As you consider starting or purchasing a franchise, understanding financial planning is crucial. Traditional budgeting methods have given way to more dynamic tools like rolling 12-month forecasts, providing not only future insights but also setting a standard for the present. However, many prospective franchisees might not see the value in these forecasts. Here’s why and how you can make the most of financial planning tools.
The Reality of Financial Planning
Many small business owners, including those looking to start a franchise, often focus on the immediate future rather than long-term planning. Here are some common challenges:
- Short-term Focus: It can be difficult to plan beyond the next 90 days when all management tasks fall on a few individuals.
- Constant Adaptations: Small businesses frequently undergo changes, making it hard to maintain long-term discipline.
- Inconsistent Systems: Many small businesses lack systems to generate reliable results consistently.
Why Forecasting Matters
Despite the challenges, forecasting can help you:
- Understand Projected Cash Balances: Knowing your cash flow projections helps you plan for future expenses.
- Strategize Effectively: A forecast provides a roadmap for your business strategy.
- Set Benchmarks and Measure Performance: By setting financial goals, you can measure your progress and make necessary adjustments.
However, detailed forecasts can be overwhelming. Most small business owners, including franchisees, benefit more from impactful financials rather than intricate details.
Steps to Effective Financial Planning
- Understand Your Business Model Analyze your business model by focusing on key operational levers. Prioritize the areas you can most impact, such as revenue and major expenses. Simplifying your financial statements to align with your business model provides clarity on critical areas for strategic decision-making.
- Continuously Adapt Your Model Your business model should be dynamic, adjusting to reflect the current state of your business. Focus on 4-6 key levers influenced by primary assumptions. As your business evolves, so should these assumptions. Stay attuned to potential shifts and prioritize substantial issues over minor fluctuations.
- Benchmark Regularly Set monthly expectations based on your refined business model and compare actual results against these benchmarks. This comparison helps you understand where you need to make changes and focus your efforts.
- Enhance Cash Flow Analysis View cash flow forecasts as trend indicators rather than definitive predictions. Simplify your focus to core elements like revenue, variable costs, and fixed costs. Use historical data for revenue projections and control variables like accounts payable and inventory days to make more accurate cash flow predictions.
Conclusion
As a prospective franchisee, understanding and utilizing effective financial planning tools can significantly impact your success. Focus on impactful financials, adapt your business model continuously, and use benchmarks to measure performance. By doing so, you can navigate the financial landscape more effectively and set your franchise up for success.