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3 ways to manage working capital as a franchisee
Don’t be at the mercy of cash flow, just adopt the right approach to working capital.
The easiest way to think of working capital in your business is to equate it to your personal finances. Just as you might use a personal overdraft to carry you over until payday, working capital is a credit facility for your business to draw on when cash flow is tight.
When you invest in working capital financing, you’ll usually be granted an overdraft facility that gives you instant access to credit up to a preset limit. When your payments come in, these debits then cancel all or some of the credit you’ve used to cover expenses.
How much working capital do you need?
You can calculate your working capital requirements by subtracting your current liabilities from your current assets.
Current assets include all your cash and liquid assets that can be converted into cash within a year. That 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. These include accounts, salaries, taxes and interest payable, and any deferred revenue like advance payments from customers for goods or services not yet delivered.
What causes a cash flow crunch?
Unplanned expenses or delays in being paid can play havoc with your cash flow. Most recently, many businesses suffered because of the Covid-19 lockdown. Even when companies were able to make arrangements on current liabilities like rent, they still suffered enormous losses when their income streams dried up.
We have a fully fledged franchising team that has helped many franchise owners through the toughest times
A cash crunch could happen just as easily if your business is expanding rapidly. Needing to buy more stock than usual to fulfil large orders or hiring extra staff to meet rising demand can drain your cash reserves quickly.
How to manage your cash flow and working capital
Working capital financing is therefore a form of insurance against those days when sales are down or clients are slow in paying. It’s something you might not make use of often, but it’s reassuring to know it’s there. You can minimise your continued reliance on working capital financing by applying the following 3 cash management principles:
1. Understand your business cycle and how long it usually takes to convert stock into cash
Use this data to plan your working capital so that you can cover payroll, rent and other expenses.
2. Use cash in the business for priority purchases
For example, buy extra fuel supplies before a price increase, or stock up on goods that are on special from your suppliers.
3. Improve management of stock levels, accounts receivable and accounts payable
Proper management of your stock and cash levels are crucial to reducing over-reliance on working capital in your daily operations.
Speak to the franchising experts
We have a fully fledged franchising team that has helped many franchise owners through the toughest times. We’re especially proud of the extended support we’ve been able to give to them through the devastating Covid-19 pandemic.
Apart from overdrafts and short-term working capital finance, we’re also able to help with asset finance and rental discounting, renewable-energy and efficiency finance, and commercial property finance.
You can reach us at franchising@nedbank.co.za, or through your business banking manager.
