BANKING ON YOUR FUTURE

Your new business is not an ATM, so don’t treat it like one.

Your company is not an ATM!

You’ve done all the research and you’re ready to sign the franchise agreement, armed with a brilliant business plan. Keeping a tight rein on your financials will ensure you don’t unwittingly sabotage the business.

One of the reasons franchisors choose franchising to expand their business models is the belief that franchisees’ financial investments give them ‘skin in the game’.

The resulting shift in mindset from employee to business owner is most obvious when new franchisees, who were previously managing the business, lift their performance level once the business is their own.

There’s a reason the term ‘take ownership’ is so commonly used in business circles. As a business owner, even as a franchisee, you are ultimately responsible for your business, its performance and its finances.

So it makes perfect sense for a new business owner to focus on getting a good return on their investment.

That’s what any financial institution will do. Kate Groom, a business advisor and former franchisor, and co-founder of Franchise Accounting & Tax, draws a simple parallel between banks and business owners.

"When you buy a franchise, it's a good idea to 'think like a bank' when it comes to your investment in the business. Every franchise buyer invests some of their own money when they buy a franchise.”

So what does it mean, to think like a bank? If you have a bank loan, your bank will want to get a return for the risk it is taking.

Of course franchisees need to be rewarded for the risk they take in investing in the business, but this value is greatly decreased if the business has been unable to pay the franchisee a salary.

“We think it's important to see that the business has the capacity to repay this investment - on top of the wage you take for the day-to-day role you play, for instance as manager or pool technician,” says Kate.

“You should allow for the business to repay all your investment within the first franchise term. This is exactly what a bank does with a loan. They want it repaid — and so should you!"

And the ability to take a banker’s view of the business will also help keep the flow of cash on track, and easy to manage.

Kate is adamant that while it is the easiest thing in the world to treat your flourishing business like an ATM, it is inadvisable to do so.

For starters the revenue your business achieves will be allocated to repay loans, rent, fees, business outgoings, suppliers, wages, insurance, tax.

Putting money aside to build up cash for business improvements - a store refit, a new vehicle, an equipment upgrade - means you will be able to take your franchise to the next level.

You’ll also need a buffer for any unexpected downturn - and hasn’t 2020 shown us the importance of having funds in reserve?

If you start to raid the business for cash for one-off events, or to reward yourself with an expensive toy from your wishlist, it’s easy for these ‘treats’ to increase in occurrence. Then it becomes what’s known as lifestyle creep.

Investopedia defines this as when ‘luxury goods and discretionary spending become perceived as a right to have and not a choice—as a necessity versus a want’.

The danger with this is habituable over-spending eats away at your capital, and in extreme circumstances your ability to repay essential bills, putting your business at risk.

So rather than treating your business as a cash machine, take a longer term approach.

Think like a director.

Have a clear understanding of what’s required as a business owner: your responsibilities, both legal and financial, and how to implement them.

Ignoring this important part of business ownership can lead to a world of pain at a later stage, says Kate.

You may, for instance, become liable for significant tax bills.

Of course a good franchise system can provide tools, systems and mentoring but as a business owner you’d be wise to seek advice from experts.

The easiest way to start your business up the right way could be turning to an accounting firm well versed in franchising and small business issues.

A good franchise-focused accountant can advise on an appropriate business structure, set out what reporting requirements there are, advise on BAS and tax issues, and offer general business guidance so you can work to a business and financial plan that is realistic, and regularly updated.

You can also work out with your adviser the best way to repay director loans.

Thinking like a bank before you buy the business, and like a director once you are running your franchise, will also make you a much better prospect for financial institutions when you want to take out a loan to expand your business, buy a second outlet, or buy a new home.