Dream Maker: How a Budget can help your Food Franchise Come True
Canadian Business Franchise
Published Nov/Dec 2005
You have a dream...
I am the owner of a successful restaurant franchise. Many people drive for many miles to enjoy our food and drink and the ambience of this busy, thriving destination.
Back to reality…
Can I afford to open a restaurant?
Can I get the financing I need?
Can I make this work?
For many people who dream of running a restaurant or fast food franchise, the difference between the dream and the reality usually comes down to money: getting money, keeping money and making money.
The only way to accomplish all three goals is to budget for them. Yes, this may sound mundane, but a budget is an essential conduit to making dreams happen. Basically, a budget is a forecast of all sources of revenue and expenses and typically covers a period of one year, on a monthly basis.
Budgeting enables you to confirm your ability to purchase a foodservice operation. It helps you to secure the financing you need to get started. And a budget also assists you in managing cash flow and building profitability. This is one valuable planning tool.
Can I afford to open a restaurant?
Thus, the first step toward reality is to determine what it will cost to open your franchise. The most common cause of business failure is undercapitalization. Too many owners assume they can “get by” on too little money.
As a guideline, you should budget for start-up expenses -- plus a minimum of four months of operations. You’ll need to factor in the following components when developing your budget.
- Purchase price of the franchise
You may be lucky and find a franchisor that will accept a down payment of part of the purchase price with the rest paid in instalments over a number of years. Most franchisors, however, will expect fees to be paid up front.
- Pre-opening expenses
These costs include legal and financial consulting fees, possibly travel expenses to visit the franchisor and other franchisees, leasehold improvements, deposits for rent, telephone and equipment, and training expenses.
- Funds to operate the business for four to six months
Even when the franchise opens, it will take some time to generate enough cash to cover all of your operating expenses, so you need to have a reserve on hand. This would be your monthly overhead for four to six months. Overhead includes royalties and consulting fees payable to the franchisor, rent, insurance, equipment, furnishings, computers/cash rgisters, inventory, legal and accounting fees, advertising and marketing expenses, license and permit fees, remodeling and leasehold improvements, utilities, payroll, office and administrative expenses and the costs to service loans and leases.
- Personal expenses for four to six months
Of course, you’ll also need to set aside enough money for you and your family to live on until your business starts generating cash.
Today, a fast food or partial service food operation may require $300,000 to $600,000 to open. A full service restaurant can range from $600,000 to over $1 million. This is a lot of money at risk.
But don’t dismiss the idea of buying your top franchise choice because you don't have the cash. Many established franchisors offer various types of financing support – from assistance with assembling a financing package to present to prospective lenders, to offering a short list of potential lenders, and even to extending special financing arrangements through their own preferred bank.
Can I get the financing I need?
With other franchisors, however, you may have to seek out the financing you require on your own. While your first impulse may be to approach your local banker, you should know that foodservice operations are not high on the list of bankers’ “best loan prospects.” Most tend to impose stringent requirements – and ask for significant collateral. In fact, bankers typically require that a franchisee invest an amount equal to the value of the loan in unencumbered cash – funds that are neither borrowed nor used to secure loans.
Generally, this involves an investment of your own funds and, often, those of family, friends or business colleagues. But before you ask anyone for money, and definitely before you sign a franchise agreement, take all of the information provided by the franchisor and meet with an accountant experienced with foodservice franchises. This professional can help you calculate the specific costs involved in getting up and running, can help you determine whether your franchise is likely to be profitable – and can also help you to find out whether securing financing is feasible.
Most lenders will expect to have their investment paid back within five years. So, along with determining the costs to set up and operate your franchise, you also have to calculate the cost of repaying loans. Therefore, you’ll need a business plan with budgeted financial projections to demonstrate your ability to successfully operate the franchise.
Can I make this work?
Anyone who lends you money to start up a franchise – including family and friends – will want reassurance that you can make this business work. This means providing them with a realistic financial budget that demonstrates your ability to manage cash flow.
The two key budgeting tools are cash flow projections (also called cash flow forecasts) and profit and loss forecasts (also called projected income statements).
- Cash flow projections anticipate the amount and the timing of cash flowing into and out of the business. They tell you how much cash your franchise will need, when it will be needed and where it will come from.
Cash Receipt
Total Cash Receipts
Cash Disbursements
Cost of goods (supplies)
Variable labour
Advertising
Insurance
Legal and accounting
Fixed cash disbursements*
Mortgage/rent
Term loan
Other
Total Cash Disbursements
Net Cash Flow
Cumulative Cash Flow
* Utilities, salaries, payroll taxes and benefits, automobiles, office supplies, maintenance/cleaning, telephone, miscellaneous
- A profit and loss forecast predicts your anticipated sales and expenses to help you assess profitability.
Net Sales
Cost of Goods Sold
Gross Margin
Operating Expenses
Salaries
Payroll taxes/benefits
Rent
Utilities
Repairs/maintenance
Office supplies
Postage
Automobiles
Insurance
Legal and accounting
Advertising/promotion
Consulting services
Depreciation
Equipment rental
Telephone
Travel
Others
Other Expenses
Interest on loans
Total Expenses
Pre-tax profit/loss
Taxes
Net Profit/loss
You’ll need both short-term and long-term budgets. For the short-term, monthly statements for a period of one year will help you determine whether you will have the sales and cash flow you need to survive.
A long-term budget of three to five years on a quarterly basis will enable you to anticipate future cash needs – and inform your lenders and investors when they can expect a payback on their investments in your franchise
Numerous software programs are available to provide you with the appropriate templates and your accountant can provide guidance. Going through the budgeting process personally, however, is always an insightful discipline. While the franchisor can provide you with information about the performance of other franchises in the system, you’ll have to think ahead about your own franchise and make assumptions about its performance.
- What sales can we anticipate in the beginning and as the year progresses?
- How much will goods cost us to produce these sales?
- What inventory will we need?
- How many employees will we require? How much will we have to pay them? What will our payroll taxes be?
- What will our operating expenses be?
- What income taxes will we have to pay?
- How much will it cost us to rent or to pay the debt on our facilities?
- What equipment will we need and how much will it cost?
- How much will we need to borrow? What will the interest rate be? When will we be able to pay it back?
- How much will I pay myself?
When your franchise is up and operating, the role of a budget evolves from that of planning tool to financial management tool. In the foodservice sector, suppliers are typically paid every seven to 15 days and employees every two weeks. That’s a lot of cash flowing out of the business. You must be able to effectively manage both inflow and outflow. You need to review, on a monthly basis, actual results with the budgeted results of your forecast. This will enable you to determine where you are on and off target and to act quickly when necessary.
Preparing realistic budgets and monitoring them frequently will enable you to acquire the funds you need to start your franchise and to build the profits you need to be successful. So think of budgeting, not as an onerous task, but as a tool to achieve your dreams.
Rick Chittley-Young, CGA, is a principal of BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting and advisory firms, BDO helps entrepreneurs, family businesses, franchisors and franchisees succeed. If you have questions about this article or would like to receive BDO’s “Tax Factor” newsletter, contact Rick in the Oakville office at (905) 844-3206 or rchittley@bdo.ca.
