You have put in the time researching and scouring the market for the perfect franchise to acquire and you are quite happy to have found one that suits your goals perfectly. The excitement within you and your team is at its peak, which is quite understandable considering the amount of time all of you must have spent in search of a good business opportunity.
You are now eager to get the ball rolling and start your franchising journey. However, keep in mind that what you have managed to accomplish till now is the easy part. The difficult part lies ahead. It is great that you found a franchise that you feel will be perfect in helping you further your entrepreneurship goals. But the real test of your skills will be now.
Successfully managing and growing a franchise is where your real challenge will be as a franchisee. And one of the most important elements of running a successful franchise is effective cash flow management. In fact, this is true of any type of business and even more so when you are running a franchise business in the retail sector.
What Exactly Is Cash Flow?
Simply put, the amount of money that is “coming in” and “going out” of your business franchise every month is commonly known as “cash flow.” Following are its two different forms.
Ø Cash received from clients/customers who buy your products or avail any services that you offer. They will either pay you at the time of purchase or later on, in which case a part of your cash flow would come from the “accounts receivable.” This is normally the cash inflow.
Ø On the other hand, there will cash going out of your business in the form of expenses incurred while running your franchise. These include things like rent/mortgage payments, periodic loan repayments (if any), tax payments, and others. They are commonly called “accounts payable.”
As a franchisee and/or entrepreneur, you should think of your business’s cash flow as a snapshot of your checking account (current account in a bank). If the amount of money that is coming into your business is more than the amount of money that is going out, then you have a “positive cash flow.” In other words, your cash inflow is greater than your cash outflow which gives you a positive cash flow picture.
On the other side, if the amount of money coming in is less than the amount of money going out of your business, then you have a “negative cash flow” overall. Put another way, your cash inflow is smaller than your cash outflow which has given you this negative cash flow position. This is not an ideal situation by any means and it does not bode well for franchise development.
Importance of Cash Flow for Your Retail Franchise
They say that when it comes to retail, cash is king. There is a very good reason behind this famous line. One of the biggest causes of failure of a retail setup, be it a franchise or startup or any other type of business, is its inability to manage cash flow effectively.
Irrespective of the type of business, cash flow is important. However, this importance increases manifold when you are operating a retail setup because the business is dependent heavily on a number of major expenditures such as employees’ salaries, operational costs, inventory payments, and also any unexpected costs that may come up from time to time.
When you acquire a franchise from any a retail franchisor, you will be needing working capital for its operations. For businesses working in the retail sector, there is often a lot of reliance on loans or a line of credit in order to cover the shortfalls in cash flow. This is especially the case during the times and seasons when the business is slow and sluggish.
Having a messy cash flow situation means that you are pretty much out of money and that normally means that you have to shut it all down. However, this will not be a problem at all if you manage your cash flow in a proper manner. It is not the most difficult thing in the world either.
One of the biggest drains that your cash flow has to deal with is the payments related to inventory. Normally, the payments for utilities and rent/mortgage tend to be fixed and you can plan for them in advance. But, that is not the case with inventory payments.
Being able to predict how many sales you are going to make is a much harder job when you are stocking up on your inventory. The simple fact of the matter is that most franchise brands operating in the retail sector have an inventory turnover that is significantly slower than the due date on their accounts payable.
This means that money has left your business before it even came in. To illustrate, consider this example. If you purchase 12 sewing machines today but are only able to sell 6 in a month, it means that you must pay for the remaining 6 sewing machines before you could even sell them.
Effective Cash Flow Management Techniques for Franchisees
1) Be Aware of Your Break-Even Point
Knowing the break-even point of your business means that you are on the right track. If you don’t, however, then you are going to have major problems going forward. It is worth putting the time in to find your break-even point because this will form the basis of all financial goals that you may have for your business.
2) Decrease the Amount of Debt On Your Business Balance Sheet
Reducing debt will not only have a positive effect on your financial situation, it will also give a lot of confidence to your team. In general, businesses like holding onto their cash reserves and avail any credit opportunities on offer.
In order to reduce debt, take a look at the credit terms you are offering your customers. Are they the same as those provided by your competitors? Can you come to an agreement for earlier payment with your clients/customers without putting your customer retention in jeopardy? Consider such avenues and pick the one that seems right for your business.
3) Have the Right Team Around You
Having the right people on your team can save you a lot of bucks in the long run. Recruiting new employees is not exactly a cheap process and the cost probably doubles if you hire the wrong people.
In the same way, if the turnover rate at your franchise is high, then this will also drive up costs with new employees having to be trained and brought up to speed with your operational processes.
So, make the effort and put in the work to recruit the right employees at the first time of asking. In addition, you need to create a work culture and environment that encourages and motivates employees to not just work hard and give their best but to also stay committed to their jobs for the long haul.
4) Have a Contingency Fund or Rainy Day Account in Place
It is an important and useful exercise to maintain a budget for unforeseen circumstances. Sometimes, a problem can emerge out of nowhere and blow a hole in your finances. In order to avoid being blindsided by these sudden issues and keep your franchise from being hit hard by them, you should maintain a contingency fund for utilization during rainy days.
Conclusion
Running a franchise is a great responsibility and one that you should be looking forward to. Once you have identified a franchise opportunity and gotten what you were looking for, the real work begins then. Effective cash flow management is one of the most vital aspects of running a successful franchise. Therefore, you need to make sure you are on top of your cash flow situation all the time. Be proactive and keep a close eye on your finances. Otherwise, serious problems can occur.
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