Franchising is a good way to hedge your bet when starting a new business. You will most often have a tried and true concept that has proven itself successful in the past, and can be modeled to achieve similar results. However, it is always good to keep in mind that any business, including franchises, can still fail.
That's why we've put together the top three most important pieces of financial advice that will help you plan for your future and your franchise in a practical, realistic way.
- Write a realistic business plan. When you are first starting your business, you may have heard from the franchisor that you can make sky high profits and that you have unlimited earning potential. While that may be true, make sure you are using the information you have at hand -- from the franchisor but also from other franchisees, trends in the industry and what the economy looks like at that particular time -- to set up a realistic business plan. Although it is easy to believe that you will achieve success quickly and make assumptions about that, that may not mirror how your business will actually perform. Make sure that when you are creating pro forma financial statements (project cash flow and income statements), you are really taking into consideration all the financial aspects of your franchise.
- Have more than enough capital on hand. It can be easy to make the mistake of having just enough capital to invest in your franchise, without taking into consideration the other initial investments they may have to make. Usually, a franchisor will let you know a range for how much capital you need to start the franchise. It can be easy to think that the best way to be prepared to invest in the franchise is to have the average of that range. But you should always plan to err on the high side of the range in terms of what kind of investment you have available. Undercapitalisation will lead to your business failing, so make sure you prepare on the high side, or 10-25% above that amount.
- Don't spend too much, too soon. Once you begin investing in your franchise and you have that investment capital on hand, you may find yourself getting excited about spending money on your new business! There are exciting purchases ahead that may include leasing costs, construction, fixtures, furnishings, equipment, inventory, etc. But try not to spend too much at the outset. If you start spending like crazy at the beginning, you may find that you don't have the funds for important purchases at the end. Stick to your business plan and look ahead to what you might need to spend money on in the future. And as always, keep money on hand for unexpected expenses that may crop up.
Financing is one of the most important aspects of franchising, and you can achieve success if you make sure you are realistic about your earning potential, are fully funded and spend wisely. Good luck!