The Importance of Cash Flow Management For Franchises

If you have ever seen a small business fail, it is almost certainly due to cash flow problems. Many franchises – in particular – try to grow too fast and forget their finances while they do.

This makes cash flow management a skill you need to master if you are a small business or franchise owner.

Here we will go over some of the most important principles and basics of good cash flow management for franchises.

Why is cash flow important?

If you do not properly monitor and control your cash flow, you risk wasting all of the hard work you are putting into your new franchise.

Opening up your new business can be a challenging time. Set beside the need to hire and train your team, buy equipment, get certified, and actually find customers, balancing your books might naturally take a back seat.

But this is a classic mistake. It is the reason behind as many as four out of five failed businesses. Because if you ignore your finances, you may miss bill payments, overlook invoices, and risk being blind-sided by unexpected events.

Then, before you know it, you have a full-on cash flow crisis on your hands.

Why is a cash flow forecast important?

A cash flow forecast helps protect you from cash flow problems later down the line.

Without a cash flow forecast, you will never know how much money you need to earn to actually be making a profit. You may have constant clients. But if you have huge expenses in order to serve them all, you still might not be running a successful business.

How does a cash flow forecast help a business? In short, a forecast helps you:

• Make critical decisions – can you afford to hire a new team member? With a forecast, you can see exactly how much a new team member will cost compared with the additional workload they will allow you to take on.
• Anticipate problems and expenditure in advance – is a large customer or supplier in trouble? Will your vehicle need an MOT and servicing? Plan what you will do.
• Know when thing aren’t going to plan – are you spending much more on fuel than you had forecast? Without the forecast, you wouldn’t know. Compare your forecast with reality and see why fuel is so expensive. Is it an increase in petrol prices? Poor route-finding?

The good news is that, as a franchisee, your franchisor and other franchisees in the network should have all the information you need to create an initial cash flow forecast for your business.

Cash flow – general tips

1) Don’t just ignore it

Many new business owners simply hope that they can work hard and “work through” cash flow problems. Unfortunately, this rarely works.

Understanding more about your cash flow will always put you in a better position than putting your fingers in your ears and whistling loudly.

If you start doing things like not paying your employees or your suppliers or fail to nail down customers who haven’t paid, it is likely to make your cash flow much worse.

2) Understand your break-even point

You need to know how to calculate your break-even point. The break-even point marks the level where your revenue is the same as your costs. That is to say, the point at which you aren’t losing money or gaining money.

Once you know how much you need to earn before you are making money, you can examine all of the figures involved to see where you can make improvements. By working out your break-even point, you can get the answers to important questions such as:

• What are my costs? What am I paying in materials? In labour?
• What is my pricing level?
• Are my prices too low or costs too high to reach my break-even point?
• When should I break-even during the year?
• Based on this, is my business going to grow?

This is particularity important for some types of franchise. For instance, learning how to calculate a break-even point for a service business is very useful because your cash flow might be lower or higher during different times of the year.

3) Regularly check your payment terms

Are you getting the best deal from your current suppliers? Much like your domestic bills, it is always a good idea to check every now and again.

Talk to your franchisor and other franchisees in your network. You can ask them not only for advice as to how to negotiate a better deal, but also to see what terms they might be getting from the same or similar suppliers.

You might also consider whether you can afford to pay quickly using cash you have on hand. This may reduce or eliminate the additional cost of interest or monthly payment plans. Again, good knowledge of your own cash flow is the only way to know what is best for your business.

4) Make it easy for people to pay you

The more complex your payment system, the more likely your clients will fail to pay you in a timely manner.

As a Fantastic Services franchise, you would collect payments quickly and cleanly from your customers via our Go Fantastic app. But be aware that not all franchise systems work in the same way.

Franchise cash flow management

All in all, good franchise cash flow management is absolutely key if you want to get the highest return from the hard work you are putting into running your business.

Certainly, we know that all of the most successful franchisees – out of the more than 500 in the Fantastic Service network – are those who have the firmest grip on their finances.

Want to know how your finances could work as part of a successful franchise system?

Let’s chat. A Fantastic Services franchise is the way new business owners up and down the UK have chosen to make their new business grow.

Posted in Industry Insights