Do you know what bookkeeping for franchisees should look like? It can be a bit nuanced when compared to your average business setup.
In this post, we explore financial planning and tracking for franchises. We also get into some technology and outsourcing tips that you can apply to optimize your setup.
Understanding Franchise Bookkeeping
Basics of Franchise Accounting
bookkeeping for franchisees and independent businesses share the same core principles. Tracking income and expenses, managing cash flow, and generating financial statements is foundational. Here is where they differ:
Franchise-Specific Expenses
Franchisees incur costs upfront and also over time, which independents don’t. These include initial franchise fees, ongoing royalty fees, and marketing fees owed to the franchisor. Franchisees must track and categorize these separately.
Standardized Practices
Often, franchisees have to comply with specific reporting and accounting practices that the franchisor sets. This helps them ensure consistency across all franchise locations so that reporting stays simple.
Franchise bookkeeping needs to follow the terms of the franchise agreement. This might involve following specific budgeting or cost allocation guidelines.
Structure of Franchise Financials
Revenue
A portion of franchise revenue comes from standard sales of products or services, just like any other business. In addition, the percentage of gross sales called royalties paid to the franchisor is also revenue.
In some franchise models, revenue sharing agreements might dictate that a portion of online sales go to a central pool. This is then distributed among all franchisees.
Expenses
Franchise fees comprise the bulk of expenses for franchisees. Moreover, franchises often pay specific standardized costs for inventory, equipment, marketing materials, and the like.
These purchases can impact cost structures in a way that does not affect independent business owners. It boils down to the lack of flexibility that franchisees enjoy in terms of sourcing.
Franchisees may also incur expenses for required training programs, ongoing operational support provided by the franchisor, and regional marketing initiatives.
Assets
Because a franchise license represents the right to operate under the franchisor’s brand and system, it is an intangible asset. Required, standard equipment, signage, etc., are also assets.
Brand reputation does not reflect directly on the balance sheet, but the established name of the franchise is a valuable asset. This differs from other businesses because the franchisee can benefit from it immediately.
Liabilities
When loans finance franchise fees and debt, franchisees would record the outstanding balance as a liability.
Some franchise models might have shared liabilities, like joint marketing campaigns financed through loans. The portion of the loan that the franchisee is responsible for would reflect in their liabilities.
Since royalties are typically paid as a percentage of sales, the franchisee must compute them after the fact. This means accrued royalties at the end of an accounting period that haven’t yet been paid to the franchisor. These are also a liability.
Key Bookkeeping Practices for Franchisees
Regular Financial Tracking
Bookkeeping for franchisees must be kept up-to-date for business health. More importantly, meticulous records are crucial because of the level of accountability that franchisors expect.
Business Performance
Up-to-date records give franchisees a picture of much money they are bringing in versus spending. This helps them understand their profitability and identify areas for improvement.
With accurate data, they can make better-informed decisions about pricing, staffing, inventory, and marketing investments. Knowing the details of income and expenses helps them avoid unexpected shortfalls, too. This is vital in planning for future needs.
Tax Requirements
Accurate records ensure that a franchisee can accurately file their tax returns and avoid penalties from tax authorities. Detailed records also provide a backup for any tax deductions they claim on their business expenses.
Franchise-Specific Requirements
Franchisors often require franchisees to submit standardized reports on a regular basis. Up-to-date records make this process smooth and ensure compliance with the franchise agreement.
Some franchisors share financial data with franchisees. Accurate records across the board helps with accurate performance benchmarking against other locations.
Managing Franchise-Specific Costs
Initial Franchise Fee
This is one of those costs that you only need to worry about when doing bookkeeping for franchisees specifically. Understanding these types of fees is vital when considering bookkeeping outsourcing solutions.
This is usually a one-time, upfront payment in full, made to the franchisor for the right to operate a franchise location. It covers a range of costs associated with setting up the franchise, including:
- Training and onboarding for the franchisee and staff
- Access to the brand name, trademarks, and operating manuals
- Initial marketing and advertising support
- Site selection and lease negotiation assistance (sometimes)
The franchisee typically cannot open their location before paying this fee, but some franchisors might offer financing options.
The initial franchise fee is an intangible asset, representing a long-term right to operate the franchise. For tax purposes, the cost is amortized over the life of the franchise agreement.
Royalty Fees
Royalties are ongoing fees paid by the franchisee to the franchisor. This is the franchisor’s primary source of income.
The percentage rate and calculation method for royalties can vary depending on the franchise agreement. It is typically a percentage of gross sales, but some franchises have minimum royalty payments. This allows franchises to continue operating during slow months and not getting cancelled for poor performance.
Franchisees record royalty payments as expenses in the period they are incurred. This can be weekly, bi-weekly, or monthly, depending on the franchise agreement.
Marketing Fees
Marketing fees are another ongoing cost associated with franchises, structured in different ways:
- Percentage of gross sales, pooled and used for national or regional marketing campaigns.
- Fixed monthly or annual fee to each franchisee.
- Co-operative advertising pool used for marketing efforts in local regions.
How franchisees will pay marketing fees depends on their franchise agreement. The fees are then recorded as expenses in the period they are incurred.
Compliance and Reporting
Franchise Agreement
The franchise agreement is a legally binding contract between the franchisee and the franchisor outlining their rights and obligations. It includes specific requirements around operations, marketing, branding, quality standards, and bookkeeping for franchisees.
Operational Standards
Franchisors typically have standardized operating procedures for all franchisees to ensure consistency in the customer experience across all locations. They usually cover:
- Product preparation procedures
- Customer service protocols
- Employee training and staffing guidelines
- Inventory management and purchasing guidelines
- Health and safety standards
FAiling to follow these SOPs can lead to penalties or even termination of the franchise agreement.
Marketing and Branding
Franchise agreements often dictate how franchisees can market their locations, such as:
- Using pre-designed branding elements and logos
- Participating in national or regional marketing campaigns
- Complying with set budgets or co-operative advertising programs
Deviating from these requirements could damage the brand reputation, so they often lead to sanctions from the franchisor.
Financial Reporting
Many franchisors require franchisees to submit regular financial reports according to a certain template. The franchisor uses this information to track the performance of the entire franchise system and identify areas for improvement. Therefore, franchisees need to submit accurate data and meet reporting deadlines to maintain a good relationship.
Legal Regulations
The government imposes certain general legal regulations for all businesses. These include rules around how the business handles health and safety, hiring and management, the environment, and taxes.
Apart from the franchise agreement, franchisees must adhere to all applicable legal regulations in their location. The franchisor might offer guidance or resources, but is not responsible for legal compliance.
Technology in Franchise Bookkeeping
Choosing the Right Bookkeeping Software
Software like QuickBooks and Xero offer solutions that work well in bookkeeping for franchisees.
QuickBooks for Franchises
One of the best features of QuickBooks is their industry-specific templates, which include various franchise categories. These can streamline initial setup and data entry, too.
QuickBooks also allows franchisees to manage financials for multiple locations within a single account. This makes it easier to consolidate data and track overall performance.
Compliance tools within the software system help with tracking and reporting on fees, royalties, and marketing expenses. This helps with franchise agreement compliance.
Other tools generate tailored reports, like royalties and franchise business reviews. These are helpful when monitoring performance and complying with reporting requirements.
QuickBooks integrates with a range third-party apps that franchises commonly use, like point-of-sale systems and inventory management software.
Xero for Franchises
Xero focuses on accessibility from any device and location, and facilitating real-time collaboration between franchisees, accountants, and franchisor representatives. This helps with timely and accurate reporting and communication.
Customization within Xero offers a high degree of flexibility for franchisees to tailor financial data to franchisors’ specific expectations. Xero also offers built-in inventory management features to make things easier within franchise models with physical product sales.
Xero has a robust open API, so it integrates with a wider range of business applications. This can be advantageous for franchises with complex operational needs.
Benefits of Cloud-Based Systems
Improved Efficiency
Cloud-based bookkeeping for franchisees and franchisors allows real-time access to financial data from anywhere with an internet connection. This eliminates the need for physical storage, the risk of sharing stale data. It also facilitates remote bookkeeping.
Centralized systems can automate data entry from multiple franchise locations, reducing manual work and minimizing errors. Integrated point-of-sale (POS) systems and bank accounts automatically feed transaction data.
Cloud-based software often comes with pre-configured templates and workflows suited to specific franchise models. This ensures bookkeeping consistency across all locations and franchisees, simplifying procedures and reducing training time for new franchisees.
Enhanced Collaboration
Cloud-based bookkeeping consolidates financial data from all franchise locations into centralized reports. This provides franchisors and franchisees with a clear view of the overall system’s performance. This facilitates informed decision-making at the corporate level.
Centralized data allows for benchmarking performance so franchisees can compare their results to averages and top performers. Learning from successful practices across different franchise locations fuels success.
Cloud-based software automates tasks to simplify reporting and help franchisees stay compliant with the terms of their franchise agreement.
Outsourcing Versus In-House Bookkeeping
Pros of Outsourcing
Outsourcing bookkeeping for franchisees eliminates the need to hire full-time employees. Outsourcing eliminates the need to invest in additional hardware, software, or office space, too.
You only pay for the services you need, plus, you reduce payroll taxes and benefits costs. Moreover, experienced outsourcing providers can often complete tasks more efficiently than in-house staff.
Outsourcing firms often have teams of skilled professionals specializing in specific areas. This means access to expertise that you might not be able to afford in-house. Outsourcing providers also stay up-to-date on the latest industry trends, regulations, and software so you don’t have to pay for training.
By outsourcing non-core functions, you and your team can focus on core business activities that drive revenue and growth.
Cons of Outsourcing
When you outsource a task, you relinquish some degree of control over how it’s done. Make sure to take care when choosing a partner and always be clear when communicating.
Hidden costs can creep up on you if you don’t factor in all costs associated with outsourcing. Security can also be a major concern if your provider does not implement robust measures to protect your sensitive business information.
Frequently Asked Questions
How frequently should franchisees update their financial records?
Bookkeeping for franchisees needs to be updated in accordance with franchisor requirements. If they want financial reports weekly, then you need to keep that schedule. If they do random checks, then you might consider daily updates, especially if you run more than one location.
What are the benefits of integrating bookkeeping software with other business systems?
Integrating bookkeeping software with other business systems eliminates the need for error-prone manual data entry between different systems. When data is synced across systems, you have a single source of truth, ensuring consistency in your financial records.
Integration with inventory management software allows you to track stock levels in real-time to optimize inventory costs. Integrating with sales tax software automates calculations and reporting.
How can franchisees ensure compliance with franchisor financial requirements?
Franchisees should thoroughly review the financial sections of their franchise agreement to avoid misunderstandings on what’s required. This refers to fee payment as well as reporting, and will inform what bookkeeping system to implement.
Maintaining consistent accounting practices and proper and timely reporting for all financial transactions is crucial for franchisor audits and verifications.
What are the best practices for managing cash flow in a franchise?
Franchisees should develop a comprehensive budget that outlines projected income and expenses for specific periods based on reporting requirements. They should also update cash flow forecasts to reflect changes in sales, expenses, and market conditions.
Developing different financial scenarios with varying assumptions helps franchisees prepare for different possibilities and adapt strategies as needed. This necessitates tracking key metrics to identify trends and potential problems.
Franchisees should also regularly reconcile bank and credit card statements. Using cash flow management software makes all this easier
How can a franchisee differentiate between necessary and unnecessary expenses?
The franchise agreement will outline specific requirements regarding expenses. Some franchisors might have pre-approved vendors for specific supplies or equipment, so these expenses might be necessary to maintain operational standards.
For other expenses, consider if they are essential for the core functions of the business. Evaluate if they directly contribute to generating revenue or attracting customers. Other expenses that have great perceived benefits can be necessary, too.
What Is AccountsBalance?
AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
In Summary
Bookkeeping for franchisees does not need to be a disruptive additional process for an already complex business. If you start putting a few of these tips into practice today, you can get ahead fairly quickly. Within a few short months, you can develop a streamlined system that makes accounting easier.
