Working capital for a franchise: how much to set aside before buying

The investment needed to open a franchise does not end on opening day. Between paying suppliers and receiving sales proceeds, the outlet needs cash available to keep operating. In franchising, a well-known brand does not eliminate this gap. Before buying, calculate working capital based on your planned operation, rather than relying solely on the estimate in the franchisor’s sales materials.

1. Separate set-up costs, operating funds and personal savings

Start by dividing your budget into three parts. The first covers set-up costs: the initial franchise fee, building work, equipment, licences, security deposits and pre-opening expenses. The second covers the money needed to sustain the business. The third is your personal financial reserve, which should not depend on your first withdrawals from the business.

This separation prevents a common mistake: spending almost everything on setting up and expecting the first sales to fund wages, rent and stock replenishment.

Working capital is not the same as a loss. Even a profitable outlet can face a cash shortage when it receives payments after its own bills fall due. Slow-moving stock, sales paid in instalments and short supplier payment terms increase this need.

In Brazil, Law No. 13,966/2019, the Franchise Law, requires the Franchise Disclosure Document (Circular de Oferta de Franquia, or COF) to state the estimated initial investment needed to acquire, set up and launch the business. It also requires information about premises, equipment and opening stock, including payment terms. These estimates are a starting point, not a guarantee that the money will be sufficient for your location and pace of sales.

Ask the franchisor to clarify what its working capital estimate includes and which assumptions it used. Get the answers in writing.

2. Forecast cash flow using actual receipt and payment dates

Build a monthly spreadsheet for the first year, with a weekly breakdown for the first few months. The aim is to identify when the cash balance reaches its lowest point, not simply whether the annual result looks positive.

For cash inflows, record when the money will actually be available. A card sale does not necessarily turn into cash on the same day. Allow for instalment payments, settlement periods, fees and possible cancellations.

For cash outflows, include:

• rent, building service charges and other premises costs;
• wages, employer contributions, benefits and provisions for employment-related liabilities;
• stock purchases and replenishment;
• taxes, accounting, insurance and software systems;
• contractual payments to the franchise network;
• maintenance, local marketing and owner-manager remuneration (pró-labore);
• loan repayments, where applicable.

Do not count opening stock twice: distinguish the set-up outlay from purchases needed to replace stock sold. Nor should you confuse accounting depreciation with an immediate cash payment.

Calculate the cumulative cash balance starting from zero, before adding your reserve. The largest negative balance indicates the minimum funding needed in that scenario. Add a safety buffer justified by the risks identified, rather than treating a fixed number of months as a universal rule.

Ask your accountant to review the schedule of taxes and other obligations. Overlooked annual or seasonal expenses can significantly distort the forecast.

3. Stress-test delays without relying on optimistic sales

A single forecast can hide weaknesses. Build a base case and an adverse scenario, changing specific assumptions: a later-than-planned opening, slower sales growth, higher stock requirements or longer waits for payments.

For each version, answer four questions:

1. What is the lowest cumulative cash balance?
2. When does it occur?
3. How much additional money would be needed?
4. Where would that money come from without jeopardising essential household spending?

Use evidence-based assumptions to estimate sales, such as service capacity, prices, footfall at the location and local seasonal patterns. The network’s average turnover alone does not show how much your outlet will sell.

Reaching operating break-even does not mean you have recovered your investment. The business may start covering its ongoing expenses while still needing to replenish cash used in earlier months. Nor does breaking even mean you can withdraw the entire available balance: future bills and stock replenishment still need funding.

If the adverse scenario requires funds you neither have nor can safely borrow, reconsider the outlet format or postpone the purchase.

4. Assess borrowing before making commitments

Credit can fund a temporary need, but it cannot fix a business that consistently operates at a loss. Before borrowing, compare the total effective cost, where applicable, including interest, fees, taxes and insurance, as well as security requirements, repayment grace periods and early repayment terms.

Include every repayment in your cash-flow forecast. A grace period does not necessarily mean interest is waived, and repayments that begin before sales stabilise can deepen a cash shortage.

Do not treat a bank credit limit, advances against receivables or preliminary approval as guaranteed funding. Check the final terms and seek advice on personal guarantees and which assets could be at risk if you default.

In practice: before buying, have a reviewed cash-flow spreadsheet, a separate business cash reserve and a realistic source of funding to cover the lowest projected balance. If the figures only add up with optimistic sales, the investment still needs rethinking.