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- September 21, 2024
Everything You Need to Know About Franchise Accounting
Running a franchise business brings a unique set of challenges. So if you want to become profitable, you will have to focus on a lot of factors, especially, the accounting section. With proper accounting and bookkeeping, you can ensure better growth and profitability. Now franchise accounting is not entirely different, but there are certain points that needs special attention. In this blog, we will cover every detail about franchise accounting.
So, let’s take a look at it.
What Is Franchise Accounting?
Any accounting is all about keeping accurate financial records of all the transactions related to your business. For franchise accounting, it is all about doing the same, but with some additional considerations. These considerations are unique to franchise business model. While managing franchise accounting, you will have to consider factors like specific expenses that are not related to non-franchise accounting.
Now, let’s take a look at the key elements of Franchise Accounting.
What Are the Key Elements of Franchise Accounting?
1. Initial Fees
When you start a franchise, you pay an initial fee to the franchisor. This is the fee that you pay so that you can use your franchisor’s name, branding, and other assets. But you should know that this fee does not cover startup costs. On the contrary, it’s more like a membership fee. This gives you access to the franchisor’s established systems & brand recognition. Also, it gives you the right to use the franchisor’s name, branding, and other assets. It is important to note that this fee does not cover startup costs. Instead, it functions like a membership fee. So, it gives you access to the franchisor’s established systems and brand recognition.
2. Amortizing Initial Fees
Many franchise agreements allow you to pay off the initial fee over time. This is somewhat similar to a loan. This process is known as amortization. You have to keep track of monthly payments until you have paid them fully. So you will need to ensure accurate financial records and can help manage your cash flow effectively.
3. Royalty Fees
Most of the franchisees pay a monthly royalty fee to the franchisor. This is generally a percentage of revenue generated for a particular month. These fees are the compensation to a franchisor for using their branding and support. It’s very important to track and report these fees to maintain a good relationship with the franchisor.
4. Marketing Fees
Sometimes, certain franchisors charge monthly marketing fees along with their standard royalty fees. These fees are used for a franchisor’s overall marketing efforts. This is done to promote the particular franchise and its business growth. But it also helps the franchisor’s overall marketing. So it’s a kind of a win-win situation for both. Marketing fees are a regular expense, just like your royalty fees. So make sure you record and report it accurately.
Basic Accounting Practices for Franchises
1. Track Expenses and Revenue
This is the most basic step. You should start with proper record-keeping of all your business expenses and revenue. You will have to maintain a record of your employees’ salaries, rent, utilities, raw materials, and other overhead costs. Such accurate management helps you better understand your cash flow situation and determine how much profit you are actually making. After all, the whole idea is to become a profitable franchise, right?
2. Separate Personal and Business Finances
This is the most commonly ignored step that most of the franchises make. They do not separate their personal financial records and their business financial records. This is a big mistake. So make sure you separate both of them for accurate accounting and ensure all business transactions are accurately recorded. This makes it super easy to track and report expenses and revenue.
3. Use Accounting Software
There are a lot of accounting software available. You can use them to streamline your bookkeeping processes. Many accounting software programs are designed to handle the specific needs of franchises. This includes tracking royalty and marketing fees. You can use this software to reduce errors, save time, and provide valuable insights into your financial performance.
When to Hire an Accountant?
While you can handle basic accounting tasks yourself, hiring a professional accountant offers several benefits. Accountants have specialized training and experience that can help you avoid costly mistakes and ensure compliance with all financial regulations. Consider hiring an accountant if:
– You lack an accounting background.
– Your franchise has complex financial needs.
– You want to focus on other aspects of your business.
– You need help with tax preparation and filing.
Benefits of Hiring a Franchise Accountant
Accountants who specialize in franchises bring specific knowledge and expertise that can be invaluable. They understand the unique fees and expenses associated with franchises and can provide tailored advice to optimize your financial management. For example, when you hire a professional agency like CROWNGLOBE, you can rest assured that all your franchise accounting woes are managed. We have a dedicated team for franchise accounting management. These experts have extensive experience in managing complex taxation and accounting-related issues for franchise businesses. Additionally, they can help with financial forecasting, budgeting, and strategic planning. Each of these factors plays a critical role in ensuring your franchise business stays profitable.
Wrapping Up
Franchise accounting is all about applying general accounting principles within the unique context of a franchise. It covers managing specific fees such as initial, royalty, and marketing fees, along with general business expenses. So, although basic accounting can be handled independently, hiring a professional accountant can provide a lot of benefits. It ensures better accuracy, compliance, and strategic financial planning.
Proper franchise accounting helps you maintain financial health, avoid potential pitfalls, and focus on growing your business. We hope this guide has offered you much-needed information on franchise accounting. But if you still have some questions about the same, feel free to reach out. Our experts are here to assist.
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