Managing your finances is a key aspect of running a franchise. While you don’t need to be a financial expert, understanding the basics, such as maintaining steady cash flow, managing payments on any liabilities, and accessing necessary working capital to support your operations, is vital to keeping your franchise running smoothly.

To understand working capital, it’s important to first be familiar with two other terms—current liabilities and current assets. Current liabilities are the short-term financial obligations that you must pay (e.g., payroll, rent, supplier payments, franchise fees, bills). Current assets are anything the business owns and expects to convert into cash or use up within one year, such as cash on hand, accounts receivable, inventory, and other short-term resources.

Working capital is the difference between a franchise’s current assets and current liabilities. To calculate your franchise business’s working capital, subtract your current liabilities from your current assets. For example, if you have $90,000 in current assets and owe $35,000 in current liabilities, you have $55,000 in working capital. To accurately find these numbers, it is important to keep up with your franchise’s finances and maintain an organized system so that you can pull these figures when needed.

WHY IS WORKING CAPITAL IMPORTANT FOR FRANCHISES?

Franchisees can have several short- and long-term financial obligations. While working capital determines the funds available for immediate payments in the short term, such as product inventory, it can also provide insight into your franchise business’s financial health, which you can track long-term.

While it is important to have enough working capital to keep your franchise business running smoothly, having too much could indicate that you’re not investing enough of your available assets into growing your business. It is about finding that balance between being able to pay for short-term debts and other immediate obligations in full while also spending on your franchise business appropriately. Finding that balance will look different for every franchisee. However, if you find that your working capital is still quite high after paying your short-term debts, finding ways to invest in your business (e.g., ad campaigns, marketing opportunities) may be an appropriate next step.

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CALCULATING THE CURRENT RATIO

The current ratio, also known as the working capital ratio, can also tell you your working capital, as it highlights your franchise business’s ability to make payments on short-term liabilities with short-term assets. To determine this ratio, divide your current assets by your current liabilities. Using the same example as above, you would take your $90,000 of current assets divided by $35,000 of current liabilities, which equals 2.57.

When the ratio equals or exceeds one, your franchise business has enough short-term assets to cover short-term liabilities. However, if it is less than one, you do not have enough assets, which could indicate a liquidity problem. A ratio between 1.5 and 2 is typically recommended. However, it is important to perform this calculation at least on a monthly basis, as current assets can alter and cause changes to your ratio.

FRANCHISING WITH DOGTOPIA

One of the advantages of becoming a Dogtopia franchisee is that you typically have lower working capital requirements due to being service-based as opposed to inventory-based. If you’re interested in investing in a Dogtopia franchise, check out our detailed FAQ, which covers the pet industry, Dogtopia, and your investment. We also have a breakdown of the financial requirements available.

Ready for the next step?  Use our convenient online inquiry form to reach out to our franchising team today.