I think one of the most fundamental factors that separates successful franchise business owners from those that fail is financial planning. Having adequate cash or access to capital is an essential requirement to running a successful business. Businesses often run losses for periods of time - especially new businesses that are just starting up. Additionally one of the most frequent questions I am asked by new business owners and individuals that are seriously considering starting a new franchise business franchise businessis "When will my business generate enough capital to sustain itself?"
I have mentioned this topic before but decided to dedicate an entire post to the subject because I believe it is so fundamental to achieving success as a new franchise business owner. If there's one thing I want you to take away from this post today, it's knowing that perfectly good and profitable businesses fail when they run out of cash. If your bank account goes to zero and you have creditors, employees, and suppliers lined up waiting for payments and unwilling to keep you afloat; before you know it you will be forced out of business. Many years ago I was fortunate to have learned this painful yet priceless lesson first-hand and I am sharing it with you today: always have a cash reserve and access to capital. Heed my advice and you won't have to learn this lesson for yourself.
Now that you understand why you need a cash reserve, let's discuss determining how large it should be and some excellent sources of funding that are cheap and flexible. To find out how long it will take for your business to become cashflow positive, I recommend calling 8-10 franchisees and asking them how long it took them to become profitable. If you simply average the number of months that you receive as responses, you will get a general idea of when you will begin making money. Additionally you should ask the franchise business owners how much cash they burned through until they were profitable. If you do this and build a good financial model for your business then you will have a pretty good idea of how much cash you should set aside to ensure your success.
Now that you know how much capital you will need to get your business on the road to profitability, I recommend having the majority of your capital cushion be in cash when you start your business. Also if you can open a business line of credit and/or personal line of credit as a backup then you will be in very good shape should your business take longer than expected to achieve profitability. I would also recommend learning how to utilize your IRA or 401k account to invest in a franchise before starting your business. By preparing for the worst, but working hard and hoping for the best, you will find yourself on the path to success.
On a side note, I have decided to purchase a food franchise as my next franchise purchase that I will be acquiring later this year. I chose this mainly because people will always need to eat and I would prefer to own a stable cash-producing business than one that does very well when the economy is good and loses money when the economy slows down.