Working Capital for a Franchise: How Much Cash to Set Aside

The cost of opening a franchise is not the whole investment budget. After the fit-out and launch, you will still need money for wages, stock replenishment and mandatory payments, even if sales remain low. Joining a franchise network does not remove this risk. Before signing the agreement, calculate your working capital needs: the funds that will allow the outlet to meet its obligations until it generates a steady cash flow.

1. Separate opening costs from operating funds

Start with two separate budgets. The first shows how much it will cost to prepare the outlet for launch. The second shows how much cash you will need once sales begin. If you combine them into a single ‘turnkey investment’ figure, it is easy to spend all your available capital before any money starts coming in.

The opening budget usually includes the initial franchise fee, fit-out, equipment, premises preparation and initial materials. The operating budget covers rent, wages, statutory social insurance contributions, taxes, purchases, utilities, advertising and payments to the franchisor.

Some amounts need particular attention:

• Rental deposit: this money is unavailable for day-to-day expenses, even if it may eventually be refunded.
• Opening stock: this is money invested in products, not a readily available cash reserve.
• Supplier prepayments: the money leaves your account before the goods begin generating revenue.
• Owner’s expenses: if you will be managing the outlet yourself, budget for payment for that work or set aside personal living expenses for the launch period.

For each payment, record the recipient, the reason it is due, the payment date and the source of funding. ‘From future revenue’ is only a valid entry if the forecast shows that the money will arrive in time.

Separately identify expenses that can be postponed without breaching the agreement. This will help you distinguish the minimum cash required to meet your obligations from desirable improvements to the outlet.

2. Turn the financial model into a payment schedule

Profit and cash in the bank are different measures. A sale may be recorded in the accounts today, while payment from the customer or intermediary arrives later. Meanwhile, rent, wages and deliveries must be paid for on their due dates.

Ask the franchisor not just for the projected payback period, but also for the model’s underlying assumptions: sales growth, payment terms, purchasing frequency, seasonality and the breakdown of costs. Check whether the model represents a new outlet or an established one. Figures from a mature outlet cannot automatically be applied to the first few months after launch.

Prepare a weekly payment schedule for the initial period, then switch to a monthly schedule. For each entry, use the date on which money actually moves, rather than the date on which income or expenditure is recognised in the accounts.

Closing cash balance = opening cash balance + cash received − cash paid out.

Allow for customer refunds, payment service fees, stock write-offs and tax payments. Check the applicable tax regime and VAT accounting treatment with an accountant: a model prepared for another business may not suit yours.

If you are borrowing, separate interest payments from repayments of the loan principal. Principal repayments reduce your bank balance even though they are not an expense when calculating profit. Do not treat an approved loan that has not yet been disbursed as available cash.

3. Check which payments cannot be stopped

In Russia, commercial concession arrangements are specifically regulated by Chapter 54 of the Civil Code of the Russian Federation. When calculating working capital, what matters is not the everyday label ‘franchise’, but the terms of the agreement and the obligations attached to it.

Russian legislation does not prescribe a specific mandatory form of pre-sale franchise disclosure. You should therefore not assume that a ready-made working capital calculation will be provided: request one and independently check its assumptions.

Compare the financial model with the draft agreements. List the obligations that remain in place when sales are weak: fixed payments, minimum franchise fees, mandatory services, agreed purchases and rent. For each, establish the first payment date and whether payment can be deferred.

As a general rule, simply not exercising the rights granted under the agreement does not remove the obligation to pay the relevant fees. This is clarified in paragraph 40 of Resolution No. 10 of the Plenum of the Supreme Court of the Russian Federation, dated 23 April 2019. You should therefore not build an automatic waiver of payments into your model if the outlet temporarily stops operating.

If the franchisor offers a deferral or grace period, check the written terms. A deferral does not reduce your overall cash requirement if the accumulated amount later becomes payable in a lump sum. That future burden must also appear in the payment schedule.

4. Calculate your reserve using a downside scenario

Do not choose a reserve based on a universal rule such as ‘enough for a few months’. Stock turnover, payment timings and the proportion of fixed costs vary between business formats.

Prepare a base case and a downside scenario. In the latter, allow for slower sales growth, delayed receipts and increases in certain costs. Base the scale of these changes on supplier terms, seasonality and available data from comparable outlets, rather than an arbitrary percentage.

Check how far cumulative cash flow falls below zero without additional funding. This maximum shortfall indicates the estimated funding needed to bridge the cash gap. Add a separate contingency buffer on top, explaining what it is intended to cover.

Before buying, answer three questions: where is the reserve held, when is it available, and what events would trigger a budget review? Do not count the same money towards both launch costs and the reserve. It is also best to keep personal savings for everyday living expenses separate.

Practical takeaway: buy a franchise with two checked budgets in place — one for opening and one for ongoing operations. If the downside scenario requires money for which you have not yet identified a source, your financial preparation for the purchase is not complete.