Business continuity and growth is a must to develop a successful franchise company. One of the most important elements is maintaining excellent working capital. The key difference between a successful and a struggling franchise is the management of its cash, having a positive level of cashflow is a must.
Working capital is the spare money that a franchise has once all the income and expenditure has been accounted for. Subtract the businesses liabilities with its assets and the balance left is the working capital. Monitoring and successfully managing working capital should be a key objective for any franchise, it is easy to demonstrate profitability but if expenditure is extremely high the business can quickly stop trading.
Both during the start-up phase and at a time of high growth, a franchise must have a healthy working capital. Often if the franchise needs to invest in inventory and stock, funds can quickly be spent and revenue through sales might not always match the same timescale. This is where business finance can be very important.
When exploring business finance a franchise will need to calculate how much working capital they need. To do this they will subtract the value of the assets with the value of the liabilities. The higher the value of the assets then then better the working capital will be.
Although this seems quite straightforward there are some other factors to consider. These include:
- What is the cycle of cash flow and how long it takes for customers to pay their bills?
- What would a safety net of cash look like in case of unexpected expenditure?
- What are the upfront or operational costs required when establishing new contracts?
For a franchise if there is a need for extended cash flow cycle then it will also need a high level of working capital. Keeping track of payment commitments alongside incoming revenue enables the franchise to maintain a healthy balance.
Finally, it is important to try and reduce risk to cash flow and keep it as optimum as possible, top tips for this include:
- Keep incoming payment terms short
- Ensure supplier payment terms are favourable
- Be efficient with stock level
- Utilise working capital loans
If you have any questions or need some help with working capital for your franchise, feel free to call us on 01993 706403 or e-mail hello@ngifranchisefunding.co.uk.