5 Key Franchise Accounting Best Practices Every Owner Should Know

Franchise owners, take note! Your business, by nature, is decentralized as it involves multiple locations, inventory, and financial data.

To stay competitive and profitable, it’s imperative to be familiar with essential franchise accounting best practices for tracking royalties, fees, taxes, inventory, payroll, and more.

Here, we delve into best practices that every franchise owner like you should know to keep accounting organized and seamlessly manage cash flow, ensuring transparency and accuracy in reporting financial data and staying compliant.

Maintain Clear and Separate Financial Records

“This is a very important step and unfortunately one that franchisees often overlook. You have to respect the business entity no matter how small the business is in terms of separate accounts, financial statements, and tracking of expenses. Commingling of business and personal finances almost always leads to trouble especially when dealing with income tax filings. Commingling can also cause significant issues with your business entity liability protection and cause the corporate veil to be pierced."

Charles Dean Smith, Tax Partner

The best franchise accounting practices ensure standalone financial records of each location and consolidated reporting to have complete visibility of financial position if you own more than one. Also, experts separate your personal and business accounts, helping you avoid mixing up your expenses and income.

For instance, you are running a chain of BIGGBY COFFEE. You will have different sales volumes, operating costs, and footfalls in every franchise location. This approach makes it easier for you to track cash flow and profitability. You can seamlessly monitor the performance of each unit, identify any issues or opportunities, and make informed decisions about expansions and closures.

Why It Matters

Maintaining separate accounts is the foundation of accurate franchise’s financial reporting, providing a clearer picture of overall business performance. It helps you better understand which locations are thriving and which are struggling.

Standardize Accounting Procedures

You should ensure every financial operation aligns seamlessly with established industry best practices. Having a standard operating procedure (SOP) can reduce the risk of errors, ensure consistency, reliability, and accuracy in your financial reporting, and enhance overall accounting control.

Implement Robust Internal Controls

Rigorous internal controls are essential to safeguard your financial data from errors, fraud, and non-compliance. It’s key to mitigate financial and operational risks and run your franchise business profitably. Let’s delve into key strategies that help every franchise owner to implement robust reconciliation.

Standardizing Accounting Documents – Always keep invoices, receipts, and purchase orders in order. Establish clear guidelines and formats to maintain meticulous records of all financial transactions. This standardization simplifies account reconciliation, eliminating the risk of fraud and inaccurate entries.

“Establishing a regular schedule for recording, reviewing, and reporting financial data is the critical step in organizing your accounting. Adhering to a structured routine, encompassing daily, weekly, monthly, quarterly, and annual tasks, ensures the accuracy and timeliness of your financial processes. This routine should include entering and reconciling transactions, scrutinizing bank statements, generating and analyzing financial reports, and submitting required reports to your franchisor.” - Lou Gervasi, Franchise Owner

Compliance – Proper record-keeping and financial management enable you to stay compliant with federal, state, and local tax obligations, including income tax, sales tax, and payroll tax. It’s imperative for avoiding penalties, legal issues, and reputational damage and maximizing tax efficiencies.

Financial Reporting – Stay ahead with proactive planning by gaining access to comprehensive financial reports enriched with actionable insights through financial intelligence solutions. You can extract key performance indicators (KPIs) relevant to your franchise business goals, consistently monitor them to identify trends, performance, and improvement areas, and make well-informed decisions based on financial data. This helps to evaluate franchise performance standalone and consolidated. You can track progress towards financial goals and maintain financial stability.

Independent Audit – Franchise audits and inspections are complex and time-consuming. However, with a third-party assessment, you can ensure accurate financial records, adding an extra layer of trust and confidence for franchise owners and stakeholders.

Separation of Duties – Establish a clear separation of duties and create a system of checks and balances. It helps to minimize risks associated with errors and fraud. This strategic division enhances internal controls, ensuring accountability and operational integrity.

Seek Professional Assistance

Before diving into numbers, there is a lot to consider as a franchisor or franchisees. That is why it’s crucial to have a deep understanding of franchise accounting intricacies.

Outsourced accounting experts stay abreast with best practices, standards, and regulations, ensuring your franchise stays up to date while using innovative approaches and technologies that drive efficiency and competitiveness.

“Managing accounting effectively is crucial for running my business as it helps me monitor revenue, expenses, and cash flow. With too many things on a plate, there was a need for accounting expertise to generate accurate, timely consolidated and standalone financial statements, including income statements, balance sheets, and cash flow statements. Outsourced accounting options tailored for franchises exist, but there was a fear of losing control.

Before making a decision, I carefully considered factors like standardization certification, accounting expertise and experience, and franchise accounting best practices. My outsourced accounting partner provided continuous support to meet my current needs and accommodate potential future requirements. Their expertise ensures accurate, compliant, and up-to-date accounting, relieving me of the burden and potential pitfalls of DIY financial management.” - Lou Gervasi, Franchise Owner

Of course, the journey of mastering franchise accounting is ongoing, these essential practices equip you to navigate complexities with clarity and conviction. Leverage franchise accounting best practices and take complete control of your financial well-being.

Remember, your ultimate goal is not to keep franchise business running, but to illuminate the path to gain a clear financial picture, make data-driven decisions, and propel your franchise forward. With these accounting best practices in your arsenal, you're well on the way to conquering your franchise goals!