When starting a business, cash is king. That saying has never been truer when you are a franchisee. Preparing to open your newly purchased business involves so many things to do and so many things to think about.
The good news is that you have the operational roadmap to be successful, but do you have the financial plan to be successful? Too often, people buy into franchises without understanding what it financially takes to get their first or second unit open or how and why to expect that those units should be funding the next wave of openings.
This is where financial modeling early on comes into play. As a franchisee, you should be thinking about your financial model and strategy well before you outlay your cash to buy into a territory.
The financial model is meant to lay the foundation for how you want to time and sequence future openings, when to invest in the right people to grow, and even how to think about owner distributions. While anyone with a level of spreadsheet knowledge can build a financial model, a good financial model will have 3 key ingredients to help guide your newly purchased business.
1. It will have a time horizon of 5 to 10 years
Having a long-term perspective is important when investing in a multi-unit business. It helps you understand how each new unit will impact your company over time. People usually focus mainly on opening and running the first unit, which is very important. However, it is also crucial to have a plan for when and how you will expand your business in the future.
Understanding the impacts of the timing of lease signings, build out timelines, and lengths of time to operational efficiency will help you understand where and when to invest in the business. These investments come in many different forms, from new systems to new hires that will help speed up efficiency and grow your business.
To reach your goals, it’s important to have a financial plan to guide you. This plan will help you know when and how to manage your money effectively over time. By looking back at your journey, you may realize that you can grow your business faster than you expected.
2. It will have a sensitivity analysis
It’s common knowledge that even with thorough research and well-built financial projections, things can still go wrong. That is how life works and centuries have proven that this fact will not change.
Adding triggers and sensitivity grids to your financial models can help you succeed in the worst-case scenario and give you peace of mind. This will ensure your success even in the worst-case scenario. When building models, it is always ideal to start with a conservative scenario and work your way both upward and downward from that point.
Using spreadsheets makes it easy to do sensitivity analysis. This can help new business owners understand how different variables affect their business, and whether they can control them or not. For example, what happens to my cash flow if my initial revenue is higher by 10%? What happens to my cash flow if my initial revenue is lower by 10%? Will I still be able to grow and invest at the same pace if costs come in at different than expected levels? What is my breakeven point for revenue? All these questions should be a part of your modeling process and can be evaluated with a few basic sensitivities built into your model.
3. It will show projected free cash flow
Lastly and most importantly, the goal of your model is to show your estimated free cash flow over the course of your investment in your new business. This goes back to the initial line about why cash is king…as understanding where you will have excess cash, where you may have cash pinch-points, and how your investments manifest themselves into capital are at the core of why you invested in a franchise in the first place.
All decisions end up impacting cash flow, from promotions to drive customers, to operational decisions to that impact efficiency, to what type of equipment to invest in. These intentional choices all have impacts on your company’s cash flow and you need to know what this looks like.
Good businesses can fail because the owners take their eyes off the cash flow being generated by their business. Using your financial model as a guidepost can alert you to issues before they happen and give you time to plan before a crisis occurs.
Building a financial model can be a simple endeavor or a complex task depending on how you approach it. Whichever route you choose, ensure that you have the three key ingredients to help guide you in your business journey and enjoy the process.
About Fransmart
Fransmart’s mission is to help emerging brands grow via franchising, but it doesn’t stop there. Fransmart is also a trusted advisor in guiding franchisees in making the right choice for their needs and their business goals. Working with Fransmart connects you with experts who can help your business grow. They understand the challenges, resources, and benefits that come with business expansion.