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Franchise Accounting

World class accounting from award winning chartered accountants you can trust

A franchise consists of a business model in which a natural or legal person grants the right to a third party to use its brand and work under the same commercial system. Although its origins can be traced back to the Middle Ages, the franchise as we know it today was born in America, in the second half of the 19th century.

By those times Isaac Singer, a manufacturer of sewing machines, realised that he did not have enough capital to manufacture his product on a large scale. Given this situation, Singer decided to grant franchises to several local businesses, which would be responsible for covering the costs of production themselves. As a result, sales of the sewing machines increased and Singer made large profits from the sale of rights.

Almost a century later, the franchise model would be replicated by various companies around the world. Some famous cases are McDonald’s, KFC, Subway, Dunkin ‘Donuts and Pizza Hut.

Frequently Asked How Does A Franchise Work?

When a franchise agreement is made, there are two parts that can be clearly distinguished: the franchisor (the company that gives away the rights to market its product) and the franchisee (the investor that acquires the rights). Through this contract, both obligations and rights are established for both parties.

The franchisor is entitled to receive payments corresponding to the right of entry and a periodic royalty agreed upon.

It also has the power:

  • to control the management of trademarks and other distinctive signs;
  • to demand compliance with the instructions for the operation of the business;
  • to access the necessary documentation to keep proper control over sales and stock of the franchisee.

In return, the franchisor must provide the know-how, patents, supplies and all the necessary elements for the operation of the business.

On the other hand, the franchisee has the right to receive the preparation and technical training required to manage the operations of the company. Their obligations are to pay the right and royalties, maintain constant coordination with the franchisor and respect the established policies regarding quality, price, customer service, among others.

Frequently Asked Questions

What are the advantages?

Sometimes known as a ‘business-in-a-box’, a franchise is founded upon an established model, offering products or services that have been tested in the market already. In some circumstances, the franchisor will make available instructions to help:

  • with setting up, preparation and training
  • with running the day-to-day business
  • develop and maintain and upward trajectory
  • overcome any teething problems

The older a franchise is, the more data there is for them to use and share. The franchisor will no doubt have lived through successful franchisees, and some not so – and consequently, they will get the chance to share these important lessons with you. From this, you should gather a few key performance indicators (KPIs) on which to focus on when handling the business. The result of which should make your life a lot easier.

Other advantages? You’ll most likely take advantage of the brand recognition right from the outset; you might acquire discounted stock, and there’ll also probably be systems in place already that make admin tasks streamlined.

And the disadvantages?

Being driven along by the confidence of what makes a franchise so appealing should be cautioned by some of the varied risks associated, that aren’t encountered by running a traditional business.

  • Extra start-up debt – Those hefty franchise fees upfront are sure to add to the usual start-up costs involved. As is often the case, a franchise will bring with it the burden of a larger payroll bill as well.
  • Staffing from the get-go – As a franchise, the expectation will be to have a team of staff already in place, meaning you managing the HR and payroll of this. This can be an issue, seeing as many smaller businesses begin life as sole traders and grow their staff-base as they evolve.
  • Added overheads – It’s not only wages that you’ll be paying, but those monthly franchise fees will need to be taken care of too. This will all add up, so be aware and clearly manage your cash flow with a keen eye, or even better, hire a firm like Norden’s to look after it all for you.
  • Challenging sales targets – There are a lot of franchises that make a success of offering their products or service at low costs. Traversing along this low margin / high volume business model is not always for the faint of heart, because financial positions can change fast.

What are the aims of franchise accounting?

nderstandably, you’ll look to regulate many of these risks, and even try to eliminate some of the more pertinent ones associated with belonging to a franchise. At the same time, you should aim to make the most of the frequent advantages to being a franchisee too. This means you’ll want to figure out strategies for:

  • Handling your debts
  • The management of your employees
  • Keeping on top of your cash flow
  • Looking after your KPI’s

How to best manage employees?

Nearly all franchises are founded upon customer service activities. What does this mean? It means you’re going to need a staff team who won’t let you down. You’ll have to:

  • Give them excellent training
  • Make sure they stay motivated
  • Plan their time and schedule
  • Pay them on time and comply with tax requirements

Just when everything seems to be going along swimmingly, your top employee decides to take a new job elsewhere and you need to find someone else fast. Sometimes, there may not be the need. There are lots of business software and systems that automate much of the workload, such as:

  • Payroll software which calculates the amount of pay and tax for all your employees. Also, this can fill in your tax forms automatically, and have your team paid straight into their bank accounts.
  • Scheduling apps mean you can create and manage staff rotas, sharing them directly onto their mobile phones, making your employees aware straightaway when they’re next due in.
  • Time-recording software clocks each specific time worked – making your pay calculates dead simple. Your employees can easily install the software on their phones and therefore clock into work through their device.

What are the key performance indicators?

If you’ve got a quality franchisor, then the ingredients to success should be there in front of you. They would have shared with you the few core elements that distinguish their most effective franchisees from the others. These are what is known as the key performance indicators and may fall under things like:

  • How many customers are entering the shop
  • The amount of time customers are waiting to be served
  • Quantities of a certain product you are selling
  • The numbers of recurring customers you get
  • How much you’re paying in wages, in relation to your revenue

The amount of possible KPIs can number in the hundreds, but a canny franchisor will teach you the right areas in which to focus. Get those metrics right, and you’re success will be all the more likely. As a result, franchise accounting and business management become a lot more straightforward.

If your franchisor isn’t able to advise on the right KPIs to action, speak to some other franchisees within the network, or check with a franchise accountant. It’s vital you know exactly where your energies are going to be invested.

Beyond Accountancy

At Nordens we're more than just accountants, we're business experts who can help you achieve the biggest goals.

Nordens Strategic

Our specialist strategic division at Norden’s boasts some of the leading entrepreneurial business minds in the country. They cater towards delivering consistent success stories for businesses looking to achieve all their goals and more.

Through highly tailored guidance, coaching and advice, Norden’s Strategic are able to define exactly how your business can attain new levels of success.

Regardless of how you define ‘success’ for your business, our strategic service is guaranteed to bring about real and lasting change. By partnering with some of the UK’s top business coaches, we steer you along the path to greater future.

Accounting 2 You

Every business, no matter how big or small, needs to make the right decisions. How to best manage your accounts can put huge question marks over your business. Accounting 2 You are here to take that away and provide all the answers you need.

Our bookkeeping branch offers a fully inclusive, comprehensive service that they can trust. Since 2005, our specialist bookkeepers have been successfully managing the accounting of individuals and small businesses.

With experts in payroll analysis, credit control and financial recording, Accounting 2 You will lead your business efficiently and with a real purpose to help you grow and prosper.

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In November 2002, having sold our other business interests off earlier in the year, I decided to set up Nordens Chartered Accountants. The easy part was knowing how to do it, as I had established and built a smaller practice a few years earlier, the difficult part was not following the traditional accountancy path. Having run businesses, both successfully and unsuccessfully, I wanted to help business owners resolve their short term problems and work with them to achieve their longer term goals. Business has always been my interest and I love that I can help business owners achieve what seems like the impossible every single working day.

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