Last editedAug 20223 min read
Franchise accounting basics
Whether you’re thinking of taking over a franchise, or you’re new to the world of franchising, it’s essential that you understand how franchise accounting works. When you’re running a franchise, you are taking over an existing brand, and many of your administrative tasks will be outlined for you in your franchise operations manual. It can, however, still be tricky to get to grips with the franchise accounting basics (for example, completing your tax returns or managing payroll).
To stay on top of all your record-keeping, you’ll need to set aside a specified amount of time per week to complete all your accounting tasks. And it may be worthwhile to consider using a software solution to help you streamline and speed up processes, and ensure your accounts are accurate and compliant.
In this post, we’ll look at some franchise accounting basics and offer up some tips to help make doing your accounts easier.
Franchise accounting definition
A franchise is sometimes termed a “business in a box”. It’s built on a proven model and provides services, or items, that have been tested for their marketability. New franchisees are often provided with detailed literature to help them get started with the administration.
Despite all this initial support, running a franchise, as with any other type of business, comes with its own risks. In order to minimise these risks, you’ll need to become adept at franchise accounting and devise strategies for, amongst other things:
Dealing with debt
Tracking KPIs (key performance indicators)
Maintaining a steady cash flow
Pre-purchase franchise accounting tips
Before even taking on a franchise, it’s crucial to carry out some accounting basics to make sure the franchise is a viable operation:
Check past turnover and gross profit percentages against benchmarks for the industry. If there are any anomalies, find out why they are there.
Examine the business overheads and work out historical net profit to give you a true impression of the business’s profitability. In particular, it’s important to look at wage rates to assess whether they are in line with industry benchmarks for this type of business.
Get in touch with a franchising solicitor who can check out your franchise agreement.
Franchise accounting basics
Once you’ve purchased a franchise, don’t stick with the existing accounting system if it’s too complicated. Start your own from scratch if need be, and make sure you include the following procedures:
Check your records on a monthly basis, so that you know who owes you and who you owe. Reconcile your accounts to ensure the money you have in the bank matches your figures.
Check VAT rates and assess all your expenses carefully. Make sure you use all available tax relief on your assets.
Create payment terms, if they’re not already in your agreement, to ensure invoices are raised and paid in a timely fashion.
Remember to include franchise accounting startup costs
Along with a single upfront payment to acquire the franchise, you will probably also incur ongoing franchise fees that need to be paid on a recurring, monthly basis. So, you’ll need to make sure you ring fence this money, so it doesn’t get spent on other things.
It can be helpful to set up automatic payments to avoid missed payments and late fees, since these can add significantly to your debt over time. If your franchisor uses a payment processing provider like GoCardless, they can collect your payments automatically. You need only set up your details once, and your fees are taken from your account via direct debit on every payment date. You’ll also receive an alert every time a payment is about to be taken, so you can keep a close eye on your cash flow.
Franchise accounting software
Accounting software like Xero,QuickBooks and Sage 50cloud can help you streamline your franchise accounting workflows, so that you can scale your business. Make sure to opt for accounting software that gives you customised franchise accounting templates, so you can monitor sales volumes and productivity. The ability to create reports is another useful feature, which allows you to keep an eye on cash flow and financial benchmarks. These reports can show your franchisor how well you’re doing, and identify areas that may need improving.
Running a franchise comes with a lot of responsibilities, including getting to grips with franchise accounting techniques. Hopefully we’ve given you a few tips that will help you get started. It could also be worthwhile considering using franchise accounting software to streamline processes too.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.