Ten common financial mistakes made by franchisees (part 1) 12/02/2016 12:59

Chris Roberts QFPby Chris Roberts QFP
Director, Franchise Finance

You can view part 2 of Chris's tips here

The consultants at Franchise Finance arrange funding and prepare business plans for prospective and existing franchisees on a daily basis; they also undertake ‘Business Healthchecks’ for existing franchisees. From my years of experience helping numerous franchisees and as director of the company’s Business Training Academy, here are my tips on the mistakes to avoid.

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

Piggy bankIt is not uncommon for people with just enough cash to use 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 can be a very bad decision because in these somewhat uncertain times, it is possible that trading may not be as good as was originally expected and therefore you could start making losses and running out of money. An approach to a bank at that stage, where losses are being made and the business performance is behind plan, will almost certainly be unsuccessful and the business could easily fail because of a lack of cash.

In reality, it would be much better to request a loan at the outset, say for 50 percent of the total amount required, when everything looks 'rosy' and the business plan demonstrates viability because the problem has not yet occurred. Therefore, when and if the problem does occur, you have your own cash 'safety net' which you can use to get you through the sticky patch.

Alternatively, things may be going really well for you and you decide you want to expand; perhaps through buying a second territory or another outlet. Because you don't have any spare cash, you decide to approach your bank. Our experience, particularly in the current economic environment, is that banks will require you to put in some further new money at that time, being often not willing to solely rely upon what you put in as your contribution at the outset.

So, once again, it would have been better to have borrowed at the beginning and kept some of your own money back to assist your expansion plans when you (and not the bank) felt the time is right.

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

SatNavStarting or growing a new franchise business without a comprehensive and professional business plan is rather like going on an important 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!

Do you really want to leave so much to chance or do you want to give yourself the best possible opportunity to arrive safely, or in the case of your business, make sure that you achieve your key business objectives without running out of money?

This is why having a good business plan, whether you are borrowing money or not, is so important. It acts like your Business SatNav, helping to guide you from where you are now to where you want to get to on your business journey; helping you to see what is around the corner and giving you something to regularly measure your actual progress against.

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

PlanningMake and see 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 taking forward; and a cashflow forecast to establish how much money you need at the outset so you do not run out of working capital during the course of your journey. It is so important to be absolutely sure that your business is properly capitalised 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 is likely to take some time for the business to become established. However the overheads (e.g. salaries, rent etc.) 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 will need some additional cash to sustain it through and into the profitable months in the second part of the year. This additional cash is what we refer to as ‘working capital’.

The same problem arises if an existing business is suddenly going to increase its planned sales, perhaps because of a new marketing strategy or a new 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 the projections model described above.

Not monitoring actual performance against the projections or using sensible KPIs

MetricsIn the same way as with a car journey, you need to check from time to time that you are on track to arrive safely at your destination, as planned. It is exactly the same with your business journey so you need to monitor your actual performance against your financial projections using appropriate key performance indicators.

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

Learner platesWhen 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 so don’t make the mistake of setting off (or carrying on) if you don’t really understand 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. You need to know how and which accounting ratios and trends to focus on, so that you can spot potential problems and take appropriate actions before they become real problems!

Franchise Finance arrange finance for franchisees, prepare business plans and run business and financial training courses and workshops through their Business Training Academy, including those on the bfa's Qualified Franchise Professional programme. The company is an affiliate member of the bfa and has a 95% success rate in raising finance for its clients.

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