By Charles Dean Smith, Jr., CPA
Strong accounting practices lay a solid foundation for building success as a franchise owner.
In this article, the experts from the Franchise Practice at PBMares outline several best practices for franchise accounting.
Franchise Accounting Best Practice #1: Prioritize Accuracy
When addressing any type of accounting, the starting point for developing best practices is to ensure the numbers are accurate. This should go without saying, but far too often this step is omitted.
Companies can undertake various initiatives to deploy accounting best practices, but without accurate data, these efforts are futile.
Whether it’s recording transactions, preparing reconciliations and financial statements, or analyzing performance metrics, reliable and accurate numbers are more likely to result in:
- Better business decisions
- Reliable financial misstatements
- Fewer compliance issues
- Elevated levels of stakeholder trust
Franchise Accounting Best Practice #2: Really Understand Your Financial Statements
Too often, financial statement preparation and accounting tasks are viewed as an undesirable task that simply checks a box rather than a task that can drive profitability and make a tangible difference for long-term success.
A thorough understanding of the franchise’s financial position enables owners to make well-informed and data-driven decisions regarding important components of the business, including:
- Driving profitability
- Optimizing key operations
- Allocating resources
- Investing capital
By investing time into analyzing income statements, balance sheets, and cash flow statements, franchise owners can identify trends, assess profitability, and pinpoint areas for improvement. Plus, a deep understanding of the financial statements enables franchise owners to detect early warning signs of financial distress and implement corrective actions in a timely manner.
Franchise Accounting Best Practice #3: Consistently Seek Ways to Minimize Expenses
Franchise expenses can seem never ending: royalties, marketing, rent, utilities, payroll, inventory, and taxes. Expenses add up quickly and eat away at profitability.
Accurate and well-managed financial statements make it easier to spot opportunities for cost management in various areas, including:
- Negotiating more favorable terms with suppliers and/or landlords
- Refinancing loans
- Identifying and minimizing inefficiency
- Leveraging franchisor incentives and/or discounts
- Automating routine tasks
Franchise Accounting Best Practice #4: Monitor Key Performance Indicators
Get comfortable using tools like budgeting, forecasting, and cash flow analysis to compare your actual financials to budgeted financials, industry benchmarks, other franchisees, etc.
Setting realistic financial goals and monitoring performance using KPIs enables franchise owners to optimize operating strategies in real-time. Being proactive in this way fosters financial stability, growth, accountability, and transparency within the franchise system.
Franchise Accounting Best Practice #5: Budget for Quarterly Taxes
Most business owners find themselves subject to ongoing quarterly estimated income taxes once they become profitable.
Your taxes will vary depending on the entity type, location, and size of your franchise. Just like legal structure and ownership of the franchise, tax obligations and related considerations can be complicated.
To stay ahead and avoid overwhelm when dealing with tax liabilities:
- Budget for quarterly estimated federal and state income taxes.
- Make payments throughout the year as this will help significantly with cash flow planning and avoid tax underpayment penalties and interest, which have become significant in the past year as market interest rates increase.
- Have your CPA calculate your required or safe harbor quarterly federal and state estimated income tax payments for the upcoming year as they prepare your annual income tax return filing.
- If your business income increases significantly during the year, have your CPA update the estimated income tax calculation and consider paying a higher estimated tax payment amount in the third or fourth quarter.
Estimating and paying quarterly amounts go a long way to facilitate cash flow planning — especially when April 15 creeps up each year.
Franchise Accounting Best Practice #6: Separate Personal & Business Expenses
This is a very important step and unfortunately one that new franchisees often overlook in their first few years owning a business.
Commingling of business and personal finances almost always leads to trouble — especially for income tax filings. Commingling can “pierce the corporate veil” and cause significant issues for your business entity liability protection.
No matter how small the business may be, it’s critical to respect the business entity in terms of separating accounts, maintaining financial statements, and tracking expenses.
Franchise Accounting Best Practice #7: Leverage the Franchisor Systems
One benefit of owning a franchise is being able to leverage the already-established and tested systems and processes of the franchisor. This includes financial policies and procedures for record-keeping, accounting, financial statement preparation, compliance, and auditing.
Following these systems helps to ensure consistency among the franchise network. Using the same policies and systems means you’re speaking the same language as the franchisor and other franchisees in your network, making it easier to call upon them for support as necessary.
Adopting standardized franchisee accounting also allows for easier benchmarking with other franchisees and your peers.
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