10 Financial Mistakes Franchisees Make

Chris Roberts, director of Franchise Finance, details the 10 most common financial mistakes made by franchisees

Not borrowing at the outset and using up all or most of your own money first

It’s not uncommon for people to use entirely their own money and not borrow because they don’t want to pay fees and interest or because they don’t think the banks are lending.

This may prove a bad decision, because in these somewhat uncertain times it’s possible trading may not be as good as was originally expected. An approach to a bank at that stage will almost certainly be unsuccessful.

It’s much better to request a loan at the outset, say for 50 per cent of the total amount required, when the business plan demonstrates viability. Therefore, should a problem occur, you have your own cash safety net that can be used to get you through the sticky patch.

Not having a business plan to help quantify and achieve business and financial objectives

Starting or growing a new franchise business without a comprehensive and professional business plan is similar to going on a car journey without a road map, not knowing how safe your car is and how much petrol you have or will need to reach your destination.

A business plan acts like your satnav, helping to guide you from where you are now to where you want to get to.

Not having a full set of financial projections to ensure the business has sufficient working capital

Make your mistakes on screen, not in real life. You should use a projected profit and loss account to gauge profitability and ensure your plans are worthwhile and a cash flow forecast to establish how much money you need at the outset.

The reality is that sales in the first few months are likely to be lower than the last few months of the year, because it takes time for the business to become established.

However, overheads will probably be consistently high from the first month. This means that for the first part of the year the business will be making a loss and require some additional cash to sustain it until you reach a profitable period.

The same problem arises if an existing business is suddenly going to increase its planned sales, perhaps because of a new marketing strategy or product launch. To cope with the extra expense and probable time lag before sufficient cash from sales is received, the business is likely to require additional working capital. The question of how much will be answered by using projections.

Not monitoring actual performance against the projections or using sensible key performance indicators

In the same way as with a car journey, you need to check from time to time that you’re on track to arrive safely at your planned destination. During your business journey, you need to monitor your actual performance using appropriate key performance indicators.

Not taking any training courses to give yourself sufficient financial knowledge to ensure you understand what’s happening within the business

When you first drove a car, did you just leap in and drive off or did you have some driving lessons? The same applies to your business journey. Don’t make the mistake of setting off without understanding business finance and accounts.

You need to be able to read and use a profit and loss account and balance sheet to help you make informed and sensible decisions.

Not knowing what you don’t know

Don’t allow yourself to think you know all you need to know - just in case you don’t.

Take some time to analyse your strengths and weaknesses and invest in yourself. Attend financial training days and read up on business topics you’re not yet confident with. This will pay off in the long term.

Not using asset finance, but using up valuable bank borrowing opportunities

There are some straightforward reasons why you might decide to use asset finance. For example, to lower contribution levels and the fact the security is the asset itself.

An often overlooked reason is that if you use a bank loan to buy these types of assets, you’re using up a finite amount of credit that your bank is likely to give you. You may well need this as working capital and it could be unwise to use up your available bank credit unnecessarily.

Not having a suitable accountant as part of your extended team

Your accountant should understand you and your business model. Do you want to show low profits to minimise tax?

Or do you want to show high profits to impress your bank manager for additional borrowing?

If your accountant doesn’t show an interest in your business goals and strategy, it would be better to move on and find one who does

Not preparing for eventual exit, so the value of the business and sale proceeds are not maximised

When it comes to selling your business, there’s a lot you can do in advance to ensure an easier and quicker sale. Failure to prepare can impact your ability to sell, alter the price you achieve and affect the ability of the potential buyer to raise the necessary finance.

You should ensure a purchaser undertaking their research sees the business in the healthiest condition possible. It therefore makes sense to conduct annual health checks on the business to ensure it’s in the best possible shape.

Not understanding the difference between profit and cash

People like talking about making a profit, but the even more important question is: do you have enough cash to pay your bills?

Assume a franchise supplies goods on 30 days credit. On a Friday afternoon, it makes a £20,000 sale for goods it bought for £10,000. The franchise despatches the goods and raises an invoice. Therefore, it can legitimately claim to have made a profit.

Monday morning arrives and the franchise needs to pay the VAT bill or perhaps the wages, but it doesn’t have enough cash in the bank. Big trouble. Yes, it’s made a profit, but it’s having enough cash to pay the bills that really matters.

Remember: turnover is vanity, profit is sanity and cash is reality.