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Nov, 20 2009

Importance of audits

It takes considerable amount of time and efforts for a franchisor to build a system for his brands. But what if the system gets diluted by franchisees?

Monitoring and maintaining of the standards set up for a franchise system, which the franchisor expects his franchisees to maintain are as important as building them. Therefore, most franchisors have a clause of franchise audits in their franchise agreements to ensure brand protection. However, some franchisors look at franchise audits as contrary to building trust between the franchisees and the franchisors. Some franchisors ignore this important aspect of the franchise system and put all their attention in signing new locations rather than examining the older ones for compliance.

Compliance of rules

Franchise audits refer to the periodical checks conducted by the franchisors to ensure the complete compliance by the franchisees. Franchise audits make sure proper functioning of the operations, store set-ups, monetary obligations, etc. Talking of the procedure involved in conducting franchise audits, Anil Sharma, General Manager – Retail, Ferns N Petals (FNP), says, “A well-designed plan and approach are necessary for any audit programme to be successful. There are three distinct steps in any audit programme. Firstly, an outline of the procedures to be followed, right from candidate selection to physical site visit of the selected franchisees, is made. Second step is to execute the set procedures and the third step is to detail out the findings and enforcing the recommendations.” A step-by-step process is created to address the specific needs of a particular concept whether it is of retail or a specialised service.

Talking of how the enforcements are realised, Halan Harikrishnan, Manager-Operations, Marry Brown Family Restaurants, explains, “We send the franchisee an audit report, fixing a deadline to which the franchisee has to reply and clear all the remarked issues/deviations.” TTK Prestige even changes the ownership in case the enforcements are not applied.

The franchisors can scrutinise particular franchisee for different issues like sales under reporting, marketing initiatives, display, staff, uniforms, cleanliness, records, stocks and inventory, Pricing strategies, after sales services, opening and closing timings, improper product purchase or wastage etc. Talking of what all is examined during the franchise audits, Jawed Habib, Proprietor, Jawed Habib says, “We examine the billing, accounts, financial reports, customer services, customer’s feedbacks, phone handling, complaint handling, products for use/sale, lighting, air conditioning, hygiene, staff, branding etc.”

Franchisors like Jetking, Koutons, FNP, Marry Brown, Habibs have their in-house teams of auditors, however, franchisors like TTK Prestige outsource their auditing to the external agencies. Most franchisors bear the cost of conducting the franchise audits themselves. Audits are uninformed most of the times as most franchisors conduct surprise or mystery audits. However, FNP sends a prior intimation to the franchisees and audit date and time is fixed in advance, whereas Jetking’s general audits are surprise audits. So, depending upon the company policy and requirements, the audits can be informed or uninformed.

Multiple audits benefits

As the franchisor ensures set standards for the brand, franchisees can reap multiple advantages from franchise audits. Franchisees get to understand their weaknesses, which they can overcome through the recommendations made by the auditors. They come to know, how to make the most of their resources. Franchisees may come to know of certain facts, which he might not be aware of through the direct interaction of the auditors with the customers.

FNP has a reporting format, wherein daily sales report is shared. Since the company deals with fresh flowers, which are a perishable commodity and require proper maintenance of adequate quantity and quality, a case of higher wastage may occur.

“By closely monitoring and assessing the daily sales pattern and purchases made therein, we often derive the percentage of wastage at a particular store,” affirms Sharma.

The franchisee benefits in many ways when an audit is done, as sometimes they deviate from standards unintentionally. “Lately, one of the franchisees complained that their food cost was quite high than the ideal food cost. During the audit proceedings, it was found that the reason was that their wastage was quite high,” substantiates Harikrishnan.

Boosts franchise system

Audits are not only a great help to the franchisee or franchisor but boost the whole franchise system, as they lead to knowledge-sharing and implementation of the best practices, besides bringing awareness of organisational processes.

Further, as the auditors assess the entire centre, higher management, too, gets to know the loopholes and strengths of the operational processes and resources of the particular franchisee. The loopholes can be used as feedback to strengthen the weaker areas of that particular centre and the plus points can be further strengthened, giving the whole franchise system a boost. Highlighting the importance of franchise audits, Avinash Bharwani, Franchise Manager, Jetking, avers, “In Jetking, audits are not limited to fault finding alone. Since auditor is aware of the organisational processes, he supports the franchise with regards to business development, better documentation, better students’ satisfaction, problem resolution, interfacing with RO/HO and centre etc.” Franchise audits assure the franchisees of the complete backend support.

Challenges in audit process

Lack of awareness of the processes among the staff due to high attrition rate is the biggest challenge that Bharwani feels the auditors face at Jetking franchise centres.

Further, non-conforming franchisees are apprehensive of their processes and wrong practices getting revealed. Sharma says, “At times, some of the franchisees are not willing to share their financial records for auditing. They are gradually convinced and made to understand the need to share these data and follow audit procedure for the benefit of their own business.”

Wrong or projected information given by the franchisees or non-compliance to the service standards are another challenges faced during the franchise audits. Challenges could also be in terms of logistics and interpersonal issues. “If the stores are located at very distant places, it becomes difficult for the audit team to visit the store on regular basis. Besides that the franchisee might not be willing to have the audit during a high sales season because conducting an audit might be an obstruction, thus  timings is a factor which needs to be kept in mind while conducting an audit,” informs Balvinder Singh Ahluwalia, President, Koutons Retail India.

Pros and cons

Though auditing has its own advantages, some franchisors feel that their franchise system runs well even without an audit. “We don’t conduct any formal franchise audit. Rather we take sufficient time in appointing our franchisees. At that time, we ensure that they are mentally committed and properly oriented to take up our brand,” says Himanshu Jain, Associate Vice President – National Business Head (Franchise Operations), Career Launcher. Disagreeing, Sharma says, “Franchise audits are likely to boost the franchise system as it can ensure better upkeep of the store, ambience, well-mannered staff, adequate stock and financial growth of the franchisee as well as franchisor.”

Auditing has its pros and cons. A downside of auditing for the franchisee is that he has to adhere to operational manual strictly. This also has cost implications for the franchisee. Franchisees may also consider the clause of auditing in the franchise agreement as a sign of distrust and may remain unwilling to take up the franchise. On the other hand, there could be cheating as the franchisee could be making more revenue than the franchisor thinks, and sharing less with him. This would mean that the franchisor stands to lose financially. It makes sense to devise a mechanism to keep track of the revenue that flows in. Franchise audits can prevent pilferage and misuse of company products and services while ensuring that there is no discrepancy in franchisee working and company policies and values. Educational institutions such as NIIT ensure that they give the study material and final certificate to their franchisees. This helps keep track of the number of students enrolled for the course by their franchisees. Moreover, auditing gives the franchisor a fair idea of whether the franchise system is doing well for his brand or not, i.e. whether handing out his brand to the franchisee works for him or not. Auditing further gives a scope to find out the means to fix the problems that crop up at the franchise centres at the operational stages. It is important for every franchisor to weigh the pros and cons of auditing even if he ponders over excluding the clause of franchise audit from his franchise agreement.

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