Franchise Success or Failure

The franchise model is very popular these days for building a business.  In order to manage this model most effectively the franchisor should require franchise financial statements.  It’s important to understand not only the individual franchise success or failure but the entire franchising system, as a whole.  

 Franchise Financial Statements

Financial statements for any franchise system serve as a scorecard because they:

  • Help the business owner measure the results of his business

  • Define what the investment world looks at to determine a business’s worth

  • Determine the business’s viability (and ability to repay) to a bank

  • Provide a view into the business for potential buyers

  • Allow the CFO to identify risks to the business

  • Provide the data for royalty fee calculation, collection and royalty reviews

Investing in an accounting system that will allow for streamlined franchise financial reporting is critical.  The accounting application/system should be the same for all franchisees and the owner to be most effective so this should be a required solution for the franchisee and stated in the franchise contract.  Finding solutions that provide franchise model functionality may seem daunting but there are solutions available.

There needs to be a requirement to report up from the franchise unit to the franchise system owner and it must be mandatory as part of their contract.  It’s nearly impossible to get financial data beyond sales and commissions out of the franchisees unless it’s written in as part of the contract.

Host that financial system for all franchise units to enable them to use it safely and securely. This enables the franchise system to get better participation in the financial reporting process. Make sure this system has a solid disaster recovery plan and can quickly return your business to operating status should something happen.

Financial Reporting Requires Consistency

Franchise financial statements must be compared as apples to apples data.  For this, the franchise system requires a consistent chart of accounts across all units.  There is no better way to destroy one’s reporting then to allow for custom COAs at the individual unit level that disable your ability to review data across the system.  

Some key indicators to review once all of the proper systems and procedures are in place, include:

  • Ranking based on net income, not sales

  • Who is getting the greatest return on marketing dollars

  • Who has the best sales to employee ratio

  • Who is carrying the least amount of debt

  • Who is growing the fastest (net income)

  • Who has the best cash flow?

The job of the franchise owner is to provide assistance to the franchisees but you have to know who’s doing things well in order to enable this process to work more efficiently.  Franchise financial statements are key to the success!

By setting up these systems, streamlined accounting system, standardized chart of accounts, hosting the solutions for the entire franchise, the franchise owner enables everyone at every level to function effectively.  CFOs become enabled to provide better insights into the business across the board, not just for a single unit or the units that participated in the request.

In the end, franchise financial statements are the most important component of a franchise system’s ability to identify risk, find successes and to grow their business more quickly.