Ask the Experts
Rick Chittley-Young, Partner
Canadian Business Franchise
Given the current turbulence in the economy, what can I do to ensure that my franchise stays healthy?
With economic growth booming over the past few years, many franchisees have been working all out, and there hasn’t been much extra time to analyze their businesses. So consider this time of slower economic growth as an opportunity to assess and strengthen the financial health of your business. Ask yourself the following questions.
Do you know where your cash is?
Cash flow is essential to the survival of your business in a slower economy. Anticipate what money will be coming in and going out every month by preparing monthly cash flow projections for the next one to two years. If you aren’t confident about making “educated guesses,” ask your accountant for assistance.
When you’ve determined what you expect to happen, monitor what actually happens. Review your sales reports and cash flow projections every week. If you’re off track, this will give you an opportunity to make adjustments. Do you need to step up promotions? Reduce costs? By staying on top of cash flow, you won’t have dangerous surprises – like running out of cash.
Do you know where your expenses are?
Study your expenses and note those that are increasing, such as energy, fuel and transportation, and by how much. Look for ways to offset increases by reducing other expenses – without impacting your business. If you need more staffing for example, consider alternatives to full-time employment such as part-time or temporary workers. And be especially cautious about investing in large or long-term expenses like major capital improvements. Ensure that every new expense adds value to your franchise.
Do you have access to “just in case” funds?
Have a cash reserve on hand – some extra funds in an easily accessible account or investment fund that you can draw on “just in case.” And ensure your financing is solid: review the renewal terms of any mortgages, loans or leases and where possible, negotiate lower payments, or include a “buffer” or increase credit lines. If necessary, find additional sources of financing; ask your franchisor for names or introductions to alternative lenders.
How healthy is your franchise?
Along with cash flow, keep a close watch on the profitability of your franchise. Each month, review your income statement to monitor sales, expenses and profits or losses Check liabilities and net worth on your balance sheet and track the following ratios:
- gross profits/net sales
- net income/net sales
- average number of days for payables
- average number of days of receivables
- debt/equity current
- assets/current liabilities
- inventory turnover
As well, compare your sales and margins from 2007 and the previous year.
Do you see any red flags?
Be on the lookout for significant changes in your financial statements or ratios. As soon as you notice negative trends, discuss these with your franchisor and/or accountant to address issues before they escalate into serious problems.
A slowing economy is a natural part of the business cycle; instead of worrying about the downside, focus on the upside – building the financial health of your franchise.
Rick Chittley-Young is a principal of BDO Dunwoody LLP (www.bdo.ca). BDO is one of Canada’s leading accounting and advisory firms, which helps entrepreneurs, family businesses, franchisors and franchisees succeed. You can reach Rick in the Oakville office at (905) 844-3206 or rchittley@bdo.ca.
