Cash Flow is King

Michael Johnson, Managing Director of Card Connection, explains the importance of cash flow for franchise owners.

People choose franchising for a variety of reasons: a lifestyle change, to gain more control of their destiny or to take advantage of the benefits of the flexibility of self-employment. However, occasionally, it seems when selecting a franchise, the need to make a living plummets in priority compared with the need for personal fulfilment, as franchise owners get caught up in the excitement of their new venture.

While it is essential to enjoy your professional endeavour, the fact remains that you are going into business to earn enough money to support your lifestyle. If your franchise is going to be your family’s sole income then it is even more critical that that income is sustainable from early on and to ensure this, good cash-flow is key.

If there will be a gap between when the franchise is purchased and when income will be first generated, it is important to secure sufficient ‘bridging’ funds to allow for this shortfall. Many small businesses with great commercial ideas have failed with plenty of orders on their books, purely because there is not enough cash available to keep them afloat before they are paid for their initial orders.

In addition, it is worth remembering that starting out is often the most expensive time for any business. You will need to purchase the franchise, invest in training and equipment, you may also have to cover licence fees, budget for new marketing materials and purchase stock. Make sure you are thorough when assessing the business opportunity to avoid overlooking any other start-up costs or additional fees.

Purchasing an established franchise means you are more likely to generate an income from day one. There will already be an existing customer base and much marketing investment will have been undertaken over the years. On the other hand, a ‘virgin’ franchise will take much longer to build up to be able to generate a return on investment and marketing costs may be higher to generate awareness of your offering.

In addition, when starting up, there will be an initial, and often steep, learning curve. This is likely to mean getting up to speed and will not happen straight away. Anticipate this by talking to other franchise owners, getting support from your franchisor and even spending time helping other franchise owners before your hand-over, as this can help ensure you are earning rather than learning, as quickly as possible.

At Card Connection, as well as undertaking thorough training, most of our new franchise owners spend a few weeks with the outgoing franchise owner, which really helps them get to grips with their new enterprise. It also makes for a smooth handover from the customer’s perspective and avoids the chance that any accounts could be lost due to a personnel change, which would also impact on the new franchise owner’s initial earnings.

On an on-going basis, maintaining good cash-flow it is very important. 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 critical in this regard.

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.

Taking advantage of technology to send invoices electronically saves time and postage costs. Asking to be reimbursed through the electronic banking system can also speed up the process of being paid. 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.

The continued challenges of the economic environment mean that franchise owners need to be more careful when it comes to managing cash-flow than ever before. If you have an issue then it is advisable to contact your franchisor early on, they may be able to help and will be able to support you in building your franchise sales up to resolve the situation.

Text written by Michael Johnson (pictured), Managing Director of Card Connection
Card Connection has limited UK vacancies for franchise owners who are keen to run an expanding business.