How to manage your franchise finances

CAREFUL MANAGEMENT OF THE FINANCIAL SIDE OF A FRANCHISE IS A CRITICAL ASPECT OF YOUR SUCCESS, MICHAEL JOHNSON, MANAGING DIRECTOR OF CARD CONNECTION, SAYS

Starting your own business requires funding for set-up and to ensure there is sufficient cash flow to keep it going in the early days.

Many people dream of being self-employed, but feel they cannot make the commitment without sufficient financial back-up - and rightly so. A redundancy payout or inheritance can sometimes provide the necessary means, however if you need to attract funding to set up, how do you go about it?

SUPPLIES

Daryl Perkins took over Card Connection’s Nottingham territory in 2013. He is the company’s youngest franchisee. At 24, he managed to raise the funds to purchase the greetings card franchise area and now successfully supplies products from Card Connection’s extensive range of more than 1,200 cards and accessories to 150 retailers.

Daryl explains: “Initially, I looked at many different business ideas, but my background is in retail, so that helped narrow it down. Card Connection is an established player and the largest company supplying greetings cards to retailers in the industry on a consignment basis.

It is also owned by UK Greetings, which means there is back-up and company stability, which was important for me.

“I first came across Card Connection when I was a manager at Londis. The local Card Connection franchisee supplied the store and I became aware of the brand and how the award winning franchise worked. I liked the idea of stepping into a business that was already up and running, which is what buying a resale franchise can offer.

“The business was doing well and showing growth. I felt I could earn a decent living with fairly low overheads in a sector I knew and be up and running quickly. I had always wanted to run my own business, however I needed funding to buy the territory from the retiring franchisee.

“In the first instance, I contacted my own bank for advice. I just needed an ‘is this possible?’ conversation, but they were not particularly helpful. So then I went to a bank with a specialist franchising department and spoke to their relationship manager.

“We discussed some outline figures over the phone and he advised me I needed to produce a simple business plan and cash flow forecast that showed my estimated income and outgoings, including the repayment of a loan to buy the business. The plan also needed to show the last three years’ trading accounts for the previous franchisee, which Card Connection was able to supply.

“There was further clarification needed, a few more conversations and an interview, but the bank approved a loan that covered 70 per cent of the purchase of the franchise, paid back over a five-year term. I needed to come up with the other 30 per cent myself. “This loan was backed by a government guarantee scheme, which is a bit like an insurance policy and guarantees to repay 75 per cent of my loan should something go wrong. This scheme was critical to enable the bank to agree the loan. The process from initial enquiry to starting work was around six months.

“Almost two years on and business is going well. In the past 12 months I’ve increased turnover by 10 per cent. I enjoy being self-employed and being in control of my own destiny and I’m so glad I made the move.”

HURDLES

The British Franchise Association lists five banks that have specialised franchising support: HSBC, Lloyds, Metro, NatWest and RBS. However, raising the purchase funds is not the only financial hurdle a franchisee needs to overcome. Although many franchises enable franchisees to start earning from day one, there will usually be a gap between buying the franchise and when income is first generated. It is essential to anticipate the funds needed to be allocated to allow for this shortfall.

The start-up phase is also usually the most expensive time for any franchise or indeed any business. As well as buying the franchise, it is necessary to invest in training, equipment, licence fees, marketing, stock and often a suitable vehicle. In addition, when starting up, there will inevitably be a steep learning curve and it takes time to get up to speed. Taking these factors into consideration is important when it comes to calculating the finances and making forecasts.

Maintaining good cash flow on an ongoing basis is also critically important for any franchise. Money in the business gives the flexibility to take advantage of any opportunistic investment opportunities or ride any financial storms created by unanticipated fluctuations in income.

Therefore, as soon as your franchise is up and running it is a useful exercise to establish how long, on average, it takes to get paid after an invoice is issued - this can help give a clear picture of the financial state of your business. Keeping your accounts up to date is also necessary in this regard.

Getting paid on time by customers is fundamental to maintaining good cash flow.

Sending invoices promptly or before the end of the month can be helpful, as many customers pay at the end of a calendar month and billing at the start of a month may mean your invoice payment rolls over to the end of the following month.

Don’t feel embarrassed to contact late payers as soon as an invoice is overdue - you are running your own business now and it is your responsibility to chase them. And remember, it’s your money they owe you.

REVIEWING

By keeping a close eye on your balance sheet and reviewing the relative profit and loss of your franchise on a regular basis, you are in a good position to anticipate the likely success of any growth or return on investment on purchases. It is important if you buy new stock or equipment, upgrade your premises or vehicle, or grow your territory that the impact from a financial perspective is understood. This can help with decisions you may need to make in the future.

Careful management of the financial side of your franchise from purchase, through the initial stages and managing cash flow on an ongoing basis is a critical aspect of success. Money talks, but often people shy away from this important subject.

You may be looking at running a business because you want to enjoy what you do, but don’t be afraid to face facts when it comes to income and expenditure. If in doubt, seek independent financial advice or ask your franchisor for help with planning.