One of the most common complaints among people who have invested in a franchise business is that they aren’t earning enough, that they worry over meeting payroll and bills, or that they don’t have the sales they expected.
As with so many franchise business problems, cash flow issues are often caused by a failure to look ahead. Investing in a franchise business can be exciting, and seeing the kind of revenue other franchisees take in may be enough for you to feel confident that you’ll earn what you need.
But cash flow can be a concern even for a successful business.
Related Article: Cash Flow: The Pulse of Your Business
Here are some of the cash flow issues you should think about before you decide which franchise to buy:
- There may be time between when you make the investment and when you begin to bring in revenue. You will need to find a location and you may have construction or renovation costs to bring the space up to meet the requirements of your franchisor and to get it ready to open the doors. There will often be hiring, training, and marketing costs before you open, too. And a new business may take a while to become profitable, not because it’s a bad business but because it takes time to build a clientele. You have to be sure that you have enough capital to pay the costs of doing business, plus savings or another source of income to live on during this time.
- You may be focusing on revenue without being fully aware of costs. Revenue that comes into the business has to cover the cost of franchise fees, which are usually a percentage of the revenue, plus all the costs of running the business. That may include wages for staff, the cost of materials, and the fixed overhead costs like rent on a building, electricity and other utilities, marketing fees, and much more. There are other costs that you might not be aware of if you haven’t run a business before. For example, “shrinkage” is the cost of spoiled food or damaged products as well as shoplifting and petty theft. Most businesses have to deal with some losses of this kind. Employee turnover can also lead to unexpected costs such as additional training, extra uniforms, and the time and money involved in advertising for, interviewing, and hiring new workers. Be sure that you understand all the costs involved in the business you’re considering.
- Money may be tied up in inventory or other expenditures. It’s important to keep enough stock on hand in a retail business and a restaurant has to have enough food and drink on hand. A service business may end up putting a lot of cash into decorating an office, buying business machinery, and paying fees for associations. However beneficial for the business in the long run, these costs can make it hard to meet payroll or other cash needs in the short run. Balancing these costs with the need for cash on an ongoing basis can be challenging, especially for a new business.
Going into your franchise business with a realistic understanding of the costs and revenue make it easier to be sure that you don’t have any nasty surprises when it comes to cash flow.