Ten tips to help avoid common financial mistakes made by franchisees | Financial Help with New Franchise

Ten tips to help avoid common financial mistakes made by franchisees

Here at NGI Franchise Funding, we assist with the funding and development of business plans for both prospective and existing franchisees. The following are what we feel are the ten most common financial mistakes made by franchisees:

1 – Ensure you have the right amount of funding

Any new franchisee will need a healthy bank balance. Many will opt to fund the business out of their own pocket or just borrow a small amount of money to assist with the first 3 months of business. The key issue here is there is always something that has not been accounted for which then eats into the business cash reserves. When this happens, it is incredibly difficult to secure additional funding as lenders will be concerned about the ongoing viability of the business. Funding secured at the start-up phase is vitally important, even if it just sits in your bank as a safety net.

2 – Plan your way to success

Neglecting to have developed an accurate business plan is a bit like not having inspected your car or planned directions when starting out on a new car journey. How do you know the car is in a fit condition, are you going to arrive safely and most importantly how do you get to your destination? Relating this to your business, if you have no plan how do you know what needs to be undertaken to achieve success and how do you adapt when you face potential barriers?

3 – Understand your financial projections

Avoid making financial mistakes. Develop a projected profit and loss account which will assist with evaluating profitability along with a cashflow forecast to establish how much money you will need during the start-up phase. There will always be several large outgoings from the outset and sales within the first 6 months can often be slow. Having established clear financial projections which can be adapted throughout the business journey is crucial to the success.

4 – Set realistic KPI’s

KPIs (key performance indicators) allow a business to make sure they are on the right track (the same as directions help you with your car journey). You need to be constantly reviewing and keeping an eye on your performance compared with your financial projections, setting KPIs allows this to happen.

5 – Understanding the finance

Using the car analogy again you cannot just jump into the car and start driving, you need to be given lessons to understand what is required and how to drive correctly and safely. The same can be said about understanding the important financial elements of a new business. You need to understand profit and loss, appreciate the purpose of your balance sheet and make sensible and informed decisions. Having the ability to spot potential problems through accounting trends allows you to act on them before they have an adverse effect on the business.

6 – Do you really have to know everything?

We are all specialists in our own right but that doesn’t mean we have to know everything about every single element of our business. Financial awareness may not be your specialism, just the same as IT support may not be ours. Surround yourself with the right financial partners who can assist with your business planning and forecasting, we do the same with our IT requirements – switching our PC’s on and off has never been easier.

7 – Knowing the difference between profit and cash?

Businesses love to talk about their profit levels, “we are going to make xx amount of profit this year” or “last year we made xx amount of profit”. Of course, this is hugely important as nobody wants to run a business that does not make profit. However, something that is equally as important though is ensuring the business has the right amount of cash. You might be making profit, but if you don’t have enough cash available to pay your bills and VAT returns then clearly something is amiss.

8 – Explore all of your funding options

Businesses often turn to their local bank when they need help with funding. For example, if you need new equipment or vehicles for the running of the business then it would be natural to approach your bank for lending purposes. However, what happens when you need to extend credit with your bank, the options available could be limited because you have used up most of your credit with these new purchases. Instead, think about exploring the options of asset finance through a finance broker, often they have far more competitive solutions and you are not affecting your credit limit with your business bank.

9 – Make sure your accountant is a key partner

Accountants can be worth their weight in gold providing they understand you, your business and your business model. As with any industry there are some that will react to your needs when you need them to and there are others who will proactively work with you. They will be your sounding board, listen to your needs and then tailor their advice and support to suit you. Don’t always just take the first recommended accountant, do your due diligence and make sure they have an interest in supporting you and your ongoing business journey.

10 – Plan everything, even your exit strategy

It might seem strange to be talking about an end goal or exit strategy, but it is important to have this clearly defined. Taking steps early and recognising how best to present your business in the most effective and profitable way will be critical. Ideally preparations and plans should be initiated at least 2 years before the exit strategy concludes.

If you have any questions or need any help in relation to franchising please feel free to call us on 01993 706403 or e-mail hello@ngifranchisefunding.co.uk.

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