Franchise cash flow: check seasonality before expanding

The annual profit of an existing business does not show whether a future franchisee will have enough cash to cover wages, rent and suppliers during quieter months. Before expanding in Croatia, a franchisor should assess the seasonality of their concept’s cash flow. A sustainable franchise network needs more than a successful product: it also needs an understanding of the periods when cash goes out faster than it comes in.

1. Separate profitability from available cash

A profit and loss account and a cash flow forecast answer different questions. The first shows income, expenses and the financial result; the second shows when money actually reaches the bank account and when payments fall due. An outlet can be profitable over the year yet still run out of cash while preparing for its peak season.

For an initial analysis, gather monthly data from the existing business covering a full seasonal cycle. If you have several years of comparable data, check whether the same patterns recur. Identify exceptional events, such as a large one-off order or a temporary closure, so they do not become unspoken assumptions about future trading.

Pay particular attention to:

• the months with the highest and lowest cash receipts;
• when seasonal stock is purchased and paid for;
• customer and supplier payment terms;
• costs incurred before sales begin;
• commitments that remain even when turnover falls.

Do not equate seasonality with tourism. Demand may be affected by the school calendar, public holidays, weather conditions or business customers’ annual leave. What matters is the actual pattern of your concept, not a general impression of the market.

2. Build a monthly model for a future franchise outlet

Do not simply copy the bank statements of an existing outlet. A future franchisee may not have your supplier payment terms, established customer base or their own premises. The model should therefore reflect conditions that a new business owner can realistically secure.

Create a spreadsheet showing each month’s opening cash balance, receipts, payments and closing balance. One month’s closing balance becomes the next month’s opening balance. This reveals the cumulative effect of quieter periods, which an annual total conceals.

Under receipts, enter expected cash collections, not just invoices issued. Under payments, include purchases, wages and related employment costs, rent, utilities, insurance, maintenance, marketing, franchise fees and finance repayments. Work with an accountant to establish tax liabilities and their payment dates, including the effect of VAT if the outlet is VAT-registered.

Show the initial investment separately from day-to-day operations, but do not leave it out of the total funding requirement. A deposit on premises, opening stock and fit-out costs can use up funds before the first cash receipts arrive. Depreciation, by contrast, is not a current cash payment, whereas repayment of loan principal is a cash outflow.

For each significant assumption, state its source: historical data, a supplier quotation, an agreed payment term or an estimate that still needs to be tested.

3. Test a weaker season and poorly timed opening

A single forecast is not enough to support an expansion decision. Alongside the base case, prepare a downside scenario that tests specific weaknesses in the concept. There is no need to invent universal percentage declines: choose changes that make sense in light of your own data and experience.

For example, check what happens if the peak season starts later, customers take longer to pay or a supplier requires earlier payment for stock. Then test a combination of these events. Simultaneous pressures often expose risks that an individual change does not reveal.

Compare different opening months too. An outlet opening just after peak demand may need to fund a long stretch before sales strengthen again. One opening before the season may need more stock and staff before it generates sufficient cash receipts.

The lowest projected cash balance is a key checkpoint. If it falls below zero, the model indicates a funding shortfall. The funds required must cover both that shortfall and a reasonably justified cash buffer. Do not assume that a bank or the franchisor will step in later to make up the difference.

4. Make the findings a condition of readiness to expand

The analysis should influence the decision, not remain an appendix to the business plan. Record how much funding is needed to open, how much is needed to bridge quieter months and which assumptions remain unconfirmed. If viability depends on exceptionally favourable conditions available only to you, the concept is not yet financially replicable in its proposed form.

Croatia has no dedicated franchise law or specific statutory format for pre-contractual franchise disclosure. The contractual relationship is governed by Croatia’s Civil Obligations Act, including the principle of good faith and fair dealing, while competition law is also relevant. The European Code of Ethics for Franchising is a self-regulatory framework, not Croatian law.

Clearly distinguish financial projections from actual results, and do not present them as a guarantee of earnings. If you envisage deferring fees or providing other support during quieter months, the terms should be clearly set out in the contract rather than left as a verbal promise.

Practical takeaway: before offering a franchise, prepare a monthly cash flow forecast, test a weaker season and establish the cash reserve required. Expand only when you can explain how an outlet will fund even its quietest months.