Shoeboxed, the #1 receipt scanner app, asked Caryl Ramsey, bookkeeper extraordinaire, for what you should know about bookkeeping for franchises. Read on!
Franchising is a great option for business owners and entrepreneurs. Franchising is a way for small business owners to reach new markets by scaling their brand. For entrepreneurs, it allows them to own a business that is already established without having to start one from the ground up.
Whichever the case, as a franchise owner, you will need an efficient bookkeeping system in place to attain your goals and turn your franchise into a successful business.
When it comes to your bookkeeping requirements, you will have needs that are different from other types of businesses. Since bookkeeping for franchises is a little more specialized, whether you do your books and partner with someone to do the books for you or hire a bookkeeping business, it’s important to have at least a basic understanding of what is involved in franchise bookkeeping and how it’s different from other business bookkeeping. Not only that but whoever does the books will also need to keep up with constant regulatory changes.
What is franchise accounting?
Accounting is keeping records of all of the financial transactions that are related to your business. Accounting for franchises is the same principle, but since franchises have a different business structure, the bookkeeping method varies in order to accommodate the differences. In particular, franchises have different expenses and fees that aren’t typical in other businesses.
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What are the special accounting needs of a franchise?
When it comes to the bookkeeping needs of a franchise, you can look at it from two perspectives: one as the franchisee and the other as the franchisor. The franchisor is a business owner who provides the business model that a franchisee can invest in. The franchisor offers franchisees the opportunity to become business owners who run their own business without all the risks of a startup. The franchisee then takes the business to a specific location and runs it from there. This way, the business is scaled into a broader market with the goal of spreading the business name and bringing in more revenue.
Bookkeeping needs from the franchisor’s perspective
Franchisors are responsible for creating a proven business model for a brand and then providing support for all of the individual franchisee owners. They’re responsible for overseeing reporting compliance and providing supporting strategies for underperforming stores and franchisees.
From the franchisor’s perspective, the best solution is to partner with a financial professional or accountant who oversees the financial operations of all of the individual franchisee owners. This gives the franchisor a more consistent view of the overall picture, ensures that all standardized requirements are being followed, and forecasts performance based on the single unit and multi-unit level.
Accounting professionals will handle all of the various fees. Marketing fees are just one example. These fees are a monthly expense that franchisors must pay, and since the franchisees benefit too, they also have to cover the fee for marketing costs. The accounting professional will make sure these fees are collected and handled appropriately from there.
Another key bookkeeping service that an accounting partner will provide is to track compliance among all of the franchisees. They will make sure that as a franchisor, all of the franchisees are meeting all of the reporting requirements.
What is item 19 in the franchise disclosure document?
The Franchise Disclosure Document is just one required report that an accounting partner will provide. This document includes Item 19. Item 19 reflects the financial health and financial performance of all of the franchised units. This is a critical report because it is used to attract additional partners, so ultimately it will affect your brand’s success.
Bookkeeping needs from the franchisee’s perspective
Franchisors must have point-of-sale and payroll systems in place. Franchisees will need someone who can integrate their systems to the main system of the franchisor so that he or she can get a snapshot of the bigger financial position across all of the units. Franchisees also need someone to manage the marketing and royalty fees and prepare any required financials and reports.
What are some of the best bookkeeping practices for franchises?
Bookkeeping for franchises is, of course, going to include the typical bookkeeping tasks of monthly bookkeeping, payroll, and paying bills. They also use a standard chart of accounts that is used by the franchisees as well.
1. Keep track of expenses and revenue
Keeping track of expenses and revenue is another important task performed by either franchise owners or franchise bookkeeping services. This is no different than other small businesses and medium sized businesses that need to track overhead costs, profits, revenue, raw material costs, utility costs, rent, salaries, and employee scheduling.
2. Understand unique franchise costs
However, there are some unique franchise costs that need to be taken into account as well. These include the following:
a. Initial fees
Initial fees are fees that are paid upfront when investing in the franchise. These fees are basically for rights to use the name of the franchise and branding.
b. Amortization fees
Franchisees can amortize the above initial fees over time. These monthly fees will need to be kept track of until they are completely paid off.
c. Marketing fees
Marketing fees are monthly fees that franchisors and franchisees pay to cover marketing costs. Marketing strategies are a key element in running a successful franchise.
d. Royalty fees
Royalty fees are paid by the franchisee to the franchisor each month in exchange for using its branding. The royalty fees are a percentage of the revenue.
Bookkeeping services or practices for franchise owners should evolve around a proven business model. This model should include a healthy cash flow, writing off the onetime franchise fees, and an accounting system that includes the required reports.
Whoever is in charge of the books needs to be able to perform and analyze the day-to-day financial operations of the individual units for a stress-free tax season, as well as the brand as a whole. Financial technology is a useful tool for whoever performs the bookkeeping services because it minimizes error and maximizes efficiency.
Frequently asked questions
Franchising fees are considered “intangibles” under Section 179. Therefore, you can deduct the initial and ongoing franchising fees on your tax return.
Franchisors should routinely audit the individual franchisees to make sure that all requirements are being met and that the individual unit is profitable.
Yes, both the franchisor and the franchisee both have special bookkeeping needs since franchises have unique franchise costs.
Franchises have a host of additional financial requirements that non-franchise businesses don’t encounter. Royalty fee collection, marketing fee payments, routine financial reporting, multi-unit economics, and producing an Item 19 are just some of those requirements. Whether you take care of the books yourself or use franchise bookkeeping services, the ultimate goal is to establish and set up a bookkeeping system that will optimize the franchise’s success, ranging from the franchisor to the franchisee.
Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service. She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns. She is also experienced in setting up corporations with the State Corporation Commission and the IRS.
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