Top 3 guidelines for Franchise financial expectations
If you are like most franchisees, you will have invested your life savings into your business and taken on a heavy debt load as well. You’re also working harder than ever before. So it’s only natural that you want to see some returns in your pocket, right?
While this expectation is understandable, it’s a little premature. Many promising businesses fail because owners are quick to make excessive drawings. Our advice is to give it time and remember, financial prudence pays rich dividends.
Here are the 3 guidelines we recommend you follow to reap the rewards of your hard work and investment:
Think carefully about your salary: On paper, you have the right to write your salary cheque, and you’re entitled to any profits the business makes. This sounds great, but the reality is somewhat different. You need to remember that in a business, whatever amount of money you want to draw out of it needs to come in first.
Be cautious and remember that in some cases, you may have to pay yourself less or not pay yourself at all for some time spent in order to keep the business afloat.
Always remember that third-party payments come first: You need to remember that cash flow doesn’t equal profit. Again, be cautious.
You must use any money that comes in to pay running expenses (rent, water and lights, staff salaries and wages etc), suppliers’ bills, reduce the overdraft and make the monthly repayment of the bank loan. Only after making these payments can you think about your salary.
You also need to be wary of items that gobble up cash without producing significant returns. These include fancy cars and unnecessary travel expenses.
Have an emergency fund or a financial cushion: In this tough economy, you need to plan ahead and have some money aside.
It’s best to set aside some money each month to build up an emergency fund. From the second year of operations onwards, you should start setting aside money for a business revamp. As the business grows, it may become necessary to invest in extra equipment. What’s more, depending on your franchise agreement, you may have to revamp your business in order for the franchisor to renew your agreement again.
While your original loan should be paid off by then, instead of taking out another loan for, you should save at least part in cash for the refurbishments. Most banks need to see this contribution before they extend loans to an existing business.
So does this mean you’ll spend your entire life sacrificing for your franchise and not enjoying returns on your investment?
There is some light at the end of the tunnel.
Return on investment
Return on investment, or ROI, represents what you can expect to earn on your investment. If your expected ROI is below a certain level you’d be better off investing your capital somewhere else.
If you chose the right franchise, put in the necessary work and planning, you’ll get your pot of gold. In fact, entrepreneurs who apply financial prudence during the early years after starting a new franchise get closer to it every day.
Unlike an employee who depends on management’s discretion for pay increases, entrepreneurs can adjust their drawings in line with business performance. Come financial year-end, they can top this up with a handsome dividend, after making all the necessary payments and provisions, of course.
In general, franchisees that chose their franchise well and follow the franchise blueprint to the letter typically enjoy much higher earnings than individuals who depend on a salary.
That’s not all.
The real benefit comes when it’s time to cash in the chips. Come retirement, employees are typically seen off with a golden watch. An entrepreneur, on the other hand, owns a business with a profitable track record that can either be passed on to heirs or sold at a substantial capital gain.
It’s for these reasons we strongly believe that franchising gives you the opportunity to make real money without having to operate in isolation.