Is the franchise fee considered working capital?
Although often confused with each other, the initial franchise fee and working capital are not the same thing. The franchise fee enables a franchisee to purchase the rights to run their franchise business. This is like a “membership” fee for joining the franchise “club”. On the other hand, working capital is the difference between current assets and current liabilities and is the amount of cash or liquidity you have on hand to cover your business expenses while your new franchise business takes off and moves into profitable territory.
How can you calculate franchise working capital?
Franchise working capital is usually calculated by subtracting total current liabilities from total current assets. Current assets are considered anything that the business can convert into cash within 12 months. Examples include cash in the bank, cash equivalents (e.g. bonds), accounts receivable, stock, short-term investments, prepaid expenses, etc. Current liabilities include accounts payable, bank overdrafts, sales, payroll and income taxes, wages, rent, short-term loans, outstanding expenses, etc. It’s important when doing this calculation of your working capital to ensure that you have at least six months worth of working capital to see your business through.
How can you determine how much working capital a franchise business needs?
Every franchise business is different and will require different amounts of working capital. But to determine how much of this liquid capital you will need, you should look at the franchise’s past financial performance. Comparing the length of time it took other franchisees to break even and reach profitability should give you a good idea of how much working capital you need to cover your costs for a given period of time before you can start earning.
What are some common sources of franchise working capital?
Franchise working capital can be sourced through a number of channels. Among these, you may consider the following options:
- Personal savings
- Business overdraft
- Invoice financing
- Equity
- Trade credit
- Line of credit
- Short-term loans
What happens if a franchise business doesn’t have enough working capital?
A franchisee who would like to ensure business success should have enough working capital in hand to last and cover expenses for a period of time, usually advised as a minimum of six months. Failure to have secured sufficient working capital could result in expenses not being paid on time, not being able to order and purchase stock to sell, being unable to pay salaries, wages and taxes and overall, not “feeding” the business with enough capital at the beginning to see it yielding the right amount of returns for your investment.
