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Challenges
Managing cash flow effectively is an important business skill. An inability to manage your finances can potentially lead to the business failing. The support that a franchisor will provide depends on the size and structure of the franchise organisation, and while some franchisors faithfully fulfil pledges to oversee the running of business every step of the way, not all are involved in the day-to-day running of the business.
Many entrepreneurs cannot afford to have a CPA (Certified Public Accountant) and so must rely upon their own knowledge, something that can be tricky if you don’t want to be getting a letter from HM Revenue and Customs! In a 2018 survey, research showed that SMEs were chasing £14.9 billion in recent payments and that 58% of them are currently owed up to £10,000! As a result of the Covid pandemic at the start of March 2020, it was been reported that SME lending soared due to lockdowns, with the hospitality sector alone seeing loans rise up from 40% the previous year. Due to the high levels of lending in 2020, there is concern that indebtedness could become a huge issue down the road following the end of the government-funded pandemic loan schemes.
It is clear that UK businesses are spending a significant amount of time chasing funds and this is precious time that could be spent elsewhere.
What Can Be Done
Training in cash flow matters is important for any incoming franchisee. When a franchisor provides upfront training on the main elements of running the business, it is common practice to include tuition on efficient book and record keeping. However, after the initial one to four weeks of schooling, the franchisee may be left alone on this topic with little more than annual meetings and an operation manual for guidance. It is essential for him or her to research the level of support that will be offered long-term, both from the franchisor – who should provide a formal system for communication and assistance – and from fellow franchisees.
Whatever the level of guidance available, there are certain simple factors that any small business manager must keep in mind so that even if there are financial setbacks, at the very least they are not endogenous.
It is essential you have enough capital to see you through. Most SMEs don't allow for enough working capital at the beginning stages of the business which can lead to short term cash flow problems and long term profitability issues. It can take a while for a new business to hit the ground running, so bear this in mind.
Small business owners are renowned for inefficiency when it comes to money collection. Ensure that your invoices are accurate and that you send them out as soon as the product or service has been delivered. Contact the customer and gain confirmation that the invoice has arrived and its details are correct, so that when you call in 30 days' time they cannot claim they didn’t get it and ask for another copy, which would result in another 30 days with less cash coming in.
Plan ahead and prepare a cash flow forecast for at least six months, taking potential shortfalls into account. SMEs tend to run their businesses month-to-month instead of planning ahead. It is important to make a long term plan for your finances, and to budget for any unexpected financial issues.
Make sure that cash is used correctly. It is important to remember that profit doesn’t equal cash that can be withdrawn, and business funds must not be used for personal luxuries. One way to avoid this could be to have business and personal accounts in separate banks. Remember as well that a portion of profit should always be put aside for times when cash inflow is lower than expenses.
Make sure to spread your customers around. Many SMEs can rely too much on one or two large debtors. When money is not collected promptly, it can sink a small business very quickly.
Price your goods and services correctly. Many small businesses do not charge enough and basing your costs on those of the competition, without taking into account your own expenses, is lethal. Know what you need to charge in order to make a long term profit!
Check out our recent blogs and articles for further advice and tips!