Buying a Franchise in Colombia: Calculating Working Capital

Having enough money to open a franchise does not mean you have enough to keep it running. A cash shortfall can arise between paying for stock, covering payroll and actually receiving sales proceeds. Before entering Colombia’s franchise market, calculate the working capital your outlet will need: the funds that will sustain operations until receipts are sufficient to cover payments.

1. Separate opening costs from operating cash

A franchise proposal may include fit-out costs, equipment and the initial franchise fee, but exclude the funds needed to operate after opening. Do not treat the advertised figure as your total budget without checking what it covers.

Organise your outgoings into three groups:

• Opening investment: fit-out, furniture, equipment and initial payments under the agreement.
• Tied-up funds: deposits and other sums that will not be available to cover day-to-day operations.
• Operating cash: money for payroll, rent, utilities, stock replenishment and other obligations while you wait for income to arrive.

Opening stock requires particular care. If it is already included in the opening investment, do not count it twice. Do, however, record when you will need to replenish it and when payment for that replenishment will fall due.

Keep your household budget separate too. If you depend on the new business for your living costs, include reasonable remuneration for your work where appropriate and assess whether cash flow can support it. Unplanned personal withdrawals can use up money set aside for suppliers or wages.

2. Forecast cash receipts and payments, not just sales and expenses

Prepare a weekly cash-flow forecast for the start-up phase and a monthly forecast for the period that follows. Extend it until you can see that the business can regularly meet its obligations, allowing for possible quieter trading periods.

Record each transaction on the date the money actually comes in or goes out. A sale made today does not always become available cash today: platform settlements, card payments or credit sales may involve delays. Similarly, you may have to pay for a purchase before receiving the goods.

For each period, set out:

• Available opening cash balance.
• Expected receipts, either net of fees or with fees recorded separately, without double-counting them.
• Supplier payments and stock replenishment.
• Payroll, social security contributions, rent and utilities.
• Royalties, advertising payments, tax liabilities and finance repayments, where applicable.
• Closing cash balance after all transactions.

This exercise helps identify the largest cumulative cash shortfall before you add an operating reserve. That shortfall provides a starting point for assessing how much cash you need, not a guarantee that it will be enough.

A franchise can show an accounting profit yet run out of cash. For example, if it pays for goods in advance, holds stock for several weeks and receives payment only after selling, it must finance that entire interval. Achieving profitable sales does not automatically remove this need.

3. Check your assumptions and test a difficult start

Ask the franchisor for information that helps you understand the cash cycle of comparable outlets: replenishment frequency, payment terms, seasonality and changes in stock levels. Knowing their monthly turnover is not enough; you need to know when they receive payment and what they must pay beforehand.

Distinguish terms confirmed in writing from mere expectations. Supplier credit terms that have not yet been approved should not be used to fund your base case. Nor should you treat a pending loan application as available cash.

Build a base-case forecast and an adverse scenario. In the latter, test slower receipts, lower-than-expected sales, slow-moving stock or higher operating costs. Make the changes to your assumptions explicit, without presenting them as predictions.

Any additional reserve should reflect these specific risks. There is no universal number of months’ cover suitable for every franchise. An outlet selling perishable goods and paying suppliers in advance will have different needs from one that takes payment upfront and holds little stock.

4. Review which contractual obligations use up cash

In Colombia, a franchise agreement is an ‘atypical’ contract: there is no comprehensive legal framework specifically governing this type of agreement. Validly agreed terms apply, alongside the general rules of the Commercial Code and, where relevant, the Civil Code. Good faith also governs the pre-contractual stage; the agreement is not the only source of protection.

There is no general franchise-specific pre-contractual disclosure regime that replaces this review. Nor should proposed legislation be confused with an obligation already in force.

Before signing, check your cash-flow forecast against the agreement’s payment dates and terms. Identify minimum purchase requirements, advance payments, recurring payments due even when sales are low, and obligations that begin before opening. Request written clarification of any differences between the budget presented in the franchise proposal and the agreement.

Practical conclusion: do not commit all your resources to opening. Buy only after identifying the largest cash shortfall, allowing for a reserve that reflects the risks and confirming where that money will come from.