Buying a Franchise: Financial Matters
The 7 key causes of poor cashflow René Artz from Westpac looks at financing growth in your business
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any new franchisees will develop a cashflow forecast which shows them what they need to get started. But if there’s no improvement plan, regular monitoring, or process analysis to make lasting adjustments, then the business risks finding itself unable to access further cash as it grows. So how do you avoid this? Let’s have a look at some of the basics. Every business, regardless of what it does, has a Working Capital Cycle (WCC) which ties up available cash. Start any business, and cash is required to purchase stock, equipment or pay wages to generate a sale. When the stock is sold, it is either by way of a cash sale or is charged to an account, creating a debtor. When the debt is collected the WCC continues. Imagine that the stock a business buys sits on the shelf, on average, for 55 days before it is sold and that it takes an average of 45 days to collect upon debtors (in a service business, the ‘stock’ may be work in progress). In this example, each dollar tied up in stock will take 100 days before it returns to the cash position where it can be used again to purchase more stock. While we wait for that dollar to return, more stock must be purchased to keep the business operating. The more you grow, the more cash you require to fund the stock you need to grow. Using a bank overdraft, trade or debtor finance to provide this cash costs the business money. Without a proper working capital facility in place, a business may tie up funds that could be better used elsewhere, thereby slowing growth in sales.
I bought a Pit Stop franchise
Improperly managed, especially during growth, the WCC can be a key business constraint and the cause of a cashflow crisis. The key is to speed up the WCC, because the faster a dollar returns, the less overdraft or surplus funds the business is required to use. Here are seven key tips. 1. Stay on top of receivables Accounts receivable are what the business is owed (debtors). If you have poor accounts management processes, this René Artz will result in the time between billing and banking being too high. Review your billing process to shorten this time. Some strategies to help achieve this are: • • • • • • • •
Offer customer options for prompt payment; Suggest direct debit for repeat custom; Issue invoices on the first day, not a week later; Charge an upfront deposit; Create and communicate a clear terms of trade policy with customers; Put credit control procedures in place to minimise bad debts; Always check credit references; Collect overdue debts and work with customers to avoid recurring issues.
A good franchise will have processes and procedures in place for managing accounts receivable. Follow those systems – it’s what the franchise model requires to succeed. 2. Don’t spend more than you need Accounts payable are what the business owes to others – your trade creditors. To improve performance in this area, look to extend credit terms or reduce cost of purchases. A few areas to focus on include: • Review and extend terms you receive from suppliers; • Ensure you maximise any prompt payment discounts from suppliers; • Implement expenditure budgets.
EXCITING FRA
NCHISE
OPPORTUNITY
Brand new store on a turnkey basis! • Affordable, accredited nationwide franchise • Group buying power • Simple business model • Full/ongoing training • Fresh, new branding • Comprehensive marketing support • Integrated point-of-sale • Low wastage operation
and I’ve never looked back Franchise opportunities nationwide. Call Les 027 222 7487 for a chat. Visit www.pitstop.co.nz/franchising 36
Jesters is more than just a pie shop! All new stores are equipped with a pie van, Kindo school fundraising and catering solutions W E ’ R E L O O K I N G for passionate franchise partners to bring our ‘pies to the people’! For further information email franchisee@jesters-pies.co.nz –––– JESTERS-PIES.CO.NZ
Franchise New Zealand
Spring 2021
Year 30 Issue 03
