How can you include contingencies in your franchise budget?

1 Identify potential risks

When creating a franchise budget, it's important to identify the potential risks that could impact your franchise performance. These risks can be internal or external and can vary depending on your industry, location, and business model. Examples include regulatory changes that could affect compliance, supply chain disruptions that could affect inventory, customer demand fluctuations that could affect sales, staff turnover issues that could affect productivity, and equipment breakdowns that could affect operations. To assess the likelihood and impact of these risks, you can use tools such as SWOT analysis, PEST analysis, or risk matrices.

2 Estimate contingency costs

Estimating how much each risk could cost you if it materializes is a crucial step to include contingencies in your franchise budget. This can be difficult, as you may not have exact data or historical records to base your estimates on. To make reasonable assumptions, you can benchmark against similar franchises or industry standards, use a range of scenarios from best to worst case, apply a percentage or multiplier to your fixed or variable costs, and consult experts or advisors who have experience in your field. Additionally, consider the timing and frequency of the contingency costs; some may be one-time while others may be recurring or seasonal.

3 Allocate contingency funds

Including contingencies in your franchise budget requires allocating funds to cover the potential risks. The amount of contingency funds needed depends on factors such as your risk appetite, cash flow, franchise agreement, growth plans, and financial goals. It's essential to review these funds regularly and adjust them based on your performance and changing circumstances.

4 Monitor and manage risks

The final step to include contingencies in your franchise budget is monitoring and managing the risks you have identified and estimated. This involves tracking the internal and external factors that could trigger or escalate the risks, as well as taking proactive or reactive actions to mitigate or resolve them. Examples of this include updating policies and procedures to comply with new regulations, negotiating with suppliers or finding alternative sources, offering discounts, promotions, or loyalty programs to boost customer demand, hiring, training, or rewarding staff to improve staff retention and performance, and maintaining, repairing, or upgrading equipment to prevent breakdowns or accidents. Additionally, it is important to communicate and report your risk management activities and outcomes to your franchisor, stakeholders, and staff to ensure transparency and accountability.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?