When should franchisees pay themselves a wage?
What franchise buyers need to consider before paying themselves a wage.
Any small business, especially on starting up, needs to be especially mindful of its cash flow.
Cash flow is the life blood of the business. It is not the same as profit, although profit is required to generate cash flow.
Initially, it may take some time for the business to generate cash flow. There will be initial costs in addition to the purchase cost of the business: costs such as capital expenditure for equipment and furniture, stock holding, initial marketing costs, etc. And then there is the time needed to build sales. This is where buying a franchise can be beneficial, as it can take away much of the uncertainty as to whether the business is likely to work, how the marketing is to be done, and what business systems are needed.
All these factors need to be considered before you draw a salary from your business.
It is vital to have a business plan, and a key element of this is a projection of expected cash flows.
Cash flow projections
If you have a cash business it may be that cash will be generated from day one. However, if you need to give credit, or build up your stock levels, you may be making a profit but not generating the equivalent amount of cash flow. In fact, any business expansion can have a severe impact on cash flow, and needs careful planning.
Of course, the business owner will need to take money out of the business, and this should be built into the cash flow projections.
To ensure a business is actually profitable, a market based wage for the owner should be considered in the projections. The owner like anyone else should be paid. If the owner is not getting a wage but working many hours in the business then it really isn’t a profitable business. Initially this may be the case but at some stage it will need to change and be able to pay the wages.
So it is very important to establish both profit and cash flow projections, and monitor these against actual results on a regular basis. For many businesses this will be on a weekly, monthly or even daily basis.
A big advantage in producing profit and cash budgets is that it forces you to focus on some of the key things which will make your business successful: when sales will be made; when money will be received; when creditors will be paid; what ongoing costs there are; what wages need to be paid; what loan repayments, franchise fees etc need to be factored in. And you will also include the amount that you, as owner, need to take out of the business.
The projections should be as detailed as possible. You will likely need some professional help in setting up the reports in such a way that actual results can be compared on a regular basis. Accounting systems readily enable this to be done.
As you continue to monitor your projections this way, you will see how actual results differ and the projections can then be updated. In fact they should be regularly updated. This is particularly important if your business is seasonal, and in any business there are both quiet and busy times.
If you run your business through a company, then, for tax, any money you take out has to be by way of a salary or a dividend. And don’t forget to make provision for superannuation, work cover, and taxation.
So when the cash starts flowing don’t just take it all out – check your projections. You might need to cover a quiet time which is coming up.