There are a number of reasons you may run into franchise finance cash flow problems.

The most common causes for franchise finance cash flow problems are outlined below.

If your franchise is your first step into business, or you aren’t confident when it comes to managing the cash flow of your business you should consider undertaking some cash flow training to help you avoid franchise finance problems outlined here.

Common Cash Flow Problems

  • The goods take too long to sell
  • Goods are sold on credit
  • Too many goods are held in stock
  • Too many other costs paid before stock or services converted into cash
  • Owner’s drawing exceed business’ capacity to pay
  • Business is losing money

The goods take too long to sell

Goods on a shelf or in a warehouse are assets waiting to be sold so they can be converted to cash. The longer it takes for the goods to convert to cash, the more working capital will be required to keep the business operating in the meantime. If there is insufficient working capital available to the business, then the costs of keeping the business open (eg. rent, wages, advertising, etc) will consume the available cash and leave the business without adequate cash to replace sold inventory.

Goods are sold on credit

If it takes say 60 days from the time the goods are ordered until the time they are sold for cash, the business will need at least 60-days worth of working capital. However if the goods are sold on credit, and it then takes the buyer another 30 days to pay, the business will need at least 90 days worth of working capital to pay its bills in the meantime.

Too many goods are held in stock

While it is important for any business to hold adequate stock to meet customer needs, holding too much stock can absorb too much cash and not leave enough for the working capital requirements of the business.

If for example, a wholesaler presents a retailer with a once-in-a-lifetime deal to buy an entire container of stock which is five times more than the retailer’s normal purchases, the retailer might have the money there and then to pay for it, but may have real problems paying the staff wages the following week, the rent at the end of the month, or GST at the end of the quarter because all their money is locked up in unsold stock.

Too many other costs paid before stock or services converted into cash

Prepayment discounts might be appealing to a business owner because of their potential to increase profit, but prepayments can severely restrict the amount of cash available to pay other operating costs.

Owner’s drawing exceed  business’ capacity to pay

This is often the most common reason why businesses experience cash flow problems.

People operating a business for the first time are likely to draw a fixed regular amount from the business just the same as if they were receiving a wage or salary in their job previously.

This regular drawing is usually set at a level to meet the owner’s personal commitments (eg. rent or mortgage, groceries, living costs, etc) or is otherwise what the owner is accustomed to earning from their previous occupation.

Neither method of drawing takes into account the business’ capacity to pay.

Consequently, the business can be progressively drained of its funds by the owner themselves, and become insolvent through a poor choice of drawing methodology.

Alternatively, owners who don’t apply the discipline of drawing regular amounts from the business can equally cause cash flow problems through infrequent ad-hoc withdrawals that have the same effect of syphoning the available cash out of the business.

Often this occurs when the business owners treat the business bank account as simply another personal bank account, and draw excessive sums to pay for personal expenses (often spuriously claimed as business expenses to reduce the tax payable), such as new cars, boats, home improvements and renovations, holidays and higher living costs such as private education, etc).

When business owners ‘raid’ their business accounts in this manner, they risk depleting the business of cash needed to pay normal running costs, and drive it into cash flow difficulties.

Business is losing money

The most obvious cause of cash flow difficulties is when a business is losing money.

Businesses lose money by selling goods or services below their cost, or have insufficient gross profit to meet the normal running costs of the business.

Additionally businesses can lose money as a result of misappropriation (theft and fraud) or from excessive wastage of stock (eg, goods rendered unsaleable by spoilage, or through other loss).

Isolated catastrophic events can also cause a business to lose money, such as the bypassing of a site by a new road, construction works, flood, burglary, arson, etc, particularly if the business is not insured against such eventualities.

Learn how to overcome financial management issues and be able to set and drive financial targets at the Franchisee Financial Essentials Workshop (2 days).