The Economics of Running Your Own Business
Alice Tuffery, writer
Published at 28/03/2019, Updated on 04/05/2022 , Reading time: 6 min
Running your own business can be tough, especially when it comes to managing your finances. So, we’ve pulled together all the information you’ll need to learn more about how to make a business profitable and take home a good salary.
Becoming a franchisee allows you to be your own boss without the inherent financial risk of launching an independent start-up. But, when you open any business, you need to know how to make it pay. The trouble is, there’s no simple answer. In reality, profitability depends on a range of factors, which change with each franchise system.
Often, franchisors exaggerate financial projections and release misleading figures to draw in new franchisees. As a result, many entrepreneurs buy into a franchise only to close up shop further down the line when they haven’t made as much money as they had expected to. So, how can you stay savvy, cut through the jargon and choose a truly lucrative franchise?
Ultimately, franchisees should only rely on their own research – but it can take time to develop a true understanding of individual franchises. For that reason, we’ve collected some common franchising misconceptions to uncover the truth about the industry; what follows are some key facts about making money as a franchisee. But first – a glossary of key terms to get you started.
>> Read more:
- Is the Franchising Model Right for Me?
- A basic guide to franchising
- Franchising: An Exciting Alternative To Retirement
- Who can own a franchise?
- Franchising 101: The basics
- Understanding the Foundation of Franchising
- Franchising is on the rise: here’s why
Glossary of key terms
Break-even point – The moment a business makes enough money to cover all its expenses.
Capital – Money or assets available for investment.
Cash flow – The money moving in and out of a business.
Financial projection – An estimate of how much money a business will make in the future.
Gross income – The sum of all money going into a business before deducting tax and expenses.
Gross profit (also known as net sales) – The sum of money going into a business after deducting the cost of goods or services sold.
Net worth (also known as net assets, owner's equity or shareholder's equity) – The total value of a business’ financial and non-financial assets, after any outstanding expenses or liabilities have been deducted.
Net income – The sum of money going into a business after deducting tax and expenses.
Net profit (also known as your bottom line) – The sum of money going into a business after deducting the cost of goods or services sold and all other expenses, including tax.
Overheads – Expenses that aren’t associated with selling the business’ product or service, such as the cost of accounting, insurance, permits, rent and utilities.
Profit and loss statement (also known as an income statement) – A record of all sales and expenses used to calculate a business’ gross and net profit.
Profit margin – The percentage of sales that turn into profits.
Return on investment (ROI) – A percentage or ratio describing the economic efficiency of a business. It’s calculated by dividing net profit by investment costs.
Revenue (also known as turnover) – The sum of all money made from sales before deducting tax and expenses.
Working capital – The money available for day-to-day expenses.
How to make a business profitable
Starting a business under a franchise gives you more financial security, as you’ll be operating under a brand with proven strategies and existing customer base. But there are three additional steps you can take to boost your chances of developing a highly profitable business:
1. Choose a lucrative territory
Some territories are more profitable than others, but the most lucrative regions will depend on the franchise you’re joining. For example, a hipster bar will be far more successful in a city centre or near student accommodation than in a pensioners’ residential district. For this reason, franchisees should always consider their target market and the suitability of a potential territory before they invest.
When researching territories, it’s also worth finding out which other industries have been particularly successful there. Then, use this information to narrow down your franchise choices, eliminating ones without lucrative territories available.
2. Put aside enough money to survive the initial months
Successful franchises provide its franchisees with brand recognition, marketing campaigns and public trust. But that doesn’t mean you should expect a line of customers outside your door from day one. It always takes time to build a successful business, even if the brand is already established.
Franchisees should work out when they’re likely to reach their break-even point and how much capital they’ll need to keep the business afloat until then. The costs of setting up a franchise unit are often the largest sums of the entire franchising journey. Property, equipment and stock must be acquired and staff must be fully trained before the business can even start making money.
In the meantime, well-planned local marketing campaigns can be used to boost the business’ visibility. And before you reach the end of your first year with the franchise, make sure you’ve put aside enough money to renew your licence for the following year.
3. Stay motivated and savvy
Your mindset will have a huge impact on the profitability of the franchise. Regardless of the business model, the franchise will benefit from the franchisee’s business acumen and willingness to work hard. Building a successful franchise is never going to be an easy task; you must be savvy, determined and judicious for the unit to work efficiently.
It’s also your responsibility to make sure you follow the franchisor’s established strategies, hire qualified staff and keep them motivated. What’s more, customers will expect your franchise’s services to live up to those of the rest of the franchise, so you have to do what it takes to uphold the business’ reputation in your territory.
Failure to do these things will leave any franchise susceptible to failure. If you’re not prepared to invest the time, effort and money to bring your unit to profitability, starting a business may not be the right move for you. But if you’re committed to doing whatever it takes to make it a success, there’s no limit to how much money you can make as a franchisee.
>> Read more:
- Franchise Finance: How Do You Get it The UK?
- Franchise Finance - Do The Numbers Add Up?
- Top 5 Finance Franchises
- Sources of business finance
How to earn a good income from a franchise
It’s not uncommon to see franchises boasting about their gross sales figures. When looking at league tables of the best franchises, you’ll probably find ones that make a turnover of £400,000 or more in their first year. Don’t allow yourself to get carried away with these figures – they won’t be the whole story.
The total money a company makes — its gross income or ‘top line’ — is not the amount the franchisee takes home. Expenses and staff salaries are deducted from this figure, and only when all outgoings have been taken care of can the franchisee take their cut.
These expenses can actually cause some businesses to lose money after a busy month. In fact, some of the most profitable franchises have a low top line because their expenses are also significant. As a franchisee, the money you make will ultimately be determined by the profit margin of your franchise.
Again, it all comes down to doing your research before you invest and following the three key steps outlined above. To learn more about making money as a franchisee, take a look at some of our other articles:
Alice Tuffery, writer