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Franchise Advice

lack of cash. In reality, it would be much better to request a loan at the outset, say for 50 per cent 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 your ‘sticky patch’. Alternatively, things may be going really well for you and you decide you want to expand. Perhaps you buy a second territory or another outlet and, because you don’t have any spare cash, you decide to approach your bank.

In my experience, particularly in the

current economic environment, banks will require you to put in some further new money at that time. 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.

• Use a detailed business plan to quantify your business and fi nancial objectives Starting 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 – you don’t know how safe your car is and how much petrol you 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, do you want to 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 sat nav’, 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.

• Use a full set of fi nancial projections to ensure that you have suffi cient working capital Like a sat nav, make and see your mistakes ‘on screen’ – not in real life. You should use a projected profi t and loss account to gauge profi tability and ensure your plans are worthwhile, with a cashfl ow 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 fi rst 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 (for example, salaries and rent and so forth) will probably be consistently high from the fi rst month. This means that for the fi rst part of the year, the business will be making a loss and will need some additional cash to sustain it through and into the profi table 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 suffi cient cash from sales is received, the business is likely to require additional working capital.

• Monitor your performance against your projections using sensible key performance indicators (KPIs) In 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 fi nancial projections using appropriate KPIs.

• Get some training to ensure you have suffi cient fi nancial knowledge to understand what is happening within the business When you fi rst 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 fi nance and accounts. You need to be able to read and use a

profi t-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!

• Use ‘asset fi nance’ to avoid using up valuable bank borrowing opportunities that may ultimately be needed for working capital purposes Asset fi nance is a type of fi nance used by businesses to obtain the equipment and vehicles they need to grow. It usually involves paying a regular charge for use of the asset over an agreed period of time, thus avoiding the full cost of buying outright. The most common types of asset fi nance are leasing and hire purchase. There are some straightforward reasons why you might decide to use this form of fi nance such as lower contribution levels, and the fact that the security is the asset itself rather than there being a requirement for personal security (other than an unsupported guarantee). Often an overlooked reason is that if you use a bank loan to buy these types of assets you are using up a fi nite amount of credit that your bank is likely to give you. You may well need this as ‘working capital’ and it could be unwise to use up your ‘available credit’ unnecessarily.

Chris Roberts

Chris Roberts is a director of Franchise Finance Limited and a British Franchise Association-qualifi ed franchise professional.

Franchise Finance arranges fi nance for franchises, prepares business plans and runs business and fi nancial training courses

with workshops through its Business Training Academy. It is an affi liate member of the British Franchising Association (bfa).

Franchise Finance can be contacted on 01844 355575 or by email at info@franchisefi For more information, visit www.franchisefi

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