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How to Increase Cash Flow of Your Franchise Unit: Learn from My Mistakes

Cash flow is the life energy of every business, including franchise. Lack of it will drain the life out of your franchise unit – and this is just the beginning.

Franchise unit operation cash flow

Franchise unit operation cash flow

In the midst of economic turmoil today, we heard this advice all the time: In order for your business to survive, you should increase sales, cut expenses.

With all due respect – I don’t think the above is entirely applicable for the rest of us.

Increasing sales and cutting expense in today’s difficult economy is very challenging, if not very difficult for the rest of us. I do agree that the logic behind it is true – however, we have to keep grounded and get real – With the lower purchasing power and higher overall costs, increasing sales and cutting expense sound pretty much contrary.

One key in surviving and thriving today is: Treating your cash flow well. Cash flow is no longer king; it is now the king of kings.

The problem is, your franchise units bear heavy burdens – The monthly royalty fees, marketing fees and other franchising-related fees is killing many franchise units. Even worse, many franchises charge those fees by setting a certain percentage of sales that need to be contributed monthly.

So any problems with that? You see, we must realise that sales don’t always equal profit. Your franchise unit can have outstanding sales figures, but poor profitability, even loss-making. I know because I’ve been there!

Of course, the fees are justifiable (in many franchises) – They are needed to grow the business, in such a way that they are beneficial for both franchisors and franchisees.

However, there’s a way to pursue – a way that I wish I implemented it on my franchise units. You need to make your business run efficient and effectively. Learning from my mistakes and not-by-the-book best practices, here’s some ideas I have:

1. You need cash to make cash

When you run out of cash, your business dies. My franchise units died this way.

The key is not how much cash in hands you have, but how to use the cash wisely – If I were you, I’ll try to get more money not to grow the franchise unit, but to invest in things that can run your business more efficient and effective, with justifiable return on investment (ROI.)

My mistake: I cut maintenance costs and let old (ugly) furniture and broken equipments linger in my stores. The problems are compounding, and eventually drain my franchise units’ cash flow.

What I’m suggesting: Instead of raising your maintenance level, you should invest in durable and energy-efficient equipments (air conditioners, PCs, light bulbs with reflectors, ceiling fans, etc.) You should also invest in highly-durable and visitor-friendly fixtures that encourage visitors to stay longer and buy more from you.

Doing the above can get you surprising return on investment (ROI) – proven and guaranteed, at least in my case and my franchisor’s case.

2. Never lower your service level

Lowering your service level (in retailing, reducing your products’ variety and diversity, reducing serving sizes in restaurants, etc.) is not only repelling customers. Doing so is also reducing the opportunities for your customers to buy more from you (cross-selling.)

My mistake: I cut services and products with low-productivity, trying to implement Pareto’s 80-20 Law – identify which business activities involve 80% effort for 20% result and 20% effort for 80% result, and try to eliminate the more effort-less result one. Somehow, it seems that franchising has some anomalies that repel the effectiveness of Pareto’s Law.

What I’m suggesting: My franchisor tipped me on this: In franchising, 10 + 1 is not 11… 10 + 1 could equal 15. So, instead of cutting non or low-performing products and services, you need to keep them to offer customers more varieties, while focusing on products and services that have the highest profit margins.

3. Hire and manage too many employees too early

Franchises have operating standards that include a minimum and suggested number of staffs that franchisees should hire.

My mistake: I thought that going all-out early with full staffing is the best. Given the fact that my franchisor did allowed us to negotiate staff arrangements, my decision was only resulting in salary expenses for staffs that have low productivity (not because they were procrastinating, but because there were not much customers to serve!)

What I’m suggesting: You do need to start with less, as naturally, your business is smallish in sales volume and customer traffic early on. As your business grow, hire more staffs to support the growth. The key is communicating your need and ideas in staffing with your franchisor, so that you will somehow get more attention (thus, more support) from your franchise HQ.

Any tips to share? Please do so by commenting on this article.

Ivan Widjaya
In franchising, cash flow is the king of kings
Image by Leonardini.

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One Response to “How to Increase Cash Flow of Your Franchise Unit: Learn from My Mistakes”

  • Yes, cash is certainly king! All the more reason franchisees should think outside the box in the marketing efforts and explore various ways of promoting their business with minimal cash outlay. How? It’s relatively easy – Get Off Your Ass! That’s right, franchisees, Get Off Your Ass and get out of the store or office and promote your business to fellow business owners, at community events, to the local newspaper, at schools, etc. Let everyone know who you are and what your business does. Be proud of your business. Develop a strong data base and send emails promoting your business and share stories about how you’ve helped other customers. Most of what I’ve quickly described above can be done with no cash outlay. All it takes is the drive to Get Off Your Ass and make it happen! Some say this is too abrupt and abrasive approach… but not as abrupt and abrasive as losing your business and life savings, right?

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