As in any business, there are also in a franchise chain a series of relationships or ratios that should be monitored every month in order to know the direction of the franchise unit and to make it align with the performance expected by the franchisor, according to his previous experience.
The franchisor shall give the franchisee this sort of control panel, specially during the initial training, and he will be responsible for processing the information that recieves from each franchisee in a monthly basis, mainly to detect deviations and thus to try corrections.
Ratios are particular to each franchise industry. That is to say, within the same industry, it can exist significant variations between different brands and concepts. However, variation bands may be established for each industry in general terms. It is simple to explain the reasons for these variations. A franchisor for example may consider necessary to have more staff to provide excellent service, and then this will result in some differences between brands when salaries are taken into account in the calculation of the ratio.
Here are the most common ratios:
1- Revenues vs Salaries. A measure of the sales that can be expected with salaries paid.
2- Fixed Expenses vs Salaries. It gives an idea of the expenses you incur even if there are no sales, compared to what you pay for staff to produce sales.
3- Variable Expenses vs Salaries. Similar to above but with expenses that occur when there exist sales. Here there may be significant changes if a large part of sales are made by credit cards or another expensive collection systems.
4- Fixed Expenses vs Revenues. A measure of sunk costs necessary to produce sales.
5- Variable Expenses vs Revenues. It is the cost of having sales. It depends on the margin of each industry and again, on sales that occur through credit cards and other means of payment that cost money, and of course, on royalties and other expenses the franchisor charge as a percentage of revenues.
6- Rent vs Revenues. It gives an idea of the limits of rent that can be paid for a commercial location with the business model of the franchisor. In high-end shopping districts, rents are high, but expected sales are high too. The problem usually occurs in Shopping Malls, considering the high rents that these locations use to charge.
In the following table I compare three different industries and their possible variation bands.
RATIO SERVICES PRODUCTS FOOD
revenues/salaries 2-5 10-20 5-10
fixed expenses/salaries 20% - 30% 50% - 80% 50% - 80%
variable expenses/salaries 30% - 40% 10 - 20 3 - 5
fixed expenses/revenues 10% - 15% 5% - 10% 10%
variable expenses/revenues 10% - 20% 40% - 80% 45% - 60%
rent/revenues 5% y 10% 2,5% y 5% 5%