Finance

The importance of a good business plan can not be overstated. The initial objective of the document is to help you raise finance for the business however it will also help you understand what you wish to achieve from the business and is an essential document to review the performance against your projections alerting you to anything that is not going according to plan. The plan should demonstrate that you understand the business opportunity and unsurprisingly, a bank will only lend when it has a very good chance of being repaid. Banks can provide a business plan template for you to use. Accountants and Business Link advisors can also provide advice in producing a business plan but remember it is your document and is too important to leave to someone else to write.

 

Objectives Break Even Finance Options Security Creditors

 
A business plan is a written document that provides an overview of the business, your objectives, market, management team and financial projections. It is often assumed that a business plan is just used to secure funding for the business. Whilst this is an important benefit of producing a business plan it can also assist with the management of the business such as monitoring the ongoing performance of the business against the original benchmarks and the identification of areas for development. The plan is a working document and should be regularly reviewed and updated as the business develops.

There is truth in the old saying ‘If you fail to plan, you plan to fail’ especially when you’re starting a new business. Those who understand the benefits of business planning are more likely to be successful than those who react to day to day operational issues and are constantly fire-fighting problems. But planning a business is not a simple matter of scribbling down a few ideas. If a franchisee is going to make their plan work, a much more thorough approach must be adopted. A business plan is a useful tool to help gather thoughts and to set objectives for the business. It should demonstrate that there is sufficient demand for the product or service offered, that there is a good understanding of the market and to set out the competitive advantage or unique selling point that the business may have.
 
Presentation of the plan is important to create maximum positive impact and you should practice delivery of your plan before speaking to a lender so that you come across professionally. Think of those entrepreneurs on BBC’s Dragons Den programme.  From the outset many don’t stand a chance of securing the investment they are seeking because their presentation is poorly conceived or they don’t have a good understanding of the key financial information for their business. Consequently they are unable to establish their own creditability and project confidence in their business.
 
 If you fail to plan, you plan to fail’ especially when you’re starting a new business. Those who understand the benefits of business planning are more likely to be successful than those who react to day to day operational issues and are constantly fire-fighting problems ” 

Richard Holden
Lloyds TSB Commercial
What lenders look for
 
Lenders or investors will want the franchisee to give them confidence that they will be able to repay any finance taken. When considering the financial aspects of the business plan it is best to build in a contingency of at least six months and preferably twelve months expenditure in case the business takes longer than anticipated to get off the ground. The financial aspects of the plan should include a three year cashflow and separate profit forecast with assumptions behind the figures. Details of the capital stake and any funding required should also be included. A plan should also feature a SWOT Analysis detailing the strengths and weaknesses of the business as well as the opportunities and threats that maybe faced. 
 
 Any lender is likely to ask for some form of security to cover the amount that they lend. This security should be outlined in the plan. Background information of key individuals involved in the business, setting out their skills and attributes should also feature. If the franchisee is taking over an established business through a resale opportunity they should provide additional information about the history of the business and how well it has performed in recent years. Details of the existing client base, order book and business structure are also important. The lender or investor will ask questions about the plan presented to them, so it is important that the applicant will be able to answer these confidently.
 
A business plan is a blueprint for running your business. As with anything it’s worth taking time to look at all the banking and finance offers available before making a decision. Careful planning and preparation should place the franchisee in a better position to raise the required finance from a lender and to operate their business successfully. The business plan is the most effective way to crystallize your business objectives and provide a sense of direction. Used in the right way, a business plan is an essential tool however crucially no business plan should be set in stone and should be regularly reviewed as the business develops.
 
It is always a good idea to send a copy of the business plan to the lender in advance of the scheduled meeting, as it speeds up the process of assessing the finance. If you are looking to raise a large sum of money from the lender then it would assist if two copies of the business plan were made available, in case sanction needs to be referred to the bank’s lending department, who would also wish to review a copy of the business plan.
 
Objectives
 
When you get guidance from the professionals to start your own business, we all talk about business plans and their importance, and rightly so. If you don’t know where you want your franchised business to go, then how can you take it there? However, if you’ve never run a business before where do you start? The key is to have a structured process to follow, and to build the business plan in stages. What does success look like for you? Everyone’s aims and objectives will be different - what’s your definition of success?
 
Everybody wants something different from their own business. Lifestyle, independence or financial security are a few objectives. It’s important to define these and clearly set out your own short, medium and long term goals. This should even include an eventual exit strategy at the time of setting up the business. Having defined what success means for you, it’s important to look at your individual motives and those of your business partner if you have one. This will help ensure you remain on track towards your ultimate goals, and will help identify areas where you and any partner need to think about the potential impact of differences you may have.
 
Key Personnel
 
The key factor that is going to make the business work is you, either as an individual, or as a member of a team. When you are planning your business therefore, you need to spend some time understanding what you do well. What are key personal attributes and skills that have made you successful in your career or business to date? It is useful to break these down and analyse them. By doing this you will be able to pass on the knowledge to other members of your team both now and in the future. This is not necessarily an easy process, and whilst it may be time consuming there should be tremendous benefits for your business in the long term. Include a Curriculum Vitae for each business owner or key employee to include past experience and skills that are relevant to the business being setting up.
 
Specific skills or attributes that are often relevant to becoming a franchisee will include your keenness to learn new skills, the stamina to cope with long hours, the ability to delegate responsibility to others and being happy to work within a clearly defined system. You will also need to be willing to take advice and be able to manage your time effectively. In addition to knowing what your strong points are, it is also essential to be aware of your limitations, as very few people are excellent at everything. You need to plan how you will address the skills gap. Will you acquire the missing skills yourself? Does someone else in the business already have them? Or will you need to buy them in from an outside source?
 
You may find that by being part of a franchise system some areas are handled for you by the franchisor, invoicing or credit control for instance, or arrangements are in place to introduce you to a book-keeping service. In your plan identify the work you have done in this area summarising your strengths and the actions you have planned to fill the skills gaps. An evaluation of you and your team will also be useful when you have moved beyond the planning stage and your business is up and running. Although it will be challenging, take the opportunity to step back and look at how you spend your time, and are you using the skills you have to the best advantage for your business. You may have heard the phrase a ‘busy fool’ but try not to be one, it is easy to spend all day doing things, but try and evaluate how each one has contributed towards the success of your business. The plan should also cover the operation of the business detailing location, premises, insurance, advertising, marketing, staffing, equipment required, information technology, stock control, health and safety.
  
Market
 
Understanding your market place, your customers, competitors and suppliers is essential to helping you build a solid plan to run your business. The three key components to the market place you are operating in are your customers, your suppliers and your competitors. It is likely that you will you have a broad range of customers, or possibly just a few large ones. If the latter is the case, think about the challenges losing one of them could present to your business.
 
Whatever your business, customers are its lifeblood, and you need to understand what is important to them, what makes them buy from you, and what will make them stay with you. A well established franchisor is likely to have this type of knowledge already and should be able to share it with you. Don’t make the assumption that price is the most important factor in a customer making their decision to buy from you - it’s not always the case. Reliability, quality or speed of service and the range of products available in one location can often be the customer’s key requirements.
 
A good knowledge of your suppliers is also essential. Remember you are their customers and building a good relationship with them can be useful if you need help as your business grows. Think about how they will be helping you satisfy your own customer’s needs. Being part of a franchise network, you may be getting additional benefit from using approved suppliers, although you may have less freedom to change those suppliers. If this is the case then building relationships with them can be even more important.
 
Don’t be afraid of competition, if it is present, then you know there is a market place for your product or service. It is useful to identify who your main competitors are at a local level. Using the key requirements you have identified that are important to your customers, measure yourself and your competitors against these. This will give you a good indication of what you will need to do if you want to win more business away from the competition. Remember though, not to become obsessed by your competitors as this could become a distraction from running your own business.
 
Financial Projections
 
A Profit and Loss forecast will give you a projection of the possible performance of your business, how much of a return you can make and what is profit if any is available after all costs have been met. To prepare this report you need to establish what your likely sales will be, and what expenses the business will have to meet. It is important that the projections are realistic and it is advisable to speak with the franchisor or other franchisees to establish whether the figures can be achieved.
 
Should you decide to speak with other franchisees of your chosen system then it is important that you find out whether they were operating a comparable business to you in terms of size, premises, territory and staff. You also need to establish whether their level of drawings from the business was the same as yours. They may well be single and living with their parents and have minimal requirement for drawing funds from the business, whilst your circumstances could be different having a partner, young family, large mortgage and personal financial commitments, which would mean that your drawings would need to be substantially higher.
 
The cashflow forecast looks at how money moves through your business. It predicts when people will pay you, and when you will have to make payments. The cashflow pattern for your business will vary with a number of factors. If you are looking at a retail franchise for example, your customers will usually pay you when they buy the product, and you will often have an agreed time period in which to pay your suppliers. If you are dealing in a business to business market place, your customers will usually want you to give them time to pay and will expect to be invoiced for payment at a later date.
 
The cashflow forecast will show the effect of these timings and whether you may require an overdraft facility to assist with your working capital requirement. The ability to generate cash is critical to the success of any business. If the business can not generate sufficient cash at the right time to meet payments due then there will be potential problems. Cashflow varies widely between different types of businesses and banks will support this type of finance through an overdraft facility. Factoring and Invoice Discounting may also available to certain types of businesses as debtor management options. I will expand on financial solutions later in this book.

Break Even


Break-even analysis is an expected component of most business plans, especially for start up companies. This calculation helps determine your company's break-even point, the amount of revenue you need to generate to cover your fixed and variable costs.
Before you can perform the calculation, you need to understand the components that go into it.

Variable or Direct costs are those expenses that change depending on how many units are produced and sold; examples would include labour, utility costs, and raw materials.
Contribution is defined as unit revenue minus variable costs per unit; it's the sum of money available to contribute to paying fixed costs.
Fixed or Indirect costs are items such as insurance, management salaries, rent, product development costs - they're items that stay pretty much the same no matter how many units of a product or service are sold.
Break Even Calculation Break Even Point = Fixed costs ÷ (Selling price per unit minus Variable cost per unit)
 
Example: Sanity Check:
Total income = £50,000 (40,000 units sold @ £1.25 per unit)
Variable or Direct Costs = £20,000
Average cost per item = Direct Costs £20,000 divided by 40,000 units sold = £0.50 
Fixed Costs = £15,000 (Average apportion to Fixed Costs = £0.375)
Net Profit = £15,000 (Average apportion to Net Profit £0.375)
Contribution per item = Sales for one unit £1.25 less direct costs in producing tem £0.50 = £0.75
Break Even Point = £15,000 divided by £0.75 = 20,000 units
 
Sales of 20,000 units @ £1.25 would give £25,000 income
Direct costs in producing these units would be 20,000 x 0.50 = £10,000
Contribution made would be £25,000 less £10,000 = £15,000
The total indirect costs of £15,000 are equal to this contribution
Therefore if the business sells 20,000 units it will break even
 
Financial Requirement

This is the total sum you will need to get the business started, and most franchisors will provide you with a comprehensive breakdown of this. It’s still sensible to check that everything is included and there are no unexpected extras. For example if your franchise involves the refurbishment of commercial premises is the cost fully itemised including planning, design, legal, building and equipment costs. Make sure that the profit forecast shows the business will earn enough to service the level of borrowing you require, and the cashflow forecast demonstrates that the cash will be available to you at the right time to meet the repayments.
 
The gearing is the ratio between the funds borrowed to your cash stake in the business. You will need to raise as much as between 30%-50% of any set up costs from your own resources. Whilst most banks will consider lending up to 70% of the total costs for selected well established franchise systems, this is not an automatic option. The decision will depend upon the ability for the business to generate sufficient revenue to service the level of borrowing requested. The more that you can inject into the business from the outset will mean the less you borrow and consequently the financial repayment commitment and interest on the debt will reduce.
 
Assets and Liabilities
 
A breakdown of personal assets and liabilities as well as income and expenditure for each business owner should be included in the plan. Also detail your stake in the business and how it was raised. Your contribution may come from savings, redundancy, a family member, inheritance or even from a re-mortgage of your residential property. List the security you are prepared to offer the lender to support the finance required.
 
Ongoing use of your plan
 
As a general rule you should review progress against your plan monthly. Doing this means that you will identify either a positive or negative trend you can either take prompt action where necessary to either maximise the benefit to you, or deal with the problem early on so it does not become unmanageable or harmful to the future of the business. It is often a good idea to set out a number of key factors to look at regularly which will indicate the health of your business, often referred to as Key Performance Indicators. These could include number of enquiries to orders taken, the average value of each order, average profit per order. In many cases your franchisor will have a set of these factors which form the basis of their regular reviews with you.
 
All too often business planning is given a great deal of attention when businesses are looking for finance at the initial stages and then not looked at again. The business plan should be treated as a working document and never allowed to gather dust. Naturally, as the business develops your business plan should be updated. Should you need to approach the bank for further finance at a later date, then an updated business plan will help demonstrate that you have your finger on the financial pulse of your business. The franchisor will often review your business performance on a regular basis as after all their success depends on your own success.
 
Top Tips
 
Banks can provide you with a business plan template
• The business plan is too important to leave to someone else to write
• Planning helps you fully understand your objectives and how to achieve them
• Presentation of the business plan is important – Practice your delivery
• You should be able to confidently answer questions from the lender
• Understand all aspects of your plan including the financial projections
• Remember ‘Turnover is vanity, profit is sanity, cash is reality’
• The financial projections should be realistic and achievable
• Your business plan is a working document and should be referred to regularly
Finance Options - What can I get?
 
You must first of all come to terms with the fact that you will need to invest capital in your business otherwise you can not expect anyone else to do so. The amount of your investment will depend upon your chosen franchise opportunity. You maybe able to finance the investment from your own resources however if you need to borrow funds banks are the most common source of finance. The level of finance available from a bank will depend upon the strength of the franchise system and your business plan.
 

Typically banks will lend up to 70% of the total franchise set up costs, including any working capital requirement, however for less established franchise systems the maximum finance available maybe reduced. Raising money for purchasing a franchise is treated a similar way to any new business start up, however the application is usually looked upon more favourably. Don’t forget that the less you borrow the greater chance of your business surviving and growing successfully. Don’t however try to start your business being under capitalised.
 
Loans
 
The set up costs, including the franchise fees and the purchase of business assets are usually financed by way of a term loan. Interest rates can be fixed or variable and a capital repayment holiday for up to two years maybe available. The maximum term of the loan will be linked into the useful lifespan of the asset and the length of the licence given by the franchisor.
 
Bank’s would usually only provide a loan to match the initial term of the licence, for instance if the franchise licence is 5 years, the term of any loan provided would not usually exceed 5 years. Simply, this is the case because if the licence is not renewed by the franchisee after the initial period, the Bank would not wish the customer to be left with a loan liability, which will need to be covered with no means of repaying it.
 
Terms of finance with the Bank will depend on the amount borrowed, the nature of the business and the value of security being offered. For loan finance there are most commonly two choices of either Base rate linked or Fixed interest rate loans. The franchisee should carefully consider the financial outlook to decide which option they prefer and what impact a large increase in the base rate would have upon the ability to service the financial commitment to the Bank.
 
Overdrafts
 
Working capital is provided to bridge the period when the business needs to pay suppliers for stock and the running costs of the business, such as salaries and trading overheads, until its debtors pay for the product or service. Overdraft limits are agreed for an initial period of up to twelve months and reviewed on expiry. Overdraft borrowing will usually be provided on a variable interest rate basis.
 
They are usually quick to agree however remember that they are repayable on demand. If the bank does demand repayment or reduction of the overdraft it would usually mean that you have not adhered to the terms of the agreement, which should have been set out in writing to you when the facility was originally sanctioned and at each time the limit had subsequently been increased or renewed.
 
The time to ask for an overdraft limit or increased facility is not on the day that you realise that there will be a shortfall on your bank account. Your business manager would expect you to present your proposal preferably backed by forecasts well in advance of you actually needing it which will demonstrate good planning and cashflow management.
 
Factoring
 
Banks and commercial finance companies can also provide debtor management support through factoring or invoice discounting where appropriate. Essentially, a factoring company buys the debtors or invoiced work in return for immediate cash payment. Generally, factoring is available for business to business contracts rather than sales to individuals and the general public.
 
The invoice would be assigned to the factoring company, who will advance a percentage of the invoice value, typically 80%. The balance is paid, less charges, once the invoice has been settled and the factoring company has received payment from the client. The franchisee should consult their franchisor and accountant before entering into an agreement to factor their debtor book.
 
Invoice Discounting
 
Invoice discounting is a variation of factoring where you collect the debts rather than the factoring company and the service remains confidential meaning your clients will be unaware that the invoice is being financed. There are numerous finance companies operating in the United Kingdom who offer this service and terms vary widely. It is important to compare costs and services of various companies before committing to an agreement, which usually has a lengthy termination period.
 
Corporate Cards
 
The correct use of business charge or credit cards can help you with your business cashflow. It is a useful way of paying for general business expenses such as fuel, stationery items, hotels or a meal in a restaurant. Careful consideration is required before giving a business card to an employee.
 
Asset Finance
 
Vehicles or equipment, such as computers, can be financed via leasing or hire purchase. Most banks offer asset finance through specialist departments, although some look to this type of finance once an established track record has been seen. There are also brokers who focus on more specialist equipment finance which some of the banks will not cover.
 
Asset finance has an advantage of reducing the amount you need to borrow directly from the bank, which could mean that the bank provides more flexibility with increased facilities at a later date as and when assistance is required. You should consult your accountant as to whether there are any tax advantages in arranging asset finance in preference to traditional loan finance from the bank before making any decision.
 
Small Firms Loan Guarantee
 
This loan scheme is a joint venture between the Department of Business, Enterprise and Regulatory Reform and a number of participating lenders. The scheme is available from the major High Street Banks and some other lenders.
                            
The Small Firms Loan Guarantee makes it possible for small businesses with a viable business proposal, but lacking assets to offer as security, to borrow money from an approved lender. Lenders will require a comprehensive business plan together with cashflow and profit forecasts to consider finance under the scheme. Lenders will assess each finance application under the scheme in accordance with their normal commercial lending practices.
 
A premium is payable by the borrower to the Department of Trade and Industry in respect of the guarantee they provide the lender for 75% of the amount borrowed. This premium on the Small Firms Loans is 2% of the amount borrowed and will be collected quarterly by direct debit. The maximum turnover level for eligible businesses is £5.6million. The maximum amount of borrowing for all businesses is £250,000 which includes any amounts previously borrowed and repaid under the scheme.
 
Capital repayment holidays can be agreed with the lender at the outset in 3 month periods up to a maximum of 2 years. Extensions to the term of the loan will not be permitted and the maximum term is 10 years. Banks will make use of this scheme where it is appropriate to do so and it is a useful option to finance strong business propositions where the traditional level of security required by a bank is not available. Full details of the scheme and restrictions are available from approved lenders.
 
Security
 
A franchisee must have a cash stake in the business and usually the bank will require security to cover the agreed lending. This will typically be a legal charge over a residential property, although commercial leasehold or freehold property, a debenture, life or endowment policies with a surrender value, a portfolio of blue chip shares, cash held on an interest bearing side account and personal guarantees may also be considered.
 
Banks will require security in most cases, although this will be determined in the Bank’s assessment of the business plan provided. Generally, Banks would look for security for any loan and overdraft finance in excess of £10,000. The most common form of security would be to provide the Bank with a legal charge over a residential property with sufficient equity, whether it is your main residence or an investment property. Costs for completing the security arrangements, including any valuation and legal fees are usually paid by the customer.
 
It would be advisable to openly discuss with your family what would happen if the business were to fail and put in place a plan. This may include down-sizing your residential property to release some equity should the security be called upon to settle any outstanding debt. You should not proceed without the full backing of your family because problems will inevitably follow if pressure mounts on the business and you did not get the support from your family at the outset.
 
Personal Guarantees
 
Sole Traders are personally liable for all the money that the business owes and your personal assets can be seized to pay your business debts. Ultimately should the business completely failure and you are unable to personally cover the money owed then bankruptcy is a possibility. In partnerships there is also unlimited liability however you are also liable for your partner’s share of the debt as well.
 
Limiting your liability through Limited Liability Partnerships or a Limited Company can be an attractive option. The director’s personal assets can not be seized if the company fails unless the director knew that the company was insolvent or trading fraudulently. This limited liability is however only superficial as franchisors, banks, landlords and suppliers are likely to require the directors of a company to sign a personal guarantee. You must carefully consider the consequences of giving a personal guarantee and it is advisable to seek legal advice before entering into this type of commitment.
   
Top Tips
 
You must invest in your own business otherwise you can’t expect a lender to do so
Your business has a greater chance of survival if you borrow less money
Don’t start up business being under capitalised
• Consider a capital repayment holiday at the start of the loan if business is going to take time to build
Review the economic forecast and consider whether a fixed rate loan would be beneficial
Overdraft facilities are not the only methods of cashflow management – Review your options
Asset Finance may retain your credit line with your bank if you need to borrow more at a later date
Openly discuss with your family what would happen if the business were to fail and put a plan in place
Give careful consideration to and seek legal advice before signing a personal guarantee
Any property given as security may be repossessed if you do not keep up repayments on your mortgage or other debts secured on it – Keep the lender informed of issues within the business which may impact on the agreed finance
Sound Financial Management Practices
 
Skills and experience of franchisees differ widely and this is particularly relevant when it comes to financial management. Many franchisors will have given a great deal of thought to supporting their network with bookkeeping services, invoice processing, debtor management, payroll and financial management information. Support amongst different franchise systems varies considerably with some franchisors offering substantial guidance and financial support to their franchisee network whilst others leave the franchisee to their own devices. If you are looking for an accountant to support your business then it would be sensible to start with someone who has franchising experience and is affiliated to the bfa.
 
Should financial control be one of your personal development areas then it is vital that you receive some professional support, basic training or indeed hire someone who can assist you whilst you acquire these skills. A good bookkeeper employed on a part time basis is likely to be a sound investment and will allow you to concentrate on other areas of the business. But remember it is your business and ultimately any owner must have a rudimentary understanding of the financial performance of their business.
 
If I don’t like doing something or don’t have a very good understanding of what I’m doing, I will like most people put off doing it sometimes to the extent that it becomes pressing as a deadline approaches. This is a common mistake made by people managing their finances. Set aside time during your week to focus on the financial aspects of your business. As the business grows you may well employ a team to handle the accounts and finances even then you will still need to retain a handle on what is going on.
 
Debtor Management
 
Credit control is a vital element of any business, unless of course your firm predominately handles cash. Very few companies are lucky enough to have clients who pay their bill as soon as it is invoiced. More often than not successful cashflow management can be the difference between success and failure. Thankfully there are steps you can take to ensure your business finances remain on track. If you do have to offer credit to your customers, allowing them to pay after they have received your product or service, it pays to vet them first.
 
The checks you make on any particular customer must depend on the amount of credit being offered relative to your overall turnover. If it’s a relatively small order the investigation may cost more than the profit you make. So you’ll need to decide whether you are willing to accept such risks. Often the franchisor will be able to offer some guidance with this and they themselves would have carried out thorough checks for any national account work that they may offer you so that they fully understand that company’s payment policy.
 
If a customer sale is significant and they request credit then you will need to carry out your own checks. These may include bank references, trade references, sight of their latest financial accounts, a credit reference agency search or even a site visit. You may wish to start a new customer on a relatively low credit limit to monitor their payment history before considering increasing it. But remember you will need to carefully assess the risk each time you review a customer’s credit limit.
 
Some payment options you may wish to consider are cash with order, cash on delivery, payment after a specified number of days, or monthly credit with payment by a certain day in the following month. Legally, small businesses can charge interest on late payment of invoices, although this is a seldom used practice because they don’t want to lose future business with a customer. One way to encourage early payment is to offer a cash discount, although you will need to have good systems to closely monitor this and to make it clear that customers are only entitled to the discount if they meet the conditions you have offered.
 
Prompt invoicing is essential. I have heard horror stories from business customers who only invoice once a month and wonder why they have serious cashflow difficulties. You should, wherever possible, invoice on the day the service is provided or the goods are delivered. This is a sound financial practice which must take precedence over other administrative duties you may have that day. Failure to do this creates the impression with your customers that you don’t keep tight credit control and you won’t mind waiting for your money. Credit terms should be prominently displayed on the invoice.
 
As soon as the deadline for the invoice passes you should send a polite fax followed up with a letter chasing payment. If you don’t receive payment or a response within one week, fax again and follow up with a letter sent by recorded delivery. A phone call should follow enquiring whether there are any queries with the account or with the goods or service provided. Find out why you haven’t been paid and try to get your customer to commit to paying as soon as possible. If all else fails you may want to consider whether you wish to continue doing business and you could take steps to freeze any existing credit line until the outstanding matter is resolved.
 
Of course you could go and collect the money in person and bank the cheque immediately. If you do that you’ll need to make sure that it has been dated correctly, signed by the customer and the words and figures on the cheque are both correct. If this fails, then ask your solicitor to send a formal letter threatening legal action to recover the outstanding debt. If you’re dealing with an individual you may decide to start bankruptcy proceedings or if it’s a company you may begin action to wind up the firm. Take your solicitors advice, which may include using the small claims court or even walking away from the debt if it is too expensive to pursue, or too unlikely to succeed. It may seem an obvious point to make but if the relationship gets to this stage the time has come to stop doing business with the customer. You should also take stock of your credit assessment procedures to see if there are any lessons you could learn to avoid similar problems in the future.
 
Creditors
 
A significant tool in the cashflow management of your business is for you to take credit terms from your suppliers. With some franchises there are restrictions as to only using approved suppliers whilst others are free to develop their own local supplier network. Your suppliers are likely to be in similar shoes to you and they in turn want you to settle the outstanding invoice promptly. When you are short of cash always try to work with the supplier to negotiate improved credit terms rather than taking unapproved extended credit by the late payment of the invoice. Put yourself in their shoes you would not take kindly to your debtors paying you late without explanation.
 
You need to establish a good relationship with your suppliers and that will take time. You therefore should pay promptly to gain the suppliers confidence so that when you do have a cashflow problem and inevitably that will happen at some point you can approach the supplier for support. Obviously they may not wish to extend their credit line to you when you need it. At some stage most small businesses will need to delay payment. You can take the step not to consider paying any bills until you are asked to, which will give you a good understanding of your supplier’s own debtor management system. Alternatively you could introduce a system of only paying your invoices monthly. Other methods of delaying payment will involve a series of excuses which can soon damage your relationship with the supplier.
 
If you are not limited by the franchisor as to which suppliers to use you should regularly review the terms you are being offered and have alternatives should the supplier become uncompetitive, fall down on their service delivery or if the quality of their goods or service deteriorates. You need to assess the damage to your own business if a supplier fails to deliver an acceptable service to you and to put in place contingency plans to limit the damaged to your business and its reputation. The franchisor needs to be made aware of any supplier problems you are encountering as they may have some influence to address the matter and they would certainly want to forewarn other franchisees in the network.
 
Sales Turnover
 
Over the years I’ve lost count of how many business people solely concentrate on the level of sales and ignore the profit margins of their business. It’s crazy because ultimately no matter how much turnover your business generates if it isn’t profitable then it is doomed to fail. Increasing sales is a major focus for people managing a business however it should be looked at in conjunction with improving the Gross Profit Margin and managing the overheads of the business. Successful businesses have these as their cornerstones and each is managed effectively to maximise the bottom line profitability of the business.
 
Driving sales activity for a newly established franchise is all about attracting new customers and then gaining repeat business, however as the business develops attracting new customers at the same rate becomes more challenging. With most businesses there will come a point where the turnover reaches a ceiling unless the owner takes the step to invest in more staff, new premises or improved systems then it is very difficult to break through that ceiling. Increasing prices will have some impact on the sales figures and indeed your profitability however there is a limit to what can be done and still remain competitive in the marketplace. Let’s face it unless you sell more units a price increase is a short term fix. A business is open to changing economic conditions which may affect the cost of supplies, staff salaries, finance costs and other business expenditure which could adversely impact on the businesses profitability.
 
Gross Profit Margins 
 
How can you increase your profitability? Rationalizing your product lines and altering your sales mix to sell more of the higher profit items is always worth considering. Selling new products can also improve your profit margin. Good franchisors should be receptive to suggestions to improve existing product lines. For instance, the Big Mac was developed from a franchisee’s idea which was after testing subsequently adopted across the entire McDonald’s network. Another way to improve profitability is to source products at a cheaper price by negotiating with existing suppliers or seeking alternative suppliers. Increasing your prices would also have a similar effect. Some franchisees will be restricted to what they can do in this respect.
 
Business Overheads
 
Cutting costs is an effective short term solution to increasing your profitability. Tight controls and regular audits are advisable. Many businesses have capital tied up in stock therefore it is essential to have good stock control to convert this capital into profit. It is a useful monitoring tool to keep an eye on your stock turnover. There is an optimum level of stock to ensure that you have sufficient to meet your orders without impacting on your service levels but not to tie up too much of your capital. Improving business systems across all aspects of the business should bring about some time management savings and enhance the productivity of your staff. You may be limited by what you can do although the franchisor should be open to suggestions from their franchisees to improve the existing business systems.
 
Top Tips
 
If your financial management skills are weak then get some professional support and training – You must have a handle on your financial position
Set time aside each week to concentrate on financial matters
Make an assessment of a customer before introducing or increasing a credit limit
• Invoice immediately the service is provided or goods are delivered
• Put in place a robust procedure for chasing debtors
Management Accounts
 
I’ve identified why it is so important to closely monitor the financial performance of your business however what tools are there available to support you? There are a variety of accounting software programmes to assist and many franchisors include this in your initial franchise package, some even develop bespoke software to suit their own business model. Financial information at a touch of a button is a valuable management tool in the early identification of trends and performance. Regular review of the key financial ratios for your business is important. Amazingly some owners try to manage their business without up to date financial data and unsurprising these are the businesses at the most risk of failure. It can be too late to act on a problem if it is only identified when the end of year financial accounts are produced by your accountant. You should use the franchisor’s knowledge to understand where your business stands against others within the network. Find out where you can make improvements and implement those changes. 
 

Richard Holden - Head of Franchising


Tel: 07802 324018
E-Mail: richard.j.holden@lloydstsb.co.uk
Website: www.lloydstsb.com/franchising
Richard heads up the Lloyds TSB franchise team and is a regular contributor to trade publications and national press. He is on the panel of judges for the Franchise Marketing Awards and regularly speaks at franchise seminars and exhibitions. Lloyds TSB are affiliate members of the British Franchise Association and proud to support ethical franchising in the UK.

 

 

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