Good housekeeping
Emma Lowery reveals the common financial pitfalls that new franchisees face and how best to deal with them
The preliminary stages of setting up a business, whether a franchise or not, can be a daunting period and therefore an overwhelming time to also establish and maintain good financial housekeeping habits. The correct systems and recordkeeping in order to balance the books and file accurate financial statements will still need to be undertaken to ensure that the business runs smoothly. Although as a franchisee you will have the support of the franchisor there are still areas where one can fall by the wayside but these can be easily navigated when the business starts. Here we look at some of the common pitfalls that new franchisees face and how to deal with them and avoid problems developing and affecting your business.
Firstly it is advisable to take a look at how you will treat the cost of the franchise as, unfortunately, not all the costs can be offset against your profit in the first year of trading. It is, therefore, important to get a breakdown of what your fee has actually given you. For example, the purchase of a territory is only an allowable expense when you come to sell the business, whereas costs towards advertising, purchase of vans, stock and equipment can be used to reduce your profits.
When drafting a business plan in preparation for taking on a franchise ensure that you give careful consideration to sufficient working capital. It is important to maintain this level of capital so that, if there are lean months, all bills can still be paid thus avoiding issues with suppliers over late payment. Whilst it may be tempting to withdraw all the money in the bank to use as a living income, it is important to keep enough money in the business account to be able to pay all ongoing bills for several months.
Something else to ensure is that any sums of money borrowed to fund the purchase and start up of the franchise are not too large. Should the business not perform as expected you may subsequently experience difficulties repaying the loan, especially if the instalments are too high to accommodate any leeway. It is understandable that whilst building up the business – an intensely busy time for a new franchisee – the last thing you want to do at the end of the day is keep your bookkeeping up to date. It is important, however, to ensure that you know how the business is performing and that when your first year-end arrives you have all the relevant documentation for your accounts to be prepared. There are plenty of bookkeeping methods available, either electronic or manual, to help you with this – it is wise to choose one based on whatever suits your way of working and your needs. By keeping good records you will be able to review your profit and ensure that all liabilities can be settled and also review the income that you can extract from the business.
Also – perhaps not a number-one priority for new franchisees, but absolutely a crucial one – do start saving for tax from day one. Whilst you may not be making large profits to start with, the amount to put aside will need regular reviewing to ensure provision is made for the first tax bill – which may not be due for a least a year after starting up. For sole traders a suggested saving of 25 per cent into a savings account is a good starting point, with 20 per cent the recommended figure for limited companies. It is worthwhile including these figures within cashflow projections as it is a real cost for the business, albeit in the future.
All these things will help to move the business forward and do so smoothly. And remember, your processes can be reviewed and assessed in conjunction with your accountant who should be able to provide you with advice along the way.
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