Cashflow - keeping the cash flowing

Cashflow within any business is fundamental to its success, however it can be overlooked, especially at the early stages. Simon Clarke from TasAssist discusses the measures franchisors can take to implement good cashflow within their franchise network.

However ambitious your business plan or high your forecasted profits may be, without good cashflow your business will experience real problems. It is hugely significant in the early days of your franchise operation, but bad cashflow will also hamper future growth and can impact on day-to-day trading even when your franchise network is more established.

The following adage applys here - turnover is vanity, profit is sanity, but cashflow is reality. Although a simple phrase it is worth repeating here. A large forecast turnover and a predicted profit figure are of little relevance if cashflow problems force in extreme cases, business failure before the profits materialise into hard cash.

Securing finance
A good business plan and cashflow forecast, backed up by reliable evidence is essential for your franchisees when raising start up finance. As the franchisor you should be advising your franchisees on their turnover and cashflow during the early years in the form of initial cashflow forecasts and business plans. These will be essential in the vast majority of franchise operations where there will be an external funding requirement in addition to the start up capital.

Generally UK franchising has a good reputation with the banks, as statistically there is fewer instances of bank borrowings not being repaid compared to normal business start-ups. The banks will look at the experience and quality of the franchisor, before looking at the franchisee themselves. For this reason it is important that you as a franchisor have open dialogue channels with the major banks, and this should be done where possible via the central franchise departments.

Next, the franchisee must be credit worthy. In the majority of cases banks will expect to take security and see at least 30 percent own cash injection into a proposal. The words of the business plan must reflect the aims and aspirations of the franchisee and these must mirror the reasonable expectation levels of the franchisor. The actual numbers in the cashflow forecast must show that the level of borrowing requested is likely to be paid back and is sufficient. The biggest mistake a franchisee can make in a proposal to a bank is to under or over borrow. Over borrowing will mean paying more in interest charges than is necessary and under borrowing may lead to a franchisee returning to the bank within a year asking for more. It may be a good idea for the franchisee to enlist the help of an accountant who has been through the process many times, ideally one that has worked with you and your franchisees before.

Improving cashflow in your franchise network
By the very nature of franchising the turnover and cashflow of the franchisor will be very much linked to the success of their franchisees. Reading this article you may be wondering why so much emphasis has been placed on ensuring the franchisee prepares properly. The answer being, your franchisees may be the best widget sellers, repairers or caterers in the world but if they have not thought through their own cashflow implications, they will not be successful. If they are not successful, then ultimately you the franchisor, will not be either.

As a proactive franchisor, you will need to ensure that your franchisees are properly prepared from a financial perspective from day one, and are monitored and reviewed continually. Franchisors are in the unique position of being able to accurately gauge their turnover from the activity of their franchisees. You will know your business models better than anyone and if for example you deal with the order book of your franchisees, you should be able to predict with reasonable certainty your future cashflow. If you actually collect customer funds and distribute to your franchisees less your slice, then predicting future cashflow trends should be even easier.

Most franchisor models take income from their franchisees on a cash received basis. If this is the case, unless your business is cash, your franchisees may well need help in chasing or avoiding bad debts. Although an inconvenience for you, having established systems here will benefit your entire network and ultimately help the cashflow of your business. It may be worth you setting up a number of centrally negotiated schemes, for example allowing your franchisees to collect from their customers by direct debit can potentially save time and money.

Forecasting
Assuming that you have assisted in the franchisees forecasting, then you should use this information to extrapolate your own forecasting of income and cashflow over the same period. A good franchisor will have such systems in place, usually with the help of an accountant. Franchisees will report figures back to you monthly and you should have the ability to check their budgets in their business plan against their actual figures. This will ensure that your income streams are protected and will also allow you to spot any potential problems and take remedial action early. There is nothing worse than looking at a set of franchisees accounts a year later to see a problem that could have been avoided if spotted earlier.

When submitting business plans and cashflow forecasts to the bank in the early days and then later for expansion, you need to understand that the plan in essence is an amalgamation of all your franchisees’ plans. Their cashflow will be your cashflow, their losses will be your losses and so on. Helping franchisees with their financial matters from day one is critical to the success of your overall operation. Good cashflow is as equally important as being able to sell the same uniform product or service, protecting your brand, and your combined marketing efforts.

Article taken from Franchisor News, Winter 2007.   To find out more about Franchisor News and to subcribe for FREE click here.