Running a business is tough work, and that’s even more amplified if you’re franchising an established and reputable company.
Being an effective franchise owner requires being able to follow the company’s internal processes while balancing your management skills to keep the franchise afloat.
One particularly crucial skill that franchise owners need is maintaining a tight hold over their finances. After all, a business’s cash flow is the lifeline of a franchise, and all businesses at large.
And, to put things into perspective, here’s a not-so-fun statistic: over 40% of franchises are at risk of bankruptcy early on, making it quite a risky investment decision for business owners if they’re unprepared.
With this in mind, you must equip yourself with the right knowledge and skills to run a franchise smoothly. And if you’re still behind in terms of financial skills, this is doubly more important.
Without further ado, here are six financial skills you need to have as a franchise owner from Australia.
1. Learn to Establish Financial Boundaries
Money is a tool that can make or break your franchise’s future, and it’s important to uphold the best financial practices to ensure that you remain financially healthy.
One way to do so is by establishing financial boundaries. This starts by separating your personal finances from your business funds.
Think about it: if you take out funds from your bank account and are unable to differentiate whether it’s from your personal or business fund, you’re leaving yourself vulnerable to making costly miscalculations and errors upon withdrawals.
Furthermore, you’re also making it harder for you and your team to track your tax-deductible transactions, making it harder to scale up your franchise.
And, perhaps most important of all, you’re leaving yourself vulnerable to creditors to take your personal assets if your business is unable to pay its debts.
As such, it’s important to keep two separate bank accounts as a franchise owner: one for your own personal funds, and the other for the business. This way, you can manage both cash flows effectively without inadvertently spoiling the integrity of the other.
Still unconvinced to make the switch? See Westpac’s article for more reasons to embrace the distinction between personal and business finances.
2. Budget Management
Let’s face it: running a business without a proper budgeting strategy is a surefire path towards disaster.
Budgeting is crucial for a couple of reasons. For one, it allows you to track your business cash flow, both going in and going out.
Secondly, it highlights individual transactions and allows you to more easily monitor them, giving you a numerical basis for future business decisions.
Thirdly, you can more efficiently distribute budget funds across different business departments. These allocations can also be visually tracked, making it easier for members of various teams to obtain expectations.
Without a proper budget management system, your business is needlessly putting itself in jeopardy due to an inability to ascertain where sales and income go. It can also reduce long-term profitability overall since you won’t be able to spot data-driven opportunities with ease.
Having said this, it’s crucial to set up a budget in the initial stages of your business. This can help you maintain control of your finances, which is crucial considering you’re essentially the captain of the ship.
3. Debt Management
Another crucial skill prospecting franchise owners should develop is an astute ability to manage debt.
While the thought of having a monthly running expense can be distressing, debt is not inherently a bad thing. When used right, it can help you scale your business and pave the way for more immediate growth.
That said, the key phrase here is “used right”. Debt can spiral out of control, especially if you pick high-interest debts with unfavourable repayment terms.
Furthermore, when you consistently fail to pay your dues on time, you can tarnish your credit score in the process. This can jeopardise your ability to loan out larger amounts in the future, restricting future business opportunities.
As such, it’s important to acquire debt strategically. Vet your creditors and negotiate repayment terms to your advantage. Ensure that you have the means and financial capacity to pay everything on time. This way, you can ensure the long-term financial stability of your franchise.
4. Tax Compliance
As with all legitimate businesses in Australia, your franchise needs to comply with its taxes and obligations.
For franchises specifically, there are a few additional fees you have to sort out to be fully compliant. The franchise establishment fee is an integral part of the cost base of your business. So is the franchise renewal fee.
Secondly, royalties and interest payments are also considerations you have to make when operating your franchise. You’ll need to ensure you’re making the right withholding tax cuts so that you can optimise your deductions.
You’ll also have to consider your goods and service tax payments, as well as how much credit you’re able to claim from it.
Talking to an accountant or tax expert is a smart move to ensure you’re compliant and efficient with your strategy.
5. Profit and Loss Risk Analysis
Timing is crucial when making heavy business decisions. It’ll take careful judgment and insight, as there’s no guidebook to follow when it comes to shaping your business’s future.
One crucial variable that can shape your business growth strategy is your business’s profitability metric.
The fact of the matter is that all businesses are run to turn a profit. Knowing how well your business is doing is a good way to assess the effectiveness of your operations and pinpoint potential areas of growth. It can also reveal areas of weakness and opportunity.
An easy way to determine your franchise’s current financial health is by performing a profit and loss analysis. This is a financial statement that summarises the revenues, costs, and expenses of your business over a set timespan.
The information you can glean from this financial statement can be used to make quantifiable decisions regarding your current operations.
For instance, it can help push you to optimise your pricing and cost-cutting techniques. It can also give you an idea of your safety net, enabling you to make risky but relatively high-potential decisions.
6. Inventory Management
If your franchise is operating with perishable merchandise like food, then you’ll need to ensure that you’re optimising your inventory stock schedules to avoid spoilage and excess stock.
While this is mainly an operational function, accurately forecasting demand and tuning your inventory management to fit your forecast is closely intertwined with your expenses.
If you overshoot your demand, you can end up with wasted money. Conversely, a constant lack of supply can push customers and their hard-earned dollars away.
As such, balance is key. Always be receptive to the demands of your community and fit your restocking schedule squarely in these projections. By doing this, you’ll strike a good balance and reap more financial returns in the long run.