Cash flow budgeting for a franchise: securing a sound start

A profitable business is not automatically a concept that a new franchisee can afford to launch. When developing your existing business into a franchise network, you need to show how money flows during the set-up phase. A well-prepared cash flow budget makes funding requirements clear and helps both parties assess whether the launch is financially viable — without confusing historical results with promises about the future.

1. Adapt your existing business figures for a new start-up

Start with your business’s accounting records, payment flows and actual start-up costs. But do not simply copy the figures from an established unit. It may have repeat customers, fully depreciated equipment and supplier terms that a new business owner cannot yet obtain.

Prepare two separate sets of figures: one showing the existing business’s actual results, and another setting out the assumptions for a new franchise unit. Highlight every adjustment and explain why it is needed.

Pay particular attention to items that can easily be overlooked in the founder’s finances:

• Work that you or family members carry out without being paid at market rates.
• Premises, equipment or administration shared with another business.
• Discounts and payment terms based on long-standing relationships.
• Sales generated through your personal network.
• Central costs that the new unit will need to bear itself.

Also distinguish between costs the franchisor actually covers and items that are merely coordinated centrally. Helping to order a point-of-sale system does not mean you are paying for it. A clear allocation of responsibilities prevents expenses from being omitted or counted twice.

2. Schedule payments for when they actually happen

A profit and loss budget shows income and expenses. A cash flow budget shows when money enters and leaves the bank account. Both are needed, but cash flow determines whether the franchisee can pay the rent when it falls due.

Build the budget month by month, starting with the first set-up expense rather than opening day. Continue until the business has moved beyond the start-up phase and through a relevant seasonal cycle. A weekly overview may be needed during periods when many payments fall due.

Include deposits, premises fit-out, equipment, initial stock, insurance, travel for training and pre-opening marketing. Then add ongoing payments for items such as staff, rent, purchases, systems and agreed franchise fees.

Account for VAT according to the business’s actual circumstances and reporting period. Input VAT may be recoverable without the money immediately returning to the bank account. Also include tax payments, employer social security contributions and loan principal repayments. Principal repayments reduce cash even though they are not an expense in the profit and loss budget; depreciation works the other way round.

Use a simple calculation for each period:

Opening cash balance + cash receipts − cash payments = closing cash balance.

Show financing separately from customer receipts. Distinguish between approved credit facilities and funding that is still only under discussion. Calculate the largest cumulative cash shortfall before new financing, then add a justified buffer. A credit limit is not the same as money that is always available without conditions.

3. Test delays and weaker sales

A single budget scenario can easily create a false sense of security. Prepare a base case and at least one more cautious scenario. The aim is not to predict exactly what will happen, but to identify which events could leave the launch vulnerable.

For example, test what happens if opening is delayed while rent payments begin. Also examine the effects of slower customer growth, late payments from customers buying on account, or suppliers requiring payment in advance. These events affect cash flow in different ways and should not be hidden within a blanket percentage adjustment.

Link sales to clear assumptions: the number of purchases or jobs, average order value and available capacity. Check that staffing and purchasing levels can support the sales you expect. A budget in which turnover grows without a corresponding need for resources can be misleading.

Then agree specific decision points with the prospective franchisee:

• What funding must be secured before committing to premises?
• Which purchases can be postponed without compromising the concept?
• When should the cost base be reviewed?
• What minimum cash balance should trigger a new forecast?

Business funding must also be kept separate from the owner’s personal living costs. If the owner needs a salary from the first month, the salary cost and associated payments must be included.

4. Present the projections without promising a result

Sweden has no comprehensive franchise-specific legislation, but the Act (2006:484) on Franchisors’ Duty to Disclose Information applies before a franchise agreement is concluded. The franchisor must provide clear, comprehensible written information in good time before the agreement is signed. This must cover, among other things, fees and other financial terms of the franchise business.

The Act does not prescribe a specific cash flow budget or a profitability guarantee. The projections are a decision-making tool and must remain consistent with the agreement and pre-contractual disclosures. General rules, such as the Swedish Contracts Act and applicable marketing rules, must also be taken into account.

Date the supporting material and identify its data sources and assumptions. Clearly distinguish between historical results, estimates and contractually agreed payments. Explain which local conditions need to be investigated. A general disclaimer is no substitute for well-founded assumptions.

Encourage the prospective franchisee to review the budget with their own accountant and supplement it with actual quotations and financing terms. Then update the model as circumstances change.

Practical conclusion: Do not proceed simply because the profit and loss budget shows a profit. Make sure the unit’s peak funding requirement is clear, the financing is realistic and both parties understand the basis of the projections.