With macro events like Brexit and the election of Donald Trump potentially causing instability, how can franchisees plan their finances and buffer themselves against future shocks?
There certainly seems to be more uncertainty than usual in the world right now. In the UK, the long-term implications of Brexit are unclear when it comes to trade with the EU but it’s already having an impact on the economy and our exchange rate with the continent. Across the pond, Donald Trump’s election could change the competitive position of American businesses and a potential interest rates rise could trigger follow-on rises elsewhere in the world, including the UK. But whatever happens on the political stage, franchisees need to know that they can continue to operate, find customers and sell their products and services as usual. And to do this they need to have a strong financial plan in place so they can adapt to environmental changes and seize opportunities as they present themselves.
When faced with this type of external uncertainty, having a sound financial plan containing some form of scenario analysis can help franchisees understand the impact of potential events. This doesn’t need to be highly detailed or precise: even basic calculations will provide useful insights. For example, if inflation rises and people in the UK start spending less, domestic sales could take a nosedive. And if the the pound weakens against the Euro in the next 12 months, the most immediate effects may be relatively easy to predict. If you import raw materials from the continent, your franchisor’s costs will be higher and they may well pass these on to you. The questions you need to ask yourself are: can your business adjust to these changes and how would an increase in costs affect your profit margin or pricing strategy?
Understanding the effects of interest rate changes is also important when it comes to the cost of borrowing in the future. Most people will agree that the greatest risk in the current economic environment is around interest rates rising. The impact of this on floating rate loans or overdrafts should be understood as these will immediately reflect any increase. However, don’t completely ignore fixed-rate debt and loans, thinking they’re insensitive to interest rate changes. If they need to be refinanced or you need to extend the term, the rate may switch to whatever the current market rate is, which could be a step-up. Understanding the maximum interest rate increase your business can sustain helps you understand the point at which you might need to lock in your cost of borrowing by changing to a fixed rate.
Cash is king
In developing a financial plan, franchisees also need to make sure there’s enough liquidity in the business because even profitable companies can run into trouble if they run out of cash. The cashflow forecast is one of the most important parts of a financial plan: it ensures franchisees can cover their expenses or even fund a growth spurt by hiring more staff or buying additional stock. And as well as covering their regular expenses and paying employees, franchisees need to remember to set aside enough cash to pay themselves too. They need to achieve a reasonable return on their investment and receive enough cash from the business to meet their living requirements, after all.
The trouble is that many franchisees underestimate just how much cash they’ll need and assume that their debtors will always pay on time. This is particularly apparent when a franchise is growing but there’s a large time lag between debtors and creditors, which can squeeze working capital to the limit. In extreme cases, this can be fatal to a business if creditors demand payment but its debtors are being slow to pay. So while franchisees should always chase debtors to pay promptly, they should also factor in the possibility that they will be paid late into any cashflow predictions they make.
Preventing cash from drying up takes some forward planning: if you expect sales to be sluggish, you might need to line up another source of cash. Funds may come from various sources, including your personal savings, overdrafts, loans, alternative finance and other investors, such as family and friends. Exactly where the funds will come from should be thought about in advance. You don’t want to be scrambling around for finance at the last minute.
And, on the flip side, you don’t want to have too much cash in your business without plans for how it will be used. It may seem like a trivial problem to have but a cash surplus sitting in a low-interest bank account is effectively a wasted resource that could have been put to better use.
When forecasting your cashflow, it often helps to bring in expert help to make sure you’ve done your sums correctly. If you’ve just taken on a franchise and aren’t sure what to expect, other franchisees can be an excellent source of insight as they’ll have gone through it all already, albeit in a different market. But it’s ultimately your franchisor who will be ideally placed to sense check the financial plan for a new franchise; they have, after all, seen it all before and so know the potential traps and pitfalls that await the franchisee.
When to bring out your financial plan
When it comes to mapping out their finances, many franchisees also fail to plan far enough into the future. It’s perfectly understandable: in the early days, your focus is on the getting your business up and running. But this initial phase can pass surprisingly quickly, especially since in buying a franchise you’re starting a business that already has a successful model and an established reputation. It may not be long before you need to think about the next stage of your business and plan for growth by acquiring additional franchises or opening new outlets.
Financial planning isn’t just something you do when you first buy your franchise either: it should be something you continually review at least once a year, if not more frequently. If at any time the business’s operations change or there’s a wider event that could affect your finances, your plans should be reviewed and updated too. But at the same time, if you’re having to edit your financial plan more than once a month, this suggests that your plans are overly detailed or too sensitive to small changes. You shouldn’t spend so much time updating your plan that it becomes a distraction from your main priority: generating sales and meeting your customers’ needs.
Financial planning is crucial to the success of any franchise, especially in such uncertain economic times. While Pip Wilkins, chief executive of the bfa, is correct in saying that franchises are resilient, a sudden interest rate change, new export rules or more challenging recruitment circumstances can cause even the most successful franchises to go off-kilter. But to some extent, franchisees can factor in these variables and give themselves a little wiggle room.