Financial readiness for franchising: test your cash flow

A successful company-owned outlet does not necessarily mean that the same concept will be financially viable for an independent franchisee. Founders often work without adequate pay, use older equipment or share staff with another part of the business. Before expanding into a franchise network, build a cash flow model for a single, stand-alone outlet. Its purpose is not to promise a return on investment, but to establish how much money a franchisee will need and when they might face a shortfall.

1. Separate the outlet’s economics from the founder’s advantages

Start with the existing business’s actual accounting and operational records. Use a period covering a full seasonal cycle, not just the best months. Break down revenue by main service or product category, and separate costs that rise with sales from those incurred regardless of sales levels.

Then adjust anything that would be different for an independent franchisee. If the founder serves customers, orders stock and manages the team, include an appropriate cost for that work. Owning the property does not mean that a future franchisee will have rent-free premises. Similarly, shared accounting or transport costs must not disappear from the model simply because another part of the business currently pays them.

Prepare two versions side by side:

• Actual results for the company-owned outlet: what the business demonstrably earned and paid out.
• Adjusted franchisee model: what the same operation would look like with its own staff, local costs and contractual payments to the franchisor.

Give a reason and supporting evidence for each adjustment. A supplier’s quotation, staffing budget or actual bill carries more weight than a broad estimate. Also distinguish verified figures from assumptions. The difference between the two versions will show whether profitability can be replicated or depends on advantages enjoyed by the original owner.

2. Build a payment timetable, not just a profit forecast

A profit and loss account answers a different question from a cash flow forecast. An outlet can report a profit yet have no money to pay wages because funds are tied up in stock or unpaid customer invoices. Conversely, an advance payment received is not necessarily money earned if the service has yet to be provided.

Your model should therefore start before opening. Include security deposits, equipment, initial stock, training, staffing costs before trading begins and launch marketing. Allocate each expense to the date when payment is actually due. Remember to include payments to the franchisor under the proposed contractual terms; at this stage, show their impact rather than trying to optimise them.

During normal trading, pay particular attention to:

• when customers pay and when the money actually reaches the bank account;
• when stock is ordered and paid for in relation to when it is sold;
• payment dates for wages, payroll taxes and contributions, rent and other recurring expenses;
• loan repayments, including principal, which is not an accounting expense;
• equipment replacement and planned withdrawals by the owner.

Ask an accountant to check the treatment of VAT and other taxes for the specific circumstances. An investment budget excluding VAT does not, on its own, show how much cash will be needed to pay invoices. A weekly forecast may be appropriate during preparation and opening, followed by monthly forecasts for longer-term planning. The key is not to overlook a brief but critical dip in the cash balance.

3. Test less favourable scenarios and set a cash reserve

The base case must not be your only scenario. Also prepare a slower-launch scenario and one involving an operational setback. This is not about reducing revenue arbitrarily: each scenario should describe a specific situation, such as a delayed opening, slower growth in regular customers or the need to recruit an additional employee.

Adjust related items together. Lower sales may reduce material purchases, but rent and minimum staffing requirements will usually remain. A delayed opening may mean extra wages and rent without any income at all. Higher sales, meanwhile, may temporarily require more cash to fund stock.

For each scenario, record the lowest cash balance, when it occurs and how any shortfall will be funded. The capital required is not just the cost of opening: it also includes funding ongoing cash shortfalls and a justified reserve. Base that reserve on specific risks rather than a universal percentage.

Set decision thresholds in advance. What must be funded before opening? Under what circumstances will further investment be postponed? If the model only works because the owner works unpaid or repeatedly resorts to emergency funding, revise the concept before offering franchise opportunities.

4. Put the financial model on a sound legal and organisational footing

The Czech Republic has no dedicated franchising law, compulsory registration of franchise agreements or legally prescribed franchise disclosure document. A franchise agreement is generally concluded as an unnamed contract under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. However, general duties to act honestly and fairly, and rules on pre-contractual liability, still apply.

Once you use the financial model in discussions with a prospective franchisee, it must be clear which figures are historical facts and which are estimates. A return-on-investment calculation is not automatically a guarantee of results. Equally, a warning about uncertainty cannot remedy misleading inputs or the omission of a known, significant cost.

Appoint someone to take responsibility for updating the model and keep a version history. Any change to equipment, staffing standards or payment terms must also be reflected in the cash flow plan. Before using the model, have an accountant check the calculations and a lawyer review its consistency with contractual obligations.

Practical takeaway: Before expanding your business into a franchise network, demonstrate not only the potential profit but also the financial path to achieving it. A franchisee needs to know when payments will fall due, when cash is likely to come in and how they will fund leaner periods.