Buying a franchise: how to plan your working capital

Paying the initial franchise fee and fitting out your premises does not mean you have enough money to start trading. When joining a franchise network, you also need to plan your working capital: the funds that cover stock, wages and other commitments until customer payments are sufficient. This guide helps you distinguish between the investment needed to open and the cash required for day-to-day operations in Croatia.

1. Separate your initial investment from your cash reserve

Divide your franchise purchase budget into two parts. The first covers the costs of joining the network and setting up the business, such as the initial franchise fee, fit-out and equipment. The second sets out the cash needed to fund operations after opening. You must not earmark the same money for both finishing the fit-out and paying your first wages.

Identify opening stock, the rental deposit and prepaid services separately. Their accounting treatment differs, but they can all tie up cash that will not be immediately available to you. A refundable deposit, for example, is not an available reserve while the landlord holds it.

Ask the franchisor for an overview of the funding needs of comparable outlets during their start-up period. Check whether its initial investment figures include funding for ongoing operations or only the cost of opening. Adjust the figures to reflect your own lease, staffing levels, payment collection times and local seasonal patterns.

The key question is not just how much it costs to open, but how much cash must remain after opening. Budget separately for the owner's personal living costs so that these do not quietly eat into the business's cash reserve.

2. Create a schedule of actual cash receipts and payments

Prepare a weekly cash flow forecast for the initial period, followed by a monthly overview covering at least the first full seasonal cycle. Each period should show the opening cash balance, expected receipts, payments due and closing balance. Carry the closing balance forward to the next period.

Include the following in your forecast:

• sales receipts, based on when the money will actually arrive;
• stock purchases and replenishment, including advance payments;
• wages, social security contributions and other employment costs;
• rent, utilities, insurance and accountancy fees;
• franchise fees and other contractual payments;
• tax liabilities, loan repayments and lease payments.

A sale does not always generate an immediate cash receipt. Card payments, sales through platforms and invoices issued to business customers may all have different settlement times. Equally, you may have to pay a supplier for goods before you sell them.

Check with your accountant how your VAT registration status, the tax treatment of particular payments and payment deadlines affect your available cash. Do not treat an expected tax refund as a guaranteed receipt on an arbitrarily chosen date.

The lowest projected balance shows where a shortfall arises. Calculate the additional funding required using the largest cumulative shortfall, with a separate contingency reserve, rather than simply adding up all your monthly costs.

3. Test how well your reserve can withstand a difficult start

A base-case forecast is not enough. Prepare a downside scenario in which sales grow more slowly, customer payments arrive late or you need to replenish stock earlier. Pay particular attention to the period after the seasonal peak: turnover may fall while rent, wages and other commitments remain.

Record the reasoning and data source behind each assumption. Do not simply reduce all revenue by an arbitrary percentage and consider the exercise complete. Look at the specific causes of a shortfall: fewer customers, longer collection times and larger amounts of unsold stock each call for a different response.

Compare three sources of funding: your own available funds, approved external finance and money you are still expecting to receive. An unapproved loan, a possible grant or a verbal promise of a family loan is not as reliable as money already in your account.

Ask your bank about the terms for accessing working capital finance, its costs, security requirements and whether the facility can be renewed. A short-term loan is not a lasting solution for a business that consistently pays out more than it collects. Set a minimum cash balance in advance that will trigger a decision to defer non-essential spending or speak to creditors.

4. Align your reserve with your contractual commitments

Croatia has no specific franchise law and no dedicated mandatory pre-contractual disclosure regime requiring a standard disclosure document and a waiting period. A franchise agreement is an innominate contract — a contract type not specifically regulated by statute — governed primarily by the Croatian Civil Obligations Act. Accounting and tax obligations are governed by the relevant general legislation, including the Accounting Act and the Value Added Tax Act, within their respective scope.

Do not therefore assume that a cash shortage automatically entitles you to defer franchise fees. Before signing, compare the contractual payment dates with your cash flow forecast. Check for payments due before opening, minimum fixed commitments and annual payments payable in advance.

If the viability of your start-up period depends on a payment grace period or instalment arrangements, make sure these are clearly set out in the contract. Give your solicitor and accountant the same schedule of payment deadlines so that the legal review and financial plan are not based on different assumptions.

Practical takeaway: before signing, have a separate opening budget, a cash flow schedule and a confirmed source of funding to cover the largest expected shortfall. Your reserve must remain available to fund operations, rather than disappear into the final fit-out costs.