Buying a franchise: how to calculate your operating cash reserve

You have the money for the licence, equipment and opening your premises. But how will you pay wages, buy more stock and meet loan repayments if sales take longer than expected to build? Joining a franchise network does not eliminate the risk of running short of cash. Before signing, separate your one-off investment from your operating cash reserve and check whether you can fund a less favourable start. What matters is not just expected profit, but also when payments actually come in and go out.

1. Build a cash flow forecast, not just an investment budget

Start with the first payment involved in preparing your premises, rather than the opening date. Record every expected receipt and payment according to when the money will actually enter or leave your account. Use weekly figures for the first few months; you can plan subsequent periods monthly. Include your first seasonal downturn too.

Divide payments into three groups:

• Preparation and opening: upfront fees, deposits, fit-out work, initial stock and wages before trading begins.
• Day-to-day operations: rent, utilities, wages including employer contributions, accountancy, insurance, stock replenishment and payments to the franchisor.
• Finance and statutory obligations: loan principal repayments, interest, bank charges and tax payments as applicable to your circumstances.

A refundable deposit may not be an expense in your profit and loss account, but the money is still unavailable to you. Similarly, repaying loan principal uses cash without being an accounting expense. That is why a profit and loss statement alone is not enough to calculate your reserve.

For each item, indicate whether it is a documented price, a contractual commitment or an estimate. A budget in which almost every date and amount is merely an assumption is not yet a reliable basis for signing.

2. Check when sales actually turn into cash

Ask the franchisor for evidence of how comparable outlets typically perform during their start-up period. Annual turnover is not enough: you need a breakdown of sales over time, seasonal fluctuations and an explanation of how the figures were compiled. Distinguish actual results from existing outlets from projections for a new one.

Next, check the payment arrangements. When does the payment services provider transfer card takings? Who collects payments for orders placed through the central online shop, and when does the outlet receive its share? If you will be invoicing business customers, what payment terms will apply, and who will bear the risk of late payment?

On the expenditure side, establish whether initial deliveries require advance payment and whether agreed payment terms apply from the outset. Do not assume that a supplier will automatically give a new business the same terms as an established outlet.

A profitable sale can temporarily worsen your cash position: you pay for stock today, but the customer settles the invoice later. Faster growth can therefore sometimes require a larger reserve than a slow start. Work with your accountant to factor in the applicable VAT rules too; do not treat a potential VAT deduction or refund as immediately available cash.

3. Calculate the largest shortfall and test the effect of delays

For each period, subtract payments from receipts and track the running balance. Its lowest point shows the size of the funding gap you need to cover. Count only funds that will remain available after paying for your initial investment: the same Czech koruna cannot pay for both equipment and wages.

Alongside your base forecast, prepare a downside scenario. Rather than simply reducing turnover by an arbitrary amount, model specific events:

• opening is delayed while you are already paying rent and some wages;
• customers arrive more slowly than forecast;
• stock takes longer to sell, and the next delivery must be paid for in advance;
• a major customer pays late.

Add a safety buffer to the largest calculated shortfall, reflecting the uncertainties in your plan. There is no universal number of months or percentage that suits every franchise. A service paid for immediately has different cash needs from a shop carrying substantial stock.

Prepare a separate personal household budget. If you need to draw a regular income during the start-up period, include it in the business cash flow forecast. The owner's unpaid labour is not a cost-free source of finance in the long term.

4. Secure access to your reserve before signing

Distinguish between your own funds, a formally approved loan and a non-binding indication of finance. For a working capital loan, check the drawdown conditions, how long the facility will remain available, the repayment terms and the circumstances in which the bank can restrict further borrowing. Funding long-term equipment with a short-term loan can create problems just as the business is beginning to stabilise.

The Czech Republic has no dedicated franchise legislation or mandatory standardised pre-contractual disclosure document such as an FDD (Franchise Disclosure Document). Franchise agreements are generally entered into as contracts not specifically defined by law under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. General rules on fair dealing and pre-contractual disclosure obligations still apply; the absence of a dedicated document does not give anyone licence to provide misleading information.

You should therefore explicitly request the financial information and explanations you need. Work with a lawyer to ensure that financing is available when binding, non-refundable commitments arise. A voluntary franchise industry code of ethics is no substitute for the law or contractually secured funding.

Practical takeaway: Sign only once you have a cash flow forecast, a downside scenario and a documented source of reserve funding. If your plan works only with immediate success, your start-up financing is not yet ready.