Are you up to speed?
We at Franchise Finance have three fundamental messages for franchisees:
- Businesses go bust when they run out of money!
- Turnover is vanity, profit is sanity and cash is reality.
- When you start to measure businesses performance only then can you truly manage business performance.
We firmly believe that an understanding of these three fundamental aspects will have a major impact on whether a franchise business will survive and how successful it will be. We also strive to make the subject of managing the financial aspects of a business easy to understand by using simple relevant examples, plain English and easy to understand analogies.
When starting a franchise, we suggest you should look at it as though you are setting out on a business journey, where your business objectives are in fact your destinations on that journey. This driving theme provides many helpful analogies – why not think of your business plan as a ‘business satnav’ that you can develop and use to help you guide your way and see what is around the corner whilst ensuring you do not run out of cash or working capital en route, (which can be described as the ‘petrol in the engine’!
Indeed, when you first started to drive a car, did you just jump in and head off down the road or did you have some driving lessons first? The chances are that your franchisor will give you quite a lot of operational and marketing help and support but many give less help on the financial side of running a business.
So, what financial aspects should be included within your business satnav? The answer, with their technical definitions, is:
A projected profit and loss account (projected sales less projected costs)
A cash flow forecast (a prediction of what your bank account should look like)
A balance sheet (a list of your business assets and liabilities)
In layman’s terms, and to help differentiate between the three, the first shows what you hope to do and whether it is worth it, the second shows how much money you will need to do it (or if you can afford to do it!) and the third shows what your business will look like at a particular time in the future, i.e. what it will own and what it will owe. In order to compile these documents you will need to have costed all the activities that you wish to undertake on your business journey.
A good way to do this is to consider what level of sales is realistically achievable over, say, each of the first three years (your franchisor and other existing franchisees should be able to help you with this) and then decide what level of resources (property space, equipment, vehicles, personnel, etc.) you will need in each of these years.
By using this information in your business satnav you will be able to establish whether what you are hoping to do will be possible with your cash resources and whether it is profitable and worth it! If it doesn’t work for you the first time, then make some realistic revisions to see if you can find a way to make it work.
It is obviously better to make any mistakes on paper or on your computer, rather than in real life, which can be much more expensive! Finally, don’t forget to MOT your business from time to time, i.e. undertake a business health check. Every franchisee should occasionally stop working in the business and take time out to work on the business, review how they are doing against plan and consider what changes, if any, they need to make. So, good luck on your business journey and drive safely!
Chris Roberts is a director of Franchise Finance. Franchise Finance has been training franchisees and franchisors for many years but this summer, as part of its expansion, the company has launched a new ‘Business Training Academy’ to help improve the financial and business knowledge and skills of the 22,000 plus franchisees within the UK.
