Why franchisees need financial know-how
Up to 63% of new businesses fail within their first two years in South Africa, and running a franchise connected to an established brand is no guarantee of success in today’s marketplace. Overwhelmingly, the reason for this is bad financial management – business funds are mismanaged, franchisees don’t know how to raise capital, and spending spirals out of control.
The essence of financial management is planning. Planning itself requires creative thinking, research, personal experience and financial know-how. It has many aspects and considerations, but it is non-negotiable for the running of a successful franchise. As the adage goes, failing to plan is planning to fail. However, financial management is not difficult to learn, and is an essential skill for franchisees who employ a significant proportion of South Africa’s workforce. Here are five reasons why you need to boost your financial skills.
1. Understanding financial jargon
After the recession that hit everybody where it hurt, franchisees have come to realise that they weren’t following what was going on around them. Mostly, this was because they didn’t understand the lingo being used, and couldn’t decipher the warning signs for themselves. Wrapping your head around the jargon of the financial world not only makes you a better businessperson, but a more informed world citizen.
2. Reading financial statements
When you know what you’re looking for, financial statements aren’t nearly as intimidating as most people think. These reports have the ability to give an overall picture of a business in an absolutely uniform format – allowing you to get real insight into what makes your business tick.
3. Appreciating the time value of money
An unassailable truth is that a rand today is worth more than a rand tomorrow. Too many company owners make the mistake of letting others hold onto their money, and it’s costing them dearly. Whether you want to get a clearer picture of what is takes to invest in growing your franchise, or feel you should be paid by your clients faster, the time value of money is integral.
4. Better profit planning and control
Whilst other businesses might have the luxury of focusing on only a few lines of product, as a franchisee you are often required to offer a set range of product lines. This requirement can present real challenges in terms of cost structuring. Effective profit planning is therefore vital and helps to chart the most efficient and effective volumes for your business, by looking at your input costs, sales prices and margins. Knowing what helps and hurts your profits is the fastest way to take your franchise to new heights.
To find out if you are making any money, you need to do some simple calculations. Sum up your total incomes and expenses, and subtract the expenses from the income you expect to earn. If the number is positive, it means that you are making an overall profit and can consider spending on growth areas or increasing your saving amount. If the number is negative, you are making a loss, which essentially means that you will need to go through your expenses clearly to see where you can cut costs on non-essential items, or review your income predictions to see if you can push to offer more services. Keep working until you find a good balance, and take into account financial growth from spending on items like advertising.
5. Managing cash flow better
Every business needs to spend some initial capital in order to establish itself. The most important part of your financial plan involves working out the money you must spend or borrow to get your franchise up and running – and whether it is within your means. Clearly planning these expenses will make it easier to repay loans and will indicate how much you need to earn to break even.
An integral part of intelligent money spending is creating a budget. A budget is a financial plan that outlines how much money your franchise makes and how much you need to spend on essential expenses. It is an excellent way of balancing cash flow: making sure that you spend enough money on your operational needs, without overspending and putting yourself under pressure. It also provides a clear overview of where your money is going if you need to cut costs.
Cash flow is the lifeblood of any business, and anybody who disagrees will be out of business soon enough. Setting budgets, knowing your expenditure patterns, and getting cash in from customers are often not franchisees’ strong points. But disregarding these vital activities is signing your business’s death warrant. So get on top of your cash flow, before it gets on top of you.
For more information on the University of Cape Town Basics of Financial Management course contact Tamsin on 021 447 7565 or tamsin@getsmarter.co.za, or visit http://www.getsmarter.co.za/.
The essence of financial management is planning. Planning itself requires creative thinking, research, personal experience and financial know-how. It has many aspects and considerations, but it is non-negotiable for the running of a successful franchise. As the adage goes, failing to plan is planning to fail. However, financial management is not difficult to learn, and is an essential skill for franchisees who employ a significant proportion of South Africa’s workforce. Here are five reasons why you need to boost your financial skills.
1. Understanding financial jargon
After the recession that hit everybody where it hurt, franchisees have come to realise that they weren’t following what was going on around them. Mostly, this was because they didn’t understand the lingo being used, and couldn’t decipher the warning signs for themselves. Wrapping your head around the jargon of the financial world not only makes you a better businessperson, but a more informed world citizen.
2. Reading financial statements
When you know what you’re looking for, financial statements aren’t nearly as intimidating as most people think. These reports have the ability to give an overall picture of a business in an absolutely uniform format – allowing you to get real insight into what makes your business tick.
3. Appreciating the time value of money
An unassailable truth is that a rand today is worth more than a rand tomorrow. Too many company owners make the mistake of letting others hold onto their money, and it’s costing them dearly. Whether you want to get a clearer picture of what is takes to invest in growing your franchise, or feel you should be paid by your clients faster, the time value of money is integral.
4. Better profit planning and control
Whilst other businesses might have the luxury of focusing on only a few lines of product, as a franchisee you are often required to offer a set range of product lines. This requirement can present real challenges in terms of cost structuring. Effective profit planning is therefore vital and helps to chart the most efficient and effective volumes for your business, by looking at your input costs, sales prices and margins. Knowing what helps and hurts your profits is the fastest way to take your franchise to new heights.
To find out if you are making any money, you need to do some simple calculations. Sum up your total incomes and expenses, and subtract the expenses from the income you expect to earn. If the number is positive, it means that you are making an overall profit and can consider spending on growth areas or increasing your saving amount. If the number is negative, you are making a loss, which essentially means that you will need to go through your expenses clearly to see where you can cut costs on non-essential items, or review your income predictions to see if you can push to offer more services. Keep working until you find a good balance, and take into account financial growth from spending on items like advertising.
5. Managing cash flow better
Every business needs to spend some initial capital in order to establish itself. The most important part of your financial plan involves working out the money you must spend or borrow to get your franchise up and running – and whether it is within your means. Clearly planning these expenses will make it easier to repay loans and will indicate how much you need to earn to break even.
An integral part of intelligent money spending is creating a budget. A budget is a financial plan that outlines how much money your franchise makes and how much you need to spend on essential expenses. It is an excellent way of balancing cash flow: making sure that you spend enough money on your operational needs, without overspending and putting yourself under pressure. It also provides a clear overview of where your money is going if you need to cut costs.
Cash flow is the lifeblood of any business, and anybody who disagrees will be out of business soon enough. Setting budgets, knowing your expenditure patterns, and getting cash in from customers are often not franchisees’ strong points. But disregarding these vital activities is signing your business’s death warrant. So get on top of your cash flow, before it gets on top of you.
For more information on the University of Cape Town Basics of Financial Management course contact Tamsin on 021 447 7565 or tamsin@getsmarter.co.za, or visit http://www.getsmarter.co.za/.
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