franchise.co.nz – PUTTING PEOPLE IN BUSINESS
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Westpac New Zealand
Franchise Awards 2025
Service Provider of the Year
7-Time Winner
Buying a Franchise
Franchise Accountants explain what you
need to get your business started and
keep it going
WORKING CAPITAL
A lack of working capital is the most common reason that businesses fail.
Buying a franchise and trying to run it without sufficient working capital is like
going on a road trip without enough fuel to reach the next petrol station.
What is working capital?
After the initial investment required to get into a franchised business, you’ll
need more money to run the business. Working capital is the money that
you need on a day-to-day basis to buy supplies or stock, pay your power bill,
meet staff wages and all the other things that a business has to do.
When you first open your doors, you are likely to have more money going
out than coming in, so you need enough funds available to make up the
difference. As your business grows, more money should be coming in than
going out but you may still need working capital to buy more supplies or
stock. Plan ahead to introduce more cash to the business by using profits
generated, borrowing more, or releasing funds locked up in the trading cycle.
How much do you need?
The amount you need depends on various factors. Is your business premises-
based or mobile? Do you mainly make cash sales, or give customers time to
pay? Is it a start-up or have you taken over an existing business?
In a typical food and beverage business, customers pay on the spot, whereas
the wages and suppliers are usually paid weekly. This type of business
is often called a cash business, which is defined as having no debtors
(customers who pay on credit terms) and little or no stock.
Contrast this to a service business such as building, which pays its workers
weekly while providing credit to customers who may take weeks to pay. Or
a retail business, which holds stock on shelves, pays rent and wages, yet its
customers pay on invoice.
How does it work?
The diagram above shows how the cash outlaid to deliver a product or
service is finally recovered. The amount of time it takes to complete the cycle
will vary. But whether it’s 20 days or 90 days, the principle is the same.
Cash introduced at the start of the cycle is the working capital. Cash is
replenished at the end of the trading cycle, when the product or service
is paid for.
Stock purchased - To make sales, you need something to sell. Stock
needs to be purchased, and suppliers paid, often before you start to trade.
Consider lead times for restocking and minimum buying quantities. Over
stocking or slow-moving stock lines can lock up cash and impact working
capital requirements.
Wages paid - Staffing levels vary enormously, and you need to pay everyone
on time, every time.
Product or service created - Capital required varies according to each
business. With product businesses, you need stock or ingredients. For service
businesses, you may hold basic parts, pay maintenance costs etc.
Customer invoiced - Do customers pay on the spot or monthly? In tighter
economic times, slow paying customers can put pressure on working capital
of a business, and this can have a domino effect.
Customer pays - Remember, it’s not until money has come in from
customers that you have the cash to fund the next cycle. Profit is not
the same thing as cashflow. Even a profitable business can fail if there is
insufficient cash to fund its growth.
GST/Tax – If the timing is not right between when customers pay you and
when you pay your GST and taxes, that can also put pressure on the working
capital of your business.
Each business has its own cashflow dynamics. Get a cashflow forecast to
assess your working capital
requirements and take
professional advice to help
gain the insights you need
to operate your business. At
the end of the day, it is up to
you to make sure you have
enough fuel in the tank to
complete your journey to
business success.
- FUEL IN THE TANK
Franchise Accountants
www.franchiseaccountants.co.nz
Contact
Philip Morrison & Hayden Cargo
0800 555 80 20
hcargo@franchiseaccountants.co.nz
pmorrison@franchiseaccountants.co.nz
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