Franchise cash flow projections never seem all that urgent when cash on hand isn’t a problem, and the business is happily humming along.
And why would they? There are always other action items that require immediate attention — finding new opportunities to grow or expand, building on what’s been working well, promoting high-performing staff, finding talented new team members…the list never ends.
For many franchise owners and managers, focusing on improving the franchise by building new efficiencies or strengthening the team is wildly more interesting and fulfilling than reviewing numbers and balance sheets. We pursue opportunities that excite us, that invigorate our energy and passion for a project. Doom-scrolling through spreadsheets until your eyes glaze over? Pass. When all seems well, and your franchise is operating like the well-oiled machine it is, you’re going to gravitate towards the fun stuff.
It’s exactly at those times, however, when stepping back and analyzing franchise cash flow for the long term becomes vital to the longevity of the business. Think of it as a prime opportunity to develop a longstanding plan to profit.
Taking the time to develop cash flow projections also gives the added bonus of making sure the business can afford to hire new talent and that any new franchise improvements are financially viable.
The obvious question, of course, is, “Cash flow sounds important, but why?” The next obvious questions are, “What does that actually look like?” and maybe, “How can I apply this to my franchise, specifically?”
Good questions, and you’re on the right track.
In this first part of a two-part article, we’ll answer these questions and more. First, we’ll explain the point of cash flow projections, and then we’ll explain what they are and what they do.
In part two, we’ll be examining the how to put a meaningful cash flow projection together and how it can illuminate every part of your franchise, from its sales cycles to its vendor payments to its day-to-day management decisions.
Let’s get started.
What Is a Cash Flow Projection?
If you’re a visual thinker, envision a cash flow projection like a roadmap. It serves as a “you are here” marker that helps franchise owners understand where their financials are now and where the business may need to go financially over time. It uses a combination of profit and loss statements and balance sheets to plot points and identify issues and opportunities – kind of like the financial version of real-time traffic data to help you navigate efficiently.
Ideally, cash flow projections should provide a short-term view of how existing cash is flowing in and out of the franchise and a clear picture of how it will look in the near future—anywhere from a week to a few months.
But that’s not all!
A cash flow projection should also provide a longer-term look at when money is coming in and when it must go out. This longer view can help franchise owners and managers understand what revenue and costs might look like three to five years down the road.
Why Are Cash Flow Projections Important to Franchise Accounting?
Very often in business, the urgent tends to drive out the important. You have to prioritize, and this is why developing cash flow projections are often overlooked or deemed less critical by franchise owners and managers. Because there’s always something that needs your attention right now.
However, by reframing the importance of cash flow projections, you’ll soon see the benefits.
These projections help proprietors gain a solid understanding of where franchise money is coming from and where it is going. They can help determine whether revenue is temporary or long-term, where potential issues might be looming, and whether loans or other financial investments may or may not make sense.
Need more convincing? Or like a few examples? Here are a handful of reasons why cash flow projections make sense for franchises.
Better Financial Decisions
This is a big one – big, as in, it’ll impact every aspect of your franchise. Full stop.
There are always going to be situations — such as opening a new location or making capital improvements to an existing one — that will require financing. But taking on new debt payments can stress future cash flow and put the location or even the entire franchise in jeopardy. Cash flow projections can help identify these issues and allow owners and managers to take appropriate action.
On the other hand, if cash is stable, cash flow projections can help identify the feasibility of potential investments and whether the returns will be worth the outlay. Because these projections are so important to franchise decision-making, they should become a regular part of your franchise accounting.
Operational Improvements
If it’s true that you can’t manage what you can’t measure, putting a forecast together for cash flow can help you measure the franchise’s financial performance so you can better manage operations via improvements or corrections.
For example, franchise cash flow forecasts might reveal high spending on labor at specific locations, indicating a need to cut back hours or reduce staff. Or they might identify a spike in the utility budget, prompting the need for more investigation: Are we leaving lights on all night? Is there an equipment malfunction? Is there a water leak?
These are opportunities for improvement that an accurate cash flow projection can help you make. And, with measurable data, you’ll be able to make impactful decisions and ask meaningful questions with the facts right in front of you.
Financial Flexibility
Surprises lurk around every corner when running a franchise. It’s just the nature of the business. Some surprises are wonderful…others, less so.
Understanding the nature of cash flow can help minimize the impact of adverse surprises and maximize the impact of beneficial ones. Being prepared for the unexpected and understanding when to invest in future growth begins with a clear and actionable franchise cash flow projection.
Stay Tuned for Part 2
Now that you have a good idea of what goes into a franchise cash flow projection and why it’s important, the next step is to put a meaningful one together for your franchise. That’s right, let’s make this personal.
In the next installment of this two-part series, we’ll give you all the tools and considerations necessary to compile a cash flow forecast that actually makes sense and is easy to understand. That way, you can actually use it, instead of relying on your accountant to translate for you every time you have a question.
In the meantime, if you need immediate help with your franchise accounting and financial management needs, reach out to your advisor at RKL Virtual or use the form below to get started. We look forward to working with you!
