Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Use Zero-Based Budgeting to Boost Profit
Transcript
- Lucas: So we've talked a lot on this show about squeezing more revenue out of a franchise unit — better marketing, new revenue streams, that kind of thing. But today I want to flip it and talk about the expense side, specifically a budgeting method that's been getting a lot of attention from multi-unit franchisees. Luna: Zero-based budgeting. I've seen it pop up in franchise trade journals a lot this year. Lucas: Exactly. And the reason it's relevant is that franchisees, especially in food and retail, operate on really thin margins. A couple of percentage points can be the difference between a profitable unit and a drag on the portfolio. Zero-based budgeting, or ZBB, is a way to systematically find those points. Luna: Walk me through the basics. How is it different from what most franchisees do? Lucas: Sure. Most franchisees use what's called incremental budgeting. You look at last year's expenses, add a percentage for inflation or growth, and call it a day. It's fast, but it bakes in all the inefficiencies from prior years. ZBB says — start from zero every budgeting period. Every single line item has to be justified as if you're building the budget from scratch. Luna: That sounds incredibly time-intensive. Is it practical for a single-unit owner? Lucas: It can be, but it's most effective when you have multiple units, because the fixed cost of doing the analysis gets spread across more locations. The example I want to use today is a franchisee I spoke with who runs 15 quick-service restaurants in the Midwest. He implemented ZBB about eighteen months ago. Luna: What kind of savings did he find? Lucas: He identified about $47,000 in annual savings just on supplies alone. And it wasn't by cutting quality — it was by questioning long-standing vendor contracts and par levels that hadn't been reviewed in years. For instance, he was paying a premium for a specific brand of cleaning product because the previous manager had a relationship with the rep. ZBB forced him to put that contract out to bid. Luna: That's the kind of thing that slips through the cracks when you're just rolling budgets forward. Lucas: Right. And the key insight is that ZBB isn't just about cutting costs — it's about aligning spending with current priorities. Maybe this year, you want to invest more in digital ordering, so you shift money away from print menus that barely get used. ZBB makes those trade-offs explicit. Luna: But I imagine it's a tough sell to unit managers who are used to a certain level of autonomy over their spending. Lucas: That's the biggest hurdle, honestly. The franchisee I mentioned told me that in the first cycle, his managers felt micromanaged. They had to submit detailed justifications for things like uniform replacements and small equipment repairs. But after the first year, they saw that the process freed up money for things they actually wanted — like better training tools. Luna: So it becomes a tool for empowerment, not punishment. Lucas: Exactly. And to make it work, you have to involve the managers in the process. Don't just hand them a zero-based spreadsheet from above. Have them build their own budget from zero, then review it together. That builds buy-in. Luna: That's actually a really practical tip. You know, this kind of deep-dive is exactly why people listen to this show. If today was useful to you, the way we keep these conversations ad-free is through listener support. You can head to buy me a coffee dot com slash fexingo — that's buy me a coffee dot com slash fexingo — and toss a few bucks in the virtual jar. Lucas: Yeah, it genuinely helps us keep the show going without sponsors. We'd rather spend our energy researching topics like this than reading ad copy. So if you've gotten value from any of these episodes, that's the place. Luna: Alright, back to the budgeting. You mentioned there are common pitfalls with ZBB. What should franchisees watch out for? Lucas: The biggest one is scope creep. It's tempting to zero-base every single line item, but that's unsustainable. The best practice is to focus on the categories that represent 80 percent of your variable costs — things like food, labor, supplies, marketing. Leave the small stuff on an incremental roll for now. Luna: So pick your battles. Lucas: Right. Another pitfall is doing ZBB once and then abandoning it. It has to be a recurring process — ideally every year, or at least every two years. Otherwise the waste creeps back in. Luna: And what about the technology side? Are there tools that make this easier? Lucas: Absolutely. Some franchisees use specialized FP&A software like Adaptive Insights or even a well-structured Excel model with macros. But the real key is having clean, unit-level financial data. If your P&L is a mess, ZBB is just going to frustrate everyone. Luna: That's a good point. You need the data hygiene first. Lucas: Exactly. So for franchisees considering ZBB, I'd say start with one or two units as a pilot. Run the full zero-based process on those, compare the results to your other units, and then roll it out. That way you learn the kinks without disrupting your whole portfolio. Luna: And I'd imagine franchisors are starting to take notice, too. If a franchisee can demonstrate better unit economics through ZBB, that could be a competitive advantage when negotiating area development agreements. Lucas: I hadn't thought of that angle, but you're right. A franchisee who can show lower cost structure is a more attractive partner. Some franchisors are actually starting to offer ZBB templates as part of their operational support. Luna: That's interesting. So it's not just a bottom-up tool — it can be a top-down initiative as well. Lucas: Yeah, and when the franchisor provides the framework, it makes adoption much faster because the data categories are already standardized. The franchisee I mentioned actually got his template from his franchisor's annual conference workshop. Luna: So if you're a franchisee listening, that's a concrete takeaway: check if your franchisor offers a ZBB toolkit or financial planning resources. Lucas: Great call. And if they don't, you can build your own. Start with the biggest cost buckets, get your managers involved, and be prepared for some pushback in year one. The payoff is a leaner, more intentional operation. Luna: Alright, Lucas, so next time someone tells me they're 'too busy' to re-evaluate their budget, I'll point them to this episode. Lucas: Fair enough. And if you try ZBB and find something surprising, let us know — we'd love to hear your story on a future episode. Luna: Absolutely. Until next time.