Franchising: work out your cash needs before investing

Joining a franchise network takes more than the amount quoted as the initial investment. You need to be able to meet payment deadlines while the business is still building its customer base. Before choosing a brand, prepare a cash flow plan: a forecast showing when money will come in, when it will go out and what reserve you will need to prevent a slower-than-expected start from bringing the business to a halt.

1. Distinguish opening costs from cash requirements

The investment figure presented by the franchisor may include some start-up expenses, but not necessarily everything you will need to fund. Always ask which items are included, which are excluded and whether the amounts include or exclude VAT.

Organise outgoing payments into three groups:

• Pre-opening expenses: the initial franchise fee, building and fit-out work, furnishings, equipment, professional advice, administrative procedures and launch marketing.
• Money tied up: the security deposit on the premises, any contractual deposits and advance payments required before you receive goods or services.
• Payments during the start-up period: rent, staff, utilities, insurance, social security contributions, taxes, ongoing franchise fees and loan repayments.

A refundable deposit is not necessarily a permanent expense, but it still reduces your available cash. Similarly, VAT on purchases may create a tax credit without immediately becoming usable cash: check the timing and recovery procedures with your accountant.

Keep your personal reserve separate from the business reserve. If you will need to live off the business's income, include that requirement in the plan too, accounting for it appropriately for your chosen legal structure.

2. Build a schedule of cash receipts and payments

A forecast profit and loss account is not enough. A business can look profitable on paper yet have no cash available when wages are due. You need a monthly forecast that starts with pre-opening payments and covers the start-up period and a full seasonal cycle. During more critical periods, switch to weekly monitoring.

For each period, show:

1. Cash available at the start.
2. Expected cash receipts, recorded on the date the money should reach your account.
3. Planned payments, based on actual due dates.
4. Any capital injections or loan drawdowns.
5. The closing balance and the minimum reserve to maintain.

Do not treat turnover as cash already received. Allow for any credit terms offered to customers, payment providers' settlement times, refunds and amounts withheld by platforms. On the payments side, check whether any services must be paid for in advance or on a schedule other than monthly.

In Italy, Article 3 of Law No. 129 of 6 May 2004, which governs franchising, requires the contract to state explicitly the amount of investment and any initial franchise fees payable before the business starts trading. It must also specify how royalties are calculated and paid, and any minimum takings the franchisee must achieve.

These details provide a basis for your plan, not a guarantee that the stated amount will cover every funding need. Translate each contractual commitment into a payment date and a cash outflow.

3. Size your reserve using cautious scenarios

There is no single reserve amount that suits every business model. Your cash requirement depends on your cost structure, seasonality, payment collection times and how quickly you attract customers.

Prepare a base-case scenario and a cautious scenario. In the latter, check what happens if:

• the opening is delayed while rent and other commitments are already due;
• cash receipts grow more slowly than expected;
• the fit-out requires additional work;
• several payments fall due in the same month;
• loan funds are released later than expected.

The starting point is the largest cumulative cash shortfall before funding is added: how much money is missing at the most difficult point in your schedule. Add a justified contingency buffer, rather than choosing a percentage without analysing the risks.

Ask the franchisor which assumptions underpin its forecasts and, where possible, compare them with the experience of franchisees running similar businesses. An established outlet does not automatically reflect the first few months of a new opening. Discussions within the franchise network are particularly useful for identifying overlooked payment deadlines and challenges.

4. Match funding to actual payment deadlines

Distinguish between your own available capital, approved finance and applications still under consideration. An anticipated public grant or an informal indication of support from a bank cannot be treated as confirmed funds.

For each financing arrangement, check the amount you can actually draw down, the timing, any conditions to be met, fees, guarantees and the repayment schedule. Even an initial period with no capital repayments may still involve interest and other payments.

Discuss with your advisers whether the financing term is appropriate for how the money will be used. Relying entirely on short-term credit that can be withdrawn to fund fit-out work and furnishings can leave the business vulnerable from the outset. Any personal guarantees also require a separate assessment of the risk to your household finances.

In practice: before committing, check that every payment in your cautious scenario can be covered by funds that are available or reasonably certain. If the balance falls below your minimum reserve, revise the investment, timetable or financing before signing.