Franchise Advice


Look into the future


Chris Roberts on the difference between profit and cash and the need for financial projections


P


eople like talking about profits, whether it’s how much they are going to make or how much they have already made. Yes, profits are hugely important because you


don’t want to be running a loss-making business. What is even more important, however, is the answer to the question: ‘Do you have enough cash to pay your bills as and when they are due?’ A simple fact is that businesses go bust when they run out of money and we really don’t want this to happen to you, so read on and find out how to avoid the pitfalls.


Let’s assume a franchise supplies goods on 30 days’ credit and on a Friday afternoon they make a £20,000 sale for goods they bought for £10,000. They despatch the goods and raise an invoice. They can, therefore, legitimately claim to have made a profit, and may decide to celebrate that weekend with several bottles of wine! If they come back into work on the Monday morning, however, and need to pay the vat bill or perhaps the wages but don’t have enough cash in the bank to do so, they are in big trouble. Yes, they have made a profit, but it is having a sufficient amount of cash, or


42 | Businessfranchise.com | July/August 2014


working capital, that really matters. In reality, it’s all about timing. The glossy brochure promoting a new franchise might state that a franchisee should be able to make a profit of £30,000 in the first year and that the start-up costs are £20,000. You could be forgiven for thinking that if you have £20,000 now to invest and you are going to make a profit by the end of the year that success is only just around the corner. The reality is that without some sensible planning, and by this I mean checking to see how much cash or working capital is going to be needed over and above


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