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Home > Franchisee > Franchise Finance
Franchisees caught up in running their own business for the first time can easily lose sight of the true financial performance of their franchise.
This can result in the common misconception that cash coming into the business is profit, when in reality, only some (or possibly even none) is actually profit.
For a start, $1 in sales almost never equals $1 in profit.
For a retail franchise, the items sold might cost on average 40 cents to buy (plus four cents GST), but can retail at $1 (actually $1.10 including GST).
This creates a GST liability of 6 cents (ie. 10 cents from the sale of the item, minus the four cents on the cost of the item), and a gross profit of 60 cents.
From the gross profit of 60 cents, you must still pay rent, wages, electricity, advertising, franchise fees and all other costs of running the business, so the net profit (what’s left after the running costs of the business have been paid) might be 30 cents.
But then there is a further cost to consider - tax. If you're a company, you're likely to pay roughly 10 out of the remaining 30 cents in tax, leaving a net profit after tax (NPAT) of 20 cents.
To make this 20 cent profit, you had to first spend the 44 cents (40 cents plus four cents GST) to buy the item to be sold in the shop.
While waiting for this item to sell, you had to pay rent, advertising, wages, and all the other costs of running your franchise.
Then once the item is sold, you will have to restock your shelves and buy another item at 44 cents (including GST), plus pay the GST of 10 cents collected on the sold item.
The implications of restocking, paying staff wages, rent and running costs of the business, plus GST and tax on profits at the end of the financial year can have significant cash flow implications for a franchisee and your requirements for working capital. (Working capital is the money a business needs to pay its bills until it is generating enough cash to pay the bills as they come in).
Even a profitable franchise can run into cash flow problems in this simple scenario.
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