Working Capital When Franchising a Business in Colombia

A business can have strong sales and still run out of money to pay wages, rent or inventory costs. Before offering your business as a franchise in Colombia, calculate how much cash a new outlet will need to sustain its operations. This reserve, separate from the money needed to fit out the premises, is essential to responsible growth within the franchise sector.

1. Separate the opening investment from working capital

The opening investment covers outlays such as fit-out work, equipment and the initial franchise fee. Working capital covers day-to-day payments while the business’s cash receipts are still insufficient to meet them. Mixing the two can make the franchise opportunity appear less expensive than it really is.

Prepare a budget with three clearly identified sections:

• Set-up: building work, furniture, technology, applicable administrative procedures and pre-opening expenses.
• Initial operations: wages, rent, utilities, stock replenishment, royalties and other recurring payments.
• Contingency reserve: funds for specific departures from the plan, such as fit-out delays or unexpected repairs.

Avoid counting the same item twice. If initial stock is included in the opening investment, subsequent cash flow should show replenishment costs, rather than charging the full initial purchase again. Apply the same approach to rent paid in advance and deposits.

The question is not just how much it costs to open, but how much money must remain available after the opening costs have been paid.

2. Build a schedule of cash receipts and payments

Start with the actual cash movements in your existing business, not just its profit and loss account. A recorded sale does not always mean cash is available that same day, and a purchase may need to be paid for before the goods are sold.

Organise cash flow by week during the most sensitive start-up period. You can then switch to monthly figures, provided that grouping them this way does not conceal shortfalls between payment dates.

For each period, record:

• Opening balance of available cash.
• Expected receipts, taking account of payment methods and settlement times.
• Payments to suppliers, staff, the landlord and service providers.
• Applicable tax and contractual obligations.
• Finance repayments, where there is debt.
• Closing balance and any additional funding required.

The largest cumulative cash shortfall provides a guide to the operating reserve required. Use this as the basis for a contingency allowance justified by identifiable risks, rather than an unexplained percentage.

With accounting support, distinguish profit from liquidity. Depreciation is not a cash outflow for the period; repayment of loan principal does consume cash, even though it is not an operating expense. Also separate out the owner’s personal drawings: these should not be hidden within the outlet’s funding needs.

3. Adjust the calculation for a new outlet

Your existing outlet may benefit from conditions that the franchisee will not have: an established customer base, supplier credit or equipment that has already been paid for. Copying its cash flow without adjustments creates a misleading comparison.

Document which conditions can be transferred and which must be negotiated afresh. If a supplier has not yet approved credit terms for the new outlet, initially assume payment will be required upfront. Do not present pending finance as secured funding.

Test separate scenarios: slower sales growth, delayed receipts, a lower margin due to the product mix, or a postponed opening while expenses continue to accrue. The aim is not to predict the future, but to identify when cash would run short and what response would be feasible.

Set out an action for each scenario: inject funds from the franchisee’s own resources, reduce spending that can be deferred, or revise the project timetable. Missing payments or cutting essential operating standards should not be the automatic solution.

4. Document the scope of the estimate in Colombia

In Colombia, a franchise agreement is an ‘atypical’ contract: there is no comprehensive franchise-specific legal framework that replaces general contract rules. The Commercial Code and, where relevant, the Civil Code apply, including duties of good faith. The absence of a dedicated law does not permit misleading budgets.

The draft decree published by Colombia’s Ministry of Trade, Industry and Tourism (MinCIT) in 2021 envisaged a Franchise Offering Circular and a twenty-working-day period. That draft should not be presented as a current legal obligation merely because it was published.

Provide the working capital estimate with a date, its assumptions, excluded items and the name of the person responsible for preparing it. Make clear that it does not guarantee profitability or remove the need for an independent financial review. If you offer support in seeking credit, distinguish that assistance from bank approval.

Practical conclusion: before marketing the franchise, prepare a cash flow forecast tailored to a new outlet and check that the budget allows it both to open and to sustain its operations.