A successful business doesn’t just happen on its own. While there are many factors involved, the accounting process is foundational. Put simply, accounting is “the process of recording financial transactions pertaining to a business” (Investopedia).
Accounting might be a tedious task at times, but it’s essential to informed decision-making, strategic planning, and the sustainable success of a business. A few examples of what is involved in business accounting include recording sales, tracking inventory, calculating profit, tax management, and financial reporting.
Franchising accounting is similar to standard business accounting, but there are some unique fees and expenses to consider (e.g. franchise fees and marketing expenses).
The Unique Fees and Expenses to Franchise Accounting
When entering a franchise agreement, the franchisee will agree to pay certain fees and expenses to the franchisor. These include:
- Initial fee – This fee doesn’t include all of the startup costs associated with a franchise, but it does cover the franchisee’s right to use the franchisor’s brand, trademarks, and business model. The fee’s amount will vary depending on the franchise.
- Amortizing initial fees – Amortization is “an accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period of time” (Investopedia). In the context of a franchise relationship, this accounting method gives franchisees the option to pay off their initial fee over time while applying it as a tax deduction each year.
- Royalty fees – A royalty is “a legally binding payment made to an individual or company for the ongoing use of their assets” (Investopedia). In the case of a franchise, the franchisee pays an ongoing royalty fee to the franchisor for their support, training, marketing, use of their business model, etc. The fee is usually calculated as a percentage of the franchisee’s revenue.
- Marketing fees – Many times, franchisors will require their franchisees to contribute to various marketing campaigns that are intended to promote the franchise brand. Franchisees might also be expected to invest a certain amount of money into local marketing and advertising strategies.
Additional monthly fees that franchisees should consider in their accounting process include: technology, software, business insurance, training, equipment and inventory, rent, etc.
7 Basic Franchise Accounting Tasks
There are several steps involved in accounting for a franchise business. Each one is essential for effective financial management and decision-making within a business. While the tasks might vary depending on the size, industry, and complexity of the organization, the following are basic tasks in the accounting process:
- Accounts payable processing – The cycle of accounts payable (AP) includes “invoice data capture, coding invoices with correct account and cost center, approving invoices, matching invoices to purchase orders, and posting for payments” (Medius). In short, the AP process encompasses every step for completing a purchase from approving an invoice to paying the vendor. Effective invoice management is crucial to any business.
- Tracking revenue and expenses – In the same way that tracking income and expenses is critical for an individual’s financial success, tracking revenue and expenses is an essential step to running an effective business. Some common business expenses include: employee salaries, rent, utilities, insurance, raw materials, etc. There are various accounting softwares that will automate this process for you, making it easier for you to monitor and organize your business expenses.
- Cash flow management – The term “cash flow” refers to “the movement of money in and out of a company…A company’s cash flow is typically categorized as cash flows from operations, investing, and financing” (Investopedia). Tracking revenue and expenses is a fundamental step to knowing a business’s cash flow, and managing that cash flow effectively is key to a business’s financial stability.
- Amortization of franchise fees – When a franchisee has amortized fees, there will be payments to track and plan for, as well as, yearly tax deductions. It’s important for a business to have a clear understanding on the amortization schedule for its franchise fees.
- Continuing franchise fees – These fees include royalty payments as well as other recurring charges for support services, marketing, training, or technology. While each franchise agreement will look different, all agreements will outline the ongoing fees the franchisee should expect.
- Marketing fees – A notable ongoing expense franchisees need to account for is the marketing fee paid to the franchisor. While franchisees will likely spend money each month on local marketing efforts, they are also responsible to contribute to the cost of the franchise brand’s national marketing efforts.
- Employment management – There are many aspects of employee management that relate directly to the accounting process. Some of these include: calculating employee wages, ensuring proper tax deductions and withholdings, tracking benefits, taking care of employee expenses and reimbursements, offering performance incentives, and more.
Most franchise businesses will include these accounting tasks in order to achieve success.
Interested in Franchising? – Don’t Go It Alone
While accounting for a franchise business is fundamental to its success, it’s not always easy or simple. After all, professional accountants go through several years of training and hold the required certifications. In most cases, it makes sense to hire a professional accountant with franchise experience for your business. Not only does this free up your time for other areas of the business, but it also avoids costly mistakes and promotes accuracy. Working with an accountant as a business owner is sure to save you time, trouble, and money in the long-run.
If you’re interested in starting a franchise business, let FranNet help you get started on the right foot. Our consultants are franchise experts who will provide the resources and guidance you need to make a well-informed decision. FranNet has you covered, from helping you prepare to buy a franchise to choosing the right brand to join. Even better, our services come at no cost to you. Schedule your free consultation now to get started!