Five Essential Franchise Accounting Best Practices Every Owner Should Know
Updated: May 17
Running a successful franchise business requires more than just meeting service expectations - it also involves understanding the essential financial and accounting responsibilities that come with ownership. To ensure your franchise stays competitive and profitable, familiarizing yourself with the crucial accounting best practices is key.
Let's dive into five franchise accounting best practices to help you better understand how to manage your finances effectively.
1 | Budgeting
Small business owners and franchisees know that managing debt is no small feat. The challenges start before a single product is sold, including the expenses of paying employee wages and franchisor fees. But there are some savvy strategies that can make all the difference. By refinancing debt, keeping a watchful eye on finances, and setting realistic budgets that account for loan repayments, franchise owners can stay ahead of the game.
Forecasting financial performance and setting achievable goals are key to keeping things on track. With some foresight and a little financial planning, small businesses can stay strong and focused and keep on the path to success.
2 | Maintaining accurate books
Franchisees must maintain accurate, detailed financial records to track revenue, expenses, and cash flow. This helps gauge financial performance, identify improvement areas, and make informed decisions.
3 | Understanding financial statements
By understanding financial statements, franchisees can extract key performance indicators (KPIs) relevant to their business goals, monitor them regularly, and make educated decisions based on the data. This helps ensure they are on track to achieve their financial objectives and maintain financial stability.
Financial statements that are essential to franchise accounting:
Income statement: This financial statement shows a franchisee's revenue, expenses, and net income throughout a certain period of time. KPIs specific to the income statement to consider:
Gross profit margin
Net profit margin
Revenue growth rates
Watching these KPIs will help you determine the usefulness of your revenue-generating and cost-saving approaches.
Balance sheet: The balance sheet shows a franchisee's assets, liabilities, and equity over a span of time. Balance sheet-specific KPIs:
Monitoring these KPIs will help you to evaluate your franchise's financial position and determine its ability to meet short-term and long-term obligations.
Cash flow statement: This statement indicates a franchisee's cash inflows and outflows during a stretch of time. Cash flow statement-specific KPIs:
Cash flow from operations
Free cash flow
Cash conversion cycle
By evaluating these KPIs, you can see your cash flow position and determine your ability to generate cash from operations, invest in growth opportunities, and meet financial obligations.
4 | Recording accounts payable and accounts receivable accurately
Accounts payable refers to the money a franchisee owes to vendors, suppliers, or creditors for goods or services purchased on credit. While on the other hand, accounts receivable pertains to the money owed to a franchisee by customers who have purchased goods or services on credit.
Accurate recording of accounts payable and accounts receivable is essential for maintaining accurate financial records and monitoring cash flow. It helps franchisees to keep track of the money owed to them and the money they owe to others, which can help them make informed decisions about cash flow management.
Separating business and personal transactions is also crucial for franchise accounting. Mixing personal and business transactions can lead to errors and make it difficult to track financial performance accurately. It can also complicate tax reporting and make it challenging to identify tax-deductible expenses.
5 | Plan for tax season throughout the year to reduce stress
Remember, in order to lower your stress level during 1099 and tax season, you should be doing all of these things throughout the year. That means capturing supplier information, maintaining timely and accurate books, reviewing financial statements, and having periodic tax planning meetings.
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Focusing on customer service, technology, and accuracy, we're here to help you every step of the way. So why wait? Contact us today and discover the difference we can make for your franchise!