Method To The Madness

Q: I am looking to expand my employment service into other cities in the United States. What method is better, franchising or satellite offices?

Bill Poindexter
Career Services Inc.
Via e-mail

A: The answer depends on two things: what kind of business you have and what kind of business you want to have. The kind of business you have now determines whether your agency can be franchised. The kind of business you want to have decides whether franchising is the best way to build it.

Let's start with what you want. If you plan to rapidly expand your concept nationwide, franchising is probably the best choice, says Robert Barbato, associate dean of the College of Business at the Rochester Institute of Technology in Rochester, New York.

Because franchisees--rather than the franchisor--provide the capital for expansion, a business can grow much farther and faster than if it were funded by, for instance, bank loans or internally generated funds. "You could probably sell a few hundred franchises in several years, but you probably couldn't open a few hundred company-owned offices that fast," says Barbato.

If, on the other hand, you plan to add only a handful of offices in a few new markets, company-owned satellites are probably a better choice. The heavy legal and regulatory costs involved in creating a franchise make it impractical for limited expansions, Barbato says.

Also, seriously ask yourself whether you want to become a franchisor, which is very different from being in the employment services business. Are you prepared to handle the more extensive staffing demands necessary to support an entire franchise system? And what about the competition? In an industry with many large, well-established franchises, are you prepared to be the new kid on the block?

Even your management style will likely need to be revised. "A person good at selling employment services may not be good at selling franchises," says Barbato. "For one thing, it's a different customer you're going to be selling to now."

Indeed, franchisees can be difficult as well as different. A renegade franchisee could seriously harm a business's image in the marketplace. Yet the franchisor may have granted a 10-year license and have few options to stop the franchisee's activities.

A company-owned office, on the other hand, is run by a manager who is hired by--and can be fired by--you. However, what a company-owned office gains in control, it may lose in terms of the extra dedication a franchisee is likely to show as compared to a hired gun.

Even if you think franchising is for you, that doesn't mean your business is franchisable, says Geoffrey Stebbins, president of World Franchise Consultants in Southfield, Michigan. No matter how successful your employment service is, it won't work as a franchise unless it appears to be a good business opportunity.

"People get too caught up in the actual product," says Stebbins. "We're not talking about selling employment services. We're talking about `Does the employment service appeal to people as a business opportunity?' "

What makes an appealing business opportunity? The franchise should be based on a concept with pizzazz, says Stebbins, such as a new kind of fast food or a patented technology for repairing automobile finishes. And, he adds, it must produce a superior product or service.

A good franchise concept also must be thoroughly systemized and its operations documented so it can be copied by others. It must be something that can be run in a noncentralized way. Finally, it must produce enough profit to absorb franchising fees and yield adequate return for the franchisees' investment.

Does all that describe you and your business? The fact is, few businesses are likely candidates for franchising. Regardless, there are thousands of franchises out there. Ask yourself what it is that makes you different. If your business passes these tests, go for it. Nothing succeeds quite like a successful franchise.

Q: I'm suffering a cash flow squeeze. How can I increase the amount of cash I have on hand?

Name withheld
Via e-mail

A: When someone squeezes you, squeeze someone else. Go over your accounts receivable to locate overdue payments, then try to collect them, says Ron Torrence, a McLean, Virginia, business consultant and author of Ten Keys to Sales and Financial Success for Small Business (Ten Keys).

Determine if your biggest customers are paid up, he suggests. Accelerating the payment of one large invoice can make all the difference. Torrence recalls one client who needed $100,000 in 90 days to avoid bankruptcy. Going over his accounts receivable revealed several clients who were overdue by a total of $140,000. "He got on the phone and, within 60 days, had collected $125,000 and was able to meet his needs out of his own resources," says Torrence.

Don't forget to squeeze your own business. Look for slow-moving or dead inventory, and try to turn it into quick cash. You may be able to ease your payables pressure by returning stale inventory to suppliers for full or partial credit. Put what's left on sale. "You can even sell [merchandise] at cost or less than cost to convert dead inventory into cash," Torrence says.

Once you get the emergency under control, take steps to avoid a repeat, adds Charles Matthews, director of the Small Business Institute at the University of Cincinnati. Create a cash flow budget that shows where your cash will come from and where it will go for the next month. Extend that to three months and then a year to prepare for long-term surprises, advises Matthews. Anticipate future problems and find a way to eliminate them.

You may be able to improve cash flow by changing your billing procedure, suggests Matthews. For instance, start faxing invoices instead of mailing them. Accept credit cards instead of billing customers for transactions. This way, you may collect the cash when or before you ship the goods.

Find and eliminate severe cash drains. A poor credit policy may be one, Matthews says. "Sales don't count," he reminds, "if you don't get paid."

Make sure you don't spend cash inappropriately. For instance, Torrence says many companies immediately pay for fixed assets, equipment and other large purchases when they should borrow to conserve cash. "Always finance long-term fixed assets with long-term financing," he says.

If you can't figure out where all your money's going, Torrence suggests looking for evidence of internal theft. "Look to internal controls to make sure the bookkeeper isn't embezzling or the goods aren't going out the back of the warehouse," he says. "It does happen."

Managing cash through internal controls, appropriate financing, careful inventory management and effective collection is especially important for fast-growing companies, Torrence says. Growing companies consume more and more cash as accounts receivables and inventory grow. That's one reason so many companies grow fast for a while, then burn out. So, says Torrence, "make sure you have a plan before you hit the growth ramp."

Mark Henricks is an Austin, Texas, writer specializing in business topics.

Contact Sources

Torrence Associates, (703) 356-2821, rtorrenc@erols.com

World Franchise Consultants, (248) 559-1415, http://www.wfcnet.com