Cash Flow Before Franchising: The Working Capital Test

An established business can report a profit yet still lack the money to pay for its next delivery or its staff. Before inviting partners to join your franchise network, check not only the outlet’s profitability but also its cash requirements. This test will show whether a new business owner can fund day-to-day operations after opening — without emergency cash injections they have not budgeted for.

1. Separate opening costs from operating funds

The budget for fitting out premises, buying equipment and launching sales is not the full cost of joining a franchise network. Working capital is also needed: funds to cover outgoings until customer receipts are sufficient to meet ongoing commitments.

Prepare two separate schedules. Put pre-opening expenditure in the first and cash flows from the start of trading in the second. Allocate each outgoing only once. Initial stock may fall within the opening budget, while subsequent replenishment should appear in the operating cash flow forecast.

Also account for money tied up in deposits, stock and customer receivables. A deposit may not be an expense in the profit and loss account, but the money to pay it must be available. Similarly, a sale on credit does not mean cash arrives in the bank immediately.

Profit measures business performance, while cash flow shows the ability to meet payment obligations. The model prepared for prospective franchisees should present both perspectives, rather than treating them as interchangeable.

2. Build a schedule of cash receipts and payments

Start with actual data from your business: bank statements, sales reports, purchase invoices and payment terms. Simply dividing the annual result by the number of months is not enough. That average conceals seasonality and periods when funding needs are greatest.

Prepare a weekly forecast for the start-up period and a monthly forecast for subsequent trading. The forecast should cover the time needed to achieve stable sales and a full seasonal cycle. For each period, show:

• cash available at the start;
• customer receipts, based on when payment is expected;
• payments for supplies, staff, premises, utilities and services;
• taxes, social security contributions, franchise-related fees and financing payments;
• planned payments to the owner;
• the closing balance carried forward to the next period.

Keep VAT treatment consistent: if cash flows are recorded inclusive of VAT, you must account for actual VAT payments and any refunds. Do not assume a refund will arrive immediately. Agree the modelling approach with an accountant, particularly if the business is VAT-exempt or subject to different tax treatments.

Next, remove any advantages available only to your existing business. A new franchisee may not secure equally generous supplier payment terms, may pay a different rent and may lack storage facilities. Nor should the model treat the owner’s labour as free. If the owner works in the outlet, show both the economic value of that work and the payments actually planned, without counting the same expenditure twice.

3. Check the lowest balance, not just the average month

Prepare a base case and a cautious scenario. The latter should not rely on an arbitrary reduction in revenue. Identify specific events you have encountered in your own business: slower customer acquisition, a delayed opening, the need to buy stock earlier or a supplier shortening payment terms.

Also test what happens when problems occur together. A delay in starting sales may mean paying rent, wages and financing costs at the same time. Analysing each risk separately can understate the reserve needed.

The minimum post-opening reserve is the largest cumulative cash shortfall plus a justified safety buffer. Calculate the shortfall before including the funding intended to cover that reserve. Then add the reserve to the opening budget, taking care not to count the same payments again.

Separate the franchisee’s own funds from loans, leasing and overdraft facilities. Treat financing as available only once its terms and drawdown date have been confirmed. An overdraft facility that expires before a seasonal fall in sales does not provide lasting security.

Record warning signs too: the balance falling below an agreed minimum, stock rising without sales growth, or payments being delayed. Assign an action, a responsible person and a response deadline to each. A spreadsheet alone will not protect liquidity if nobody responds to deviations from the forecast.

4. Establish responsibility for financial assumptions

Poland has no separate act comprehensively regulating franchising, nor any specific requirement to register a franchise system. A franchise agreement remains an ‘unnamed contract’ — a contract type not specifically defined in legislation — entered into under the principle of freedom of contract in Article 353¹ of the Polish Civil Code. Relevant tax, competition, intellectual property and data protection rules also apply.

There is no specific statutory requirement to provide a franchise disclosure document 14 days in advance. Such a provision appeared in draft legislation; a draft must not be presented as law in force. The absence of franchise-specific regulation does not remove liability under general legal provisions, including liability for acting in bad faith during negotiations.

For this reason, document the forecast’s data sources, preparation date, assumptions and limitations. Identify which figures come from your own outlet and which are estimates. Clearly distinguish a forecast from a guarantee of results. If the model requires regular additional funding, do not conceal that need behind a positive annual result.

Practical takeaway: before expanding your franchise network, prepare a single, verifiable cash flow schedule. If you cannot identify the lowest balance and the source of funding to cover the shortfall, the outlet’s opening budget is not yet complete.