An inability to manage cash flow efficiently is one of the key reasons why new businesses fail. 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 so involved in day-to-day accounting. The feeling of self-employed independence that comes with managing finances is of course one of the appealing factors that bring many to the position of franchisee in the first place.
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. A UK-wide survey recently conducted by Santander Corporate & Commercial revealed that nearly half of small businesses claim that they are either ‘very’ or ‘quite’ concerned about managing cash flow well over the next 12 months, and nearly half say that their business was recently hit by a cash flow challenge (such as a late payment from a customer or unexpected costs/charges). This can apply regardless of the age or category of the business. “I believe that cash flow problems are a universal SME (Small and Medium-sized Enterprises) challenge,” says Annie Baptiste, training manager with Franchising Plus. “There are many problems to deal with.”
What Can Be Done
Training in cash flow matters is where franchising holds the advantage. 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 beforehand 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:
• Baptiste warns that at the start, 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 leads to short term cash flow problems and long term profitability issues. I reckon this is probably one of the biggest causes of the alarming statistics on new business failure,” she says.
• Small business owners are renowned for inefficiency when it comes to money collection. Ensure 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 inflow.
• 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 and making provision for cash shortages,” says Baptiste.
• Make sure that money collected 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: “Relying too much on one or two large debtors and not being diligent in collecting money can sink a small business very quickly from a cash flow point of view,” Baptiste says.
• 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.
Check out the Government’s Guide to managing cash flow for further advice and tips.