by Franchise Accountants
last updated 23/09/2019
by Franchise Accountants
last updated 23/09/2019
Award-winning Franchise Accountants suggest ways to ensure your new business has the lifeblood it needs
A shape against the moon, the sound of leathery wings on a dark night, a rattle at the shutters – vampires are the stuff of nightmares. They come to suck your blood, they need it to survive. The only problem is, you need it too.
Just as Dracula required blood to survive, so businesses also need their own essential fluid: cashflow. Cashflow is the make or break of any business; lack of funds or insufficient cashflow can cause even apparently successful businesses to fold. So when you’re looking at buying a franchise, whether it’s a new start-up or a going concern, looking at the cashflow is essential.
Cashflow is not the same as the profit or earnings of a business, so when you see a Profit & Loss account, it’s only telling you half the story. It doesn’t measure the cashflows around the business which can result in big bites being taken out of your bank balance. To avoid those bites being fatal, you need to know when they’re coming and have plans in place to cope.
the missing element
Strangely, in our experience, a proper cashflow assessment is often the element many people forget when buying a franchise. Information packs from franchisors, brokers or individual sellers may include various documents around the marketing of the products and services sold, some earnings indication around the potential profit of a business opportunity, and legal documents, but there will be no mention of cashflow.
Some sellers refer to cashflow as ‘working capital required’ and leave it to the potential franchisee to work out what that figure will be given their own individual circumstances. This is understandable, but as working capital is cash required over and above the initial investment price which you will require to operate the business successfully, you really need specialist advice – preferably from an accountant with experience of this specific franchise or industry. Doing this before you purchase will reduce stress, reduce risk – and reduce possible bloodshed!
what does a cashflow projection tell you?
A cashflow projection measures the probable timing of cash inflows and outflows of the business: for example, how long you are likely to stock a product before having to pay for it; and how long before selling it? It then predicts the impact this and other factors will have on your business’s bank balance, and identifies what funding may be required and when to meet the shortfalls. It provides the information you will require to ensure your new business is not just profitable but also sustainable, which is important if you are to make an informed decision.
10 common areas to assess cashflow
Here are 10 of the most common areas that need to be taken into account in preparing a cashflow analysis. Each of these will vary according to the industry, the location, the region and the individual franchise model (which is why you should use a professional advisor).
Sales cycle – the time it takes to convert leads to a sale.
The level of sales – made up of sales volume, average selling price and sales mix.
Seasonal sales variation – eg. impact of summer, cold weather or the Christmas shut-down.
Margins – measures difference between sale price and cost of delivering the sale.
Overheads – the fixed costs of operating the business, such as rent, wages and power.
Breakeven – what is the cashflow neutral position of your business?
Credit terms – this applies to both suppliers and customers and affects the timing of when you pay and when you get paid.
Tax – not all the money in your account is really yours, so you need to take GST, PAYE and Provisional Tax payments into account.
Debt servicing – if you borrow money, what is the interest rate, when are repayments due and how long is the term?
Growth – a growing business sucks your business’s lifeblood faster than Dracula. The more you grow, the more demands on your cash to fund stock, employ more staff, buy new plant and equipment and pay more tax.
the franchise advantage
Of course, a good franchise can offer significant advantages in some of these areas, which is why it’s worth consulting a specialist accountant.
Brand power – Having a known brand and pooling marketing funds to leverage marketing spend will potentially lower the cost of attracting new clients.
Buying power – Group buying power can often translate into lower cost of goods and services, better credit terms and improved margins. It can also lower overheads through, eg. group insurance schemes and even funding.
Benchmarking – A good franchise measures its critical areas of operation to allow you to undertake comparative analysis. This helps franchisees assess not just indicative performance but also cashflow requirements: for example, identifying ‘best practice’ stock levels and stock turn rates.
Support – Franchise support teams can provide business insights and coaching which relate specifically to a franchisee’s business model. This can assist in managing cashflow or identifying potential issues.
If you’re thinking of buying a franchise, then, remember Dracula. Your business needs its lifeblood to survive, and cashflow is that blood. Understanding the cashflow requirements of your proposed business is fundamental, so seek out specialist advice. Work with experienced franchise advisors who have a track record in working with franchisees and franchisors, and can offer ‘inside knowledge’ on the specific brand you are looking at. Remember, good advice pays, not costs.
This advice is of a general nature only and expert advice should be sought to get the right advice for your specific situation.
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