How franchisees can better manage their cash flow

July 11, 2019

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When starting a new unit, franchisees often have instant brand recognition, but that doesn’t mean that all operators are successful. Achieving consistent profitability will depend upon how well the business is run. And managing cash flow properly is an important part of running a profitable business.

Increasing the bottom line is important for any business, especially in franchising, which is often prevalent in high-volume, low-margin industries, including restaurants and other service industries. Preparing and analyzing regular financial reports are an essential part of the process.

Know past, current, and upcoming cash flows

One of the top reasons why businesses fail is because they don’t have enough cash readily available. Therefore, monitoring cash flow is essential.

The best run franchisees prepare forecasts so they can ensure that they don’t run out of money. Preparing a cash flow forecast will help a franchisee identify any potential shortfalls. Checking the cash position regularly will allow businesses to make adjustments and take action before they encounter difficulty in making payments to suppliers. By knowing where there are tight areas, franchisees can plan big spends or arrange financing to ensure they don’t run out of cash.

For short-term analysis, business owners should be reviewing the numbers daily if cash flow is tight. Weekly analysis is often sufficient for those that have more cash at their disposal. Another helpful analysis to complete is comparing monthly cash flows over the next year, as well as longer-term cash flow projections over three to five years to plan out big spends, such as renovations or equipment purchases.

Preparing a cash flow forecast is simple. For existing franchisees, the best place to start is with their historical financial information. On the other hand, new franchisees will have to make reasonable assumptions and estimate their financial results. For franchisees that are uncertain about their projections, they can prepare a sensitivity analysis and come up with different cash flow scenarios based on a range of possible outcomes, such as variations in sales, margins, or other operating expenses.

Manage supplier payments

Proper supply chain management can make or break a franchisee’s operations. By taking advantage of credit terms and discounts available, owners can more effectively manage their cash. Franchise owners should identify what all current payment terms are, including fees for late payment and discounts for early payment, in order to mitigate additional costs when discounts can be used, and take advantage of credit when the opportunity presents itself.

When more cash is needed, or higher outflows are anticipated, franchisees can push out payment terms. When cash is available, franchisees can manage payments to take advantage of available discounts. If possible, franchisees should try to consider payment terms when selecting suppliers for bigger or recurring purchases. These additional savings can add up over the long term.

Understand interest rates in debt

Most franchisees require financing to start or operate their business. Franchisees should review the different debts they have or financing available to them, and where possible, repay higher interest debt first. They should also consider credit options that allow for repayment or redrawing, in order to reduce interest costs.

Avoiding issues related to cash flow

Positive cash flow is a must for any business in order to be successful. Having accurate and timely financial reports allow franchisees to understand past performance and create forecasts, which can help them make decisions, such as whether to finance a large purchase or pay for it right away. Cash flow projections provide insight and can reduce potential surprises.

BDO can help

We help franchisee owners with bookkeeping services, which allows them to focus on running their business. The data is stored securely in the cloud, and is accessible from a computer, tablet, or phone. This information provides actionable insights, which can help a franchisee better understand their financial position to move forward in their business goals. Contact one of our Cloud Bookkeeping Services professionals to learn how we can support your business.