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How to spot the early signs that your franchise is in trouble… and some practical advice

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Inside Franchise Business: look out for potential failsYou can take action to avoid a business fail, if you understand what to look for.

Andrew Spring, partner, Jirsch Sutherland, points out seven early warning signs...

1. There is no distinction between personal and professional assets

Where possible, franchisees need to let their company stand on its own two feet. All too often franchisees put the family home up as security for business borrowings, and then when the business gets into financial difficulties they end up losing their home. Too often directors are blurring the line between their business and personal assets - which could cost them everything in the long run.

Before undertaking any business venture, it is worth seeking independent professional advice to stress test the decision making process and to understand the potential risks.

2. Poor cash flow strategy

About 97 per cent of Australian businesses are SMEs and reasons for business failure include inadequate cash flow or high cash use, poor strategic management and trading losses.

Cash flow is the lifeblood of any business, and struggling with a day-to-day cash flow deficit puts a strain on an entire business and limits growth. Implementing a solid billing and debt collecting system will inject much-needed circulation of funds.

Jirsch Sutherland has seen many examples of business owners that fail to invoice - either on time or at all - or they provide extended credit terms. This can have a massive impact on a business’s cash flow.

It’s important to seek advice early, and to educate your customers around your credit procedures. If your terms are seven days, then reinforce those terms. Efficiency is important. Being as diligent with an invoice as you are with the job is crucial; it is not a sale until it is in the bank account.

3. Overspending to build the business

Excessive expenditure, especially on business development, can have a negative impact. This can happen when you buy expensive assets, hire the best talent in town, or move into a bigger office. Make sure you shop around, as there will always be other, less expensive options that meet your needs. And you can always ‘upgrade’ in the future when business is going strong.

Bottom line: if you are spending more than you are charging, you need to take immediate action to restructure your business to generate strong and sustainable profits. In simple economics terms, it is better to run out, than to have too much (this includes human resources); supply should always be trying to catch up to demand.

4. You are at risk of being dragged down by another business

A common cause of insolvency is when a business is pulled down by another failing business. For example, this might be by wayof clients failing to pay money owing, or a partner’s failure to follow through on a business project. When a company goes under, it has a knock-on effect for its suppliers and customers.

This is the perfect example of good franchisees failing because they have run out of cash, even if they are showing profits.

For this reason, cash is king. Ensure you are regularly collecting on invoices and have and enforce strict trading terms.

5. Financial management

It’s an obvious one, but even very good franchisees can get themselves into trouble by bad financial management.

Every franchisee needs to understand how the business works financially, otherwise you have yourself a hobby - not a business. If you are lacking the financial skills - make sure you find someone who can help and steer you in the right direction.

For example, if you don’t know what your gross profit margin and break-even point are, then it is time to seek some financial guidance from your accountant.

6. You are relying too heavily on credit

When used correctly, credit is a great way to expand your business, however borrowing comes at a cost - especially when borrowing money is on the basis of future revenue. Many franchisees rely heavily on credit, helping them to grow - however, reckless use of credit can have a serious impact.

Make sure you are capable of repaying loans even if things don’t go according to plan. And always remember that credit should only be taken if it fits within the established business plan, not simply because it is available.

7. Rising overhead costs and slow to evolve

Franchisees face the same issues as other retailers - rising overhead costs, including rent, staff and stock costs. There is also an added layer of having to pay franchise fees, often based on sales rather than profits which really chews into their margins.

Retailers, including franchisees, need to combat the changing shape of the retail environment, which includes e-commerce, by ensuring that their customers have a “shopping” experience as opposed to a “buying” experience. The shopping experience includes the social, emotional and physical impact that the purchase has on the customer and is the key advantage to traditional retailers.

If implemented successfully, franchise businesses have an opportunity, through their breath of network, to build a culture and present values that appeal to their customers, thereby protecting and growing their businesses.

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