Now that we are freshly off the annual rite of late fall–the annual budget process–it might be a good time to consider how it could be done differently next time around. Conceptually, the budgeting process for franchise companies is pretty simple: pick some revenue numbers that build off the previous year’s performance and do the same for expenses.
For franchisors that have an established book of business in the form of franchised unit locations, the process is pretty simple on the revenue side because revenues are largely driven by royalties. Royalty revenues are far less sensitive to changes in economic conditions than the sales activity they are based on because royalties are always a relatively small percentage of sales levels (even less so if royalties are based on some fixed determinant). While unit fee income is a bit harder to predict in this economy, for established franchisors it is the smaller component of total revenues, and therefore a poor budget forecast of fee income has less of an effect on the year’s operations. More.