Franchise Accounting Best Practices
As a franchise owner, you enjoy the benefits of expanding your business and earnings without being forced to open and manage individual locations on your own. But to fully enjoy these advantages, it’s important to have a strong accounting strategy. What are some of the best practices to consider? Let’s take a deeper look at the franchised business model and the importance of accounting best practices.
Franchisee vs. Franchisor
The owner of an overall brand or business is known as the franchisor and the individual location owners are known as the franchisees. By leveraging the customer base and brand awareness already established, a franchisor can give franchisees a head-start in establishing demand for their location.
As part of this agreement, the franchisee pays a fee to the franchisor for permission to use the brand, products, or services. There is an initial fee as well as ongoing annual royalties paid by the franchisee to the franchisor. This income is an acknowledgment of the value being given by leveraging a brand or product that is already in demand. These fees usually increase as gross sales or revenue improves. Some arrangements increase payments as profits increase. So, there is incentive to the franchisor to help each location be as successful as possible in growing their top line sales and their profits.
There are implications to this arrangement as the franchisor. First, acknowledging the franchisee income on your financial statements in the right way is important. Second, understanding the fees due to you is critical to ensure you are being paid accurately for leveraging your brand or product. This includes having a clear understanding of gross sales and/or profit so you can calculate what’s owed to you as each location improves its performance. Don’t panic if any of this sounds overwhelming, because there are experienced financial advisors who can help! Learn how an outsourced accountant that truly understands franchise accounting can help you.
The third factor to consider as a franchisor is how to help each location improve these measures over time. After all, the more successful each location is, the more fees you will accumulate. So, how can you as the franchisor help each location improve? Collecting and examining the financial data can help.
Assessing the success of each location and comparing its individual performance against an average of all locations can give you insight into where there may be room to improve and thus provide overarching strategic insight to individual franchise locations. This can only occur if the financial data is collected in a common way throughout the year. Hiring an accountant to create a template for each location to fill out quarterly or annually will make collecting this data much easier. Partnering with a finance and accounting team that utilizes software to create a benchmarking group for your franchise and individual franchisee performance measurement will set you head and shoulders above your competitors.
Improving Franchised Location Performance
Once you collect this data on individual franchised locations, you can use common financial calculations to determine where each one can improve. For example, you can assess each location’s profit by calculating its profit margin. Profit margin is impacted by so many factors, such as price, volume, and even sales region. So understanding an individual location’s profit margin can give you valuable insights into understanding what exactly is driving its margins. (Learn more about profit margin and how to interpret and analyze it.)
As a franchisor, the ability to assess the profit margin of your franchisees is critical to your success and theirs. You can use this information to glean insights and offer valuable advice to your franchisees on actions they can take to improve their profitability. This is especially helpful when working with franchisees whose performance may be trending below other locations. Further, setting standard key performance indicators (KPIs) for each franchisor is not only critical to collecting a true understanding of the health of your franchise business but also allows you to spotlight successful franchises and share knowledge. After all, a rising tide lifts all ships!
There is a lot to consider as a franchisor, but the benefits of collecting fees from allowing individuals to benefit from the demand you’ve built for a product or brand can be high. In addition, expanding your business this way allows you to mitigate your personal risk.
Having the right partner to help oversee the financial aspects of your franchise business is one of the most important steps you can take to ensure your success. An experienced finance partner that is well versed in the accounting and reporting requirements of a franchise business also can support your individual franchisees by ensuring they’re accurately reporting their data, which impacts the fees they pay. Book a call to learn how Simple Startup can help you and your franchisees thrive!