make to break even.<\/p>\n If you want to achieve a certain level of profitability<\/a>, add that profit to your fixed expenses and recalculate. Then you’ll know what level of sales you’ll need to achieve to get there.<\/p>\n Related: <\/b>These Are the Top 200 Global Franchise Brands in 2023<\/a><\/b><\/p>\n The vast majority of businesses don’t sell just one product<\/a> or service. Plus, each product or service will have its own associated price. And the price for each product or service will not have a consistent margin either.<\/p>\n For example, take a fast-food restaurant, where you can buy a burger for $1 and a large soft drink for $1.50. You can easily see that the cost of different products is not consistent across every product sold. So the “product” you sell and the “price” of that product will depend on your product mix<\/a>, and perhaps on value pricing or discounting as well.<\/p>\n Then there are labor costs<\/a>. In some businesses, where labor is hired on an as-needed basis to complete a job, production labor is all a variable cost. In other businesses, some labor functions<\/a> are overhead and some may be partially overhead and partially variable.<\/p>\n Again, using a food-service operation as an example, during the slowest times of each shift, you can never have fewer than one employee<\/a> in an open restaurant. But you will need to increase your staffing to meet your service requirements<\/a> at different parts of the day, on different days of the week, or even depending on different weather patterns. So while you will treat restaurant labor as a variable cost<\/a>, at least some portion of it is essentially “fixed.”<\/p>\n Once you start to account for some of the minutiae \u2014 like credit card processing fees or shipping and handling costs \u2014 a “simple” income statement becomes much more complex.<\/p>\n Related:<\/b> Is Franchising Right For You? Ask Yourself These 9 Questions to Find Out.<\/a><\/b><\/p>\n This may sound incredibly daunting<\/a> if you haven’t done it before \u2014 but once you get used to it, the process becomes second nature. And once that comfort sets in, you’ll be well on your way to running a profitable business<\/a> and making day-to-day decisions to improve or solidify your bottom line.<\/p>\nThe components of your income statement<\/b><\/h2>\n
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Understanding your potential revenue<\/b><\/h2>\n
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Diving into your expenses<\/b><\/h2>\n
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Start making calculations<\/b><\/h2>\n
The complexity of income statements<\/b><\/h2>\n
Take your time<\/b><\/h2>\n
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