Why is working capital so important to franchisees?

Working capital is well established as a business management principle. That’s why franchisors will insist that it’s included in the start-up cost calculations of any would-be business owner hoping to buy a franchise.

But because a franchise offers a proven service or product, one of the benefits of becoming a franchisee is that the franchisor must provide you with information in the disclosure documents, including an estimate of how much money you will require to get into the business – including working capital.

What is working capital?

Working capital is the amount of money you need to support your ongoing expenses that are not covered by your revenue (the money your business brings in). Depending on your business, you may need working capital to cover these expenses for at least 2 or 3 months – or sometimes even 2 or 3 years. Although the franchisor will include an estimate of the working capital, you should also speak to your accountant.

Working capital allows you to continue paying your staff, suppliers and other business expenses even if you run into cash flow problems. Think of it as ‘bridging finance’ to tide you over when payments into your business account are delayed for any reason.

How much you’re going to need, and for how long, is a bit of a guessing game if you don’t have historical data to rely on. It’s easy to calculate your fixed monthly expenses like salaries, rent and utilities. But other operational expenses might not be as predictable when you’ve just started a new business. When you buy into a franchise, though, you’ll be told how much working capital you’re going to need. Many franchisors stipulate the figure, making it a requirement to secure that amount before signing a deal.

How is working capital calculated?

Previous financial records minimise the guesswork and help you see when your high and low seasons are. It also gives you a heads-up when you may need to tap into your working capital to cover operating costs.

To calculate your business’s working capital needs, subtract your current liabilities from your current assets. If the result shows that you owe more than you have available, you will have to draw on your working capital fund.

Banks can assist with working capital facilities

Current assets include all your cash and liquid assets that can be converted into cash within a year. This includes cash and investments, money owed to you, stock already bought and any services or premiums you’ve paid up front.

Current liabilities are all your payment commitments due within a year. This includes accounts, salaries, taxes and interest payable and any deferred revenue like advance payments from customers for goods or services not yet delivered.

If you don’t have historical data, your best chance of survival may be to simply plan for a worst-case scenario. Dealing with an established franchisor that has historical data makes it a bit easier to predict cash flow and start-up cycles. When doing your research for a suitable franchise, you’ll come across working capital requirements that range from tens of thousands to hundreds of thousands of rand.

How to get working capital

Although the franchisor will ask for proof that you have the necessary working capital, it doesn’t mean you must have the money in your bank account right away. Banks can assist with working capital facilities to help you cover the shortfall caused by any delays in card and cash payments into your bank account. This facility also comes in handy when your card devices are not functioning as they should, making it impossible to batch receipts for that day.

We have competitive working capital solutions offering you flexible credit facilities to help you meet your commitments. An overdraft facility is one such solution that allows you to withdraw and repay at your convenience.

With an overdraft facility, you pay interest only on the sum used, and only for the period that you've used it. So, if the business is running smoothly and you’re able to cover expenses from your cash flow, your overdraft serves as a backup only.

Our franchise financing team is well versed in helping clients put this facility in place to meet their working capital needs, whether they’re an established business or just starting out. Speak to a consultant today to see how we can help you manage the ups and downs of your franchise’s business cycle.