As a new franchise owner, you don’t need to be an accountant but you do need to be aware of some key financial statistics within your business. New franchises are often operating on a minimal budget so ensuring that your finances are managed correctly is crucial to success and to making sure that you aren’t left with more month than money.
The following phrase might be familiar: turnover is vanity, profit is sanity but cash is king. Ultimately, it means cash is vital for the health of a business.”
However, the difference between cash flow and profit can be a source of confusion for business owners, many of whom think they are the same thing. This can make financial matters unclear and confusing. For example, a business could have a £100,000 profit on paper but their bank accounts may show that they’re still overdrawn and are struggling with their cash flow.”
Many items are included in a profit and loss account but they may not be visible in your bank account. For example, making a trade sale to another business would not necessarily show up in your accounts, as you would usually send them an invoice with a period of 30 days for them to pay. On the other hand, your payment for a purchase would not show up in your accounts until it has actually been paid.
Whether it’s struggling to keep up with changes in the market or not being able to receive any funding, it’s little wonder cash flow problems are a common reason for business failure. It is therefore vital that all businesses take every step possible to ensure that their cash flow is managed effectively.”
Check that your customers are credit worthy
If you take on customers who have a bad track record for payments or reputation, it is likely history will repeat itself with you as the victim. Linking up with companies like Red Flag Alert can help you gauge a business’s credit risk.
Invoice your customers promptly
If you do not raise your invoices promptly, you have no chance of getting paid promptly. The way I see it, the value of any work performed for a customer decreases every day that you delay raising an invoice. In other words, customers are most enthusiastic about your service or product on the day that they purchased it. Their initial excitement is likely to disappear over time so if you leave it two months before getting round to invoicing them, they may not believe it’s worth what you originally charged them.”
Invoice everything that you can”
This is perhaps more important than the last tip because although a late invoice may get paid, an invoice that’s never raised is never paid. This may seem obvious but it surprises me how many businesses don’t have a system to ensure that all the work they do or products they sell actually get invoiced.”
Invoice accurately”
Whilst it is important to ensure that you invoice everything you can, it’s dangerous to invoice any more than you should. Not only is this practice illegal and unethical if done on purpose but it will also give the customer a chance to dispute the invoice, which will drag out the time before they pay you. It is therefore vital that you have an accurate invoicing system that can help you avoid errors on invoices.
Use free of charge credit from suppliers”
Having extolled the virtues of effective credit control, it is worth remembering that your suppliers will also have payment terms and you should be able to use these to your advantage. For example, if one of your suppliers gives you 30 days’ credit, you could use this credit to help fund your overall business. I am not advising that you perpetually pay late but it can sometimes be beneficial to make the most of the permitted credit terms.”
However, it is still worth reviewing your suppliers’ terms of business to establish whether or not there are any opportunities for early settlement discounts, while also considering whether it is worth using these yourself on your own invoices.“
Regularly monitor your bank account
Now online banking is available to all businesses, there is no excuse for not knowing your exact financial position on a daily basis. Make sure you have a projection of how the forthcoming days, weeks and months look – even if it’s only a rough calculation – so you can act to improve your cash flow sooner rather than later.
Keep your financiers updated“
If you do anticipate cash flow difficulties, make sure you speak to your bankers at the earliest possible opportunity as they might be able to support you through any difficult period. They also have a vested interest in you continuing to trade so, provided that you approach them with a sensible proposal, they will probably want to assist you by offering some additional facilities. It’s essential to not bury your head in the sand over these matters, as financial support is not easy to obtain and is usually expensive later on.
I can’t overstate the importance of all of the above when it comes to staying on top of your cash flow. By implementing all of these practices into your business, it’ll keep you in a healthy position on a monthly basis and, as long as your product or service is selling well, you should find yourself on the road to commercial success.”
