Working capital for a franchise network: secure funding for launch

When you turn your existing business into a franchise network, a profitability forecast alone is not enough. A new franchisee’s business must also survive the period when bills fall due but customer payments are still limited. Suomi.fi, Finland’s public service information portal, points out that franchisees secure their own funding and bear the risks of their business. The franchisor’s role is to make the concept’s funding needs clear, not to promise finance or guaranteed success.

1. Separate launch investments from day-to-day working capital

Your existing business’s bank balance does not, on its own, tell you how much money a new franchisee will need. An established business already has customers, effective payment processes and perhaps fully paid-for equipment. A new outlet has to put these foundations in place while its running costs are already starting to accrue.

Divide the funding requirement into three categories. The first covers launch investments, such as furniture, equipment and fitting out the premises. The second includes payments due before opening, such as deposits, initial stock, the initial franchise fee and wages during the preparation stage. The third is working capital: the money that keeps the business running until customer payments are sufficient to cover its outgoings.

For each item, record not only the estimated amount but also the payment date, the basis for the estimate and who will pay it. Note whether it is a one-off payment, a recurring cost or a deposit that will be refunded later. Even a refundable deposit ties up cash, although it is not an expense in the profit and loss account.

Do not confuse the franchisee’s personal living costs with the business’s funding needs. These still need to be considered separately in the planning process. If the franchisee needs to take a salary or drawings from the business immediately, depending on its legal form, this must be reflected appropriately in the cash flow forecast.

2. Turn your business figures into a cash flow forecast for a new outlet

Start with actual receipts and payments from your existing business, rather than just the annual profit figure. Establish when customers pay, when supplier invoices fall due and how replenishing stock affects the bank balance. Distinguish seasonal fluctuations from one-off events.

Then adjust the figures to reflect the new franchisee’s circumstances. The founder’s own work may be undercosted in the existing business, an old lease may offer unusually low rent, or purchase prices may depend on order volumes. Do not assume that a new outlet will enjoy these advantages without a sound basis.

Prepare a weekly cash flow forecast for the period around launch, then move to a monthly forecast once operations settle down. Weekly figures reveal situations where total monthly sales appear sufficient but cash runs out on payday. Include at least:

• customer payments on their expected receipt dates
• purchases, wages and associated employment costs, and other recurring payments
• franchise fees on the dates specified in the agreement
• taxes and the VAT payment schedule
• loan drawdowns, interest and repayments.

Treat VAT consistently. A cash flow forecast must reflect actual cash movements, and recoverable VAT will not necessarily be refunded when the purchase is paid for. Have an accountant check the tax treatment.

For each period, calculate the opening cash balance, receipts, payments and closing cash balance. Drawing down a loan increases cash but not sales; repaying loan principal reduces cash even though it is not an expense in the profit and loss account. This distinction helps explain why even a profitable outlet may need additional funding.

3. Test delays before making binding launch commitments

A single forecast can easily create a false sense of certainty. Alongside it, prepare one scenario in which opening is delayed and another in which sales build more slowly than expected. Base these on your own business experience and identified uncertainties, not arbitrary promises of growth.

If opening is delayed, rent, insurance or staffing costs may start before the first day of trading. If sales are slow, initial stock may tie up cash for longer than planned. Long payment terms for business customers can also increase funding needs, even when orders are sufficient.

Identify the lowest cash balance in each forecast and when it occurs. Use this to assess the funding shortfall and the buffer required. The buffer should reflect the risks of the concept, rather than a standard amount recommended to every franchisee.

Agree a clear review point during launch preparations, before making major commitments. At that stage, check that funding approvals, drawdown conditions and payment schedules align. A positive verbal discussion with a lender does not mean the money is available. If funding is insufficient, postpone opening or revise the plans before committing to purchases that cannot be cancelled.

4. Define the franchisor’s responsibilities and keep the forecast up to date

Finland has no separate franchise law, statutory franchise register or specific legislation governing franchise pre-contractual disclosure documents. This does not remove responsibility for the information provided. Agreements are subject to legislation including Finland’s Contracts Act, as well as general principles of contract law. The Unfair Business Practices Act prohibits false or misleading statements in business that may affect demand or supply, or harm another business.

The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not law. Compliance does not replace carefully prepared forecasts or legal review of agreements.

Record the preparation date, source data and assumptions in the forecast. Distinguish actual figures from estimates and explain which outlet’s operations provide the benchmark data. A disclaimer stating that the forecast is not a promise does not remedy misleading underlying information.

Agree in writing who will update the estimates before opening and what financial information the franchisee will provide during the start-up phase. Encourage the franchisee to review the forecast with their own accountant and lender. Support from the network does not transfer the franchisee’s payment obligations to the franchisor unless separate responsibilities have been agreed.

Practical takeaway: before opening the first franchisee-operated outlet, prepare a cash flow forecast based on payment dates, test a delay scenario and confirm that funding will be available. More important than the opening date is having enough cash to keep trading afterwards.