Byline: Joseph Pisani
Franchising represents a great opportunity for business ownership. As a franchisee in a major network, you can expect to benefit from professional marketing, national advertising, specialized training, and centralized purchasing. As well, you are more likely to succeed with a well-established franchise than with a non-franchised independent business.
But in order to take full advantage of the opportunity and help put you on your way to long-term success, it’s crucial to look at how cash flow is being managed.
Cash flow planning involves three elements: the amount of cash coming in, the amount going out, and the cash you have on hand. Even if you’re a profitable franchise, having more cash going out than coming in can be problematic. Without cash on hand, you may not be able to meet your day-to-day business obligations; among other challenges, you may end up paying more in interest when you borrow money to stay afloat.
When looking at how to get the best handle on managing cash flow for your franchise, I talk to franchisees about four things:
Review, review, review
When it concerns the flow and use of money – accounts receivable, accounts payable, investments, cash, operating expenses, etc. – a business owner must be committed to reviewing the company’s ongoing needs and processes on a regular basis. A good rule of thumb is to review, at the very least, annually; the financial management strategy that worked for the business last year may not be the most effective solution in the coming year.
Understand your sales cycle
It’s important to know the ins and outs of your franchise’s sales cycle. To help you better understand it, look at whether the business is seasonal (so you will know when to expect ebbs and flows) and how dependent it is on things like foot traffic. If a chunk of your business depends on getting customers in the door, look to supplement that with an online storefront for when traffic might be lighter.
How the pay period is structured is another factor that can impact the sales cycle. Ensuring customers are paying you before you have to pay suppliers represents a good practice. Being able to identify the peaks and valleys of your business cycle will help with identifying potential cash flow issues.
Manage the money going out
The employee pay period can influence a franchise’s cash flow. Paying employees on a weekly basis will mean that money is going out more frequently, which can put pressure on finances in the short term. If employees are paid weekly, look to switch the pay period to either biweekly or monthly to help alleviate some pressure. Stretching your average payment cycle by even just five extra days can also help alleviate some of the short term pressure on finances.
It’s also important to stay on top of all Canada Revenue Agency (CRA) payroll-related regulations to avoid costly fines. For instance, if you pay remittances for Canada Pension Plan contributions, income tax or employment insurance late, CRA may charge a 10 per cent penalty. The CRA will charge a 20 per cent fee if you’re late twice.
Part of cash flow management is looking at where to allocate resources that can help with long-term profitability. Look to technology investments that help spur customer loyalty. Consider options like point of sale terminals and Guest Wi-Fi. Both provide convenience and add-on services to customers as well as providing the franchise owner the ability to get a better understanding of their customers – what they are buying and time spent in the store or restaurant. Getting a deeper understanding of the customer base can help find ways to get repeat business and target new customers as well.
Lean on your bank (relationship manager)
One thing that franchisees (or all business owners) sometimes neglect is looking at the overall role that their bank can play. There is far more to be gained in the long term if a business owner looks at what a bank can do to help the business achieve its goals.
If your relationship manager at your bank has an understanding of your business, he or she should be able to offer terms that benefit your operational structure and cash management needs. Ask potential banks how quickly your sales receipts will post to your account, as well as if you can make a deposit before midnight, receive same-day credit, and have access to a line of credit that will provide some security during negative cash flow periods.
Franchising is an exciting opportunity, if done right. As a franchisee, look at ways to manage cash flow to help with long-term success and profitability. It requires planning, perseverance, and careful monitoring, but it’s a crucial pillar to a successful business.
Joseph Pisani is the Director North American Industry Sectors, Franchise Finance for BMO Bank of Montreal (BMO). Visit www.bmo.com/franchising for more information.