Rising interest rates and other pressures: Can franchisees cope?

20 Nov 2015

The recent decision by the South African Reserve Bank to increase the interest rate to 6% has had an impact on all sectors of the economy, from consumers, big conglomerates to franchisees. As with all business enterprises, the economic conditions of the day have a direct and indirect impact on the operations of franchises - their production, management, pricing - and so must be analysed carefully and managed strategically.

Ethel Nyembe.

Image credit: Standard Bank

Ethel Nyembe, Head of Small Enterprise of Standard Bank said: "The recent interest rate hike, combined with a myriad other economic challenges, certainly puts franchisees under pressure, and so, with the rate only expected to rise, they must plan carefully to mitigate the foreseen side effects for future success. Fortunately, there are a number of strategies that can help franchise owners weather this economic storm."

Limit your spending: It is common to underestimate the costs involved in buying, opening and maintaining another franchise, but in a weak economy this can be fatal as consumers cannot spend freely. Rather focus your efforts on improving your current business endeavours and, hopefully, you will still be able to attract customers in these tough times;
Don't skimp on marketing: In times of economic trouble, marketing is usually the first expense to be cut, especially in small businesses, because the effects are less immediate than increasing production, for example. However, this can be a dangerous mistake, particularly if you are competing with many similar outlets. Plan on becoming more visible to your consumer base, especially existing customers - success in this area could see you through a downturn;
Understand the basics of financial management: Every successful franchisee has a comprehensive financial management system in place to keep up with invoicing; debtors, creditors and stock turnover; and targets etc;
Sell unproductive assets: If you have any assets that are not making money, sell them for cash or lease them and use the money to help with productivity; and
Plan your franchise's future: Every business owner should have a plan for future maintenance and growth, and this plan needs to include thorough cash-flow forecasts that are regularly updated and studied, depending on the prevailing economic conditions. If not, cash-flow problems may not be identified in time, leading to financial difficulties down the line.

South Africa's economic problems are set to persist for the foreseeable future; load shedding is estimated to continue for at least five more years. For this reason, franchisees need to modify and streamline their business models to make them more efficient and cost effective, or, in some cases, alter them completely in order to survive.

"For example," said Nyembe, "changing a struggling business to one that takes care of an age-old and ubiquitous consumer need - such as entertainment - can improve profits, but even this cannot act as a buffer against economic hardship. And there is definitely no substitute for thorough planning and meticulous financial management."