In the world of franchising, accurate financial information plays a crucial role in both the success of franchise brands and in supporting franchisees. A clear understanding of the financial health of individual franchise units allows the franchisor to provide necessary support and guidance, while franchisees can make informed decisions to drive profitability and long-term sustainability.
In a recent interview with franchise consultant Tom DuFore of Big Sky Franchise Team, we explored how accurate financial information helps in supporting franchisees, and the practices that both emerging and established brands can adopt to ensure financial transparency and success.
Sharing a Common Chart of Accounts
For emerging franchise brands, focusing on revenue generation often takes precedence over managing franchisees’ financials. Especially when looking at the first 25 or so franchise units, franchisors will often focus on top-line growth over their franchisees’ bottom-line profitability.
However, this is a missed opportunity to support franchisees and ultimately improve growth and revenue for the brand.
DuFore explains, “one of the easiest ways a franchisor can provide support is by sharing a common chart of accounts – keeping accounting records similar so that their bookkeeper or accounting company have it unified in one place. If all the books are being kept in a similar fashion, when the franchisor reads a P&L from the past month or the past quarter, they can more easily assess how that franchisee’s health is doing, comparing from one location to the next.”
Accurate financial information is not only beneficial for the franchisor but also provides invaluable insights and support to franchisees.
Benchmarking and Shared Unit Metrics
DuFore also suggests that franchise owners can benefit from implementing a roll up feature to aggregate franchisee data into a central data point. This kind of system will pull unit metrics together for accurate comparison and data sharing amongst franchisees. This helps the franchisor protect their brand and helps franchisees ensure profitability.
Drawing from his own experience as a multi-unit franchisee, DuFore highlighted the benefit of franchisors setting aside time for monthly financial reviews with their franchisees. These reviews allow franchise owners to share wisdom, advice, and financial benchmarks with franchisees who may lack financial expertise.
He explained, “I was a multi-unit franchisee for many years, and because I wasn’t yet familiar with the industry, one of the things that I requested from my franchisor was a monthly meeting to review my financials. I wanted someone who knew the numbers to be able to sit down with me and say, ‘Your gross margin should be X, and your labor should be Y, and your marketing should be Z percentage points,’ and then be able to reference the data to support those benchmarks.”
Having a centralized hub for financial data offers both the franchisor and franchisee insight into the operations of successful units – data that other locations and operators can use to improve profitability.
Monthly Financial Check-ins
Having monthly check-ins is an excellent option for supporting franchisees as they establish their businesses. It allows franchisors to spend quality time with their franchisees and help ensure franchisee satisfaction. With accurate financials at hand, franchise owners can discuss a franchisee’s profitability, assess performance, and help them plan for the future.
As DuFore put it, “monthly check-ins around financials are the easiest pathway to support the franchisee because a profitable franchise is the gateway to franchisee satisfaction. And franchisee satisfaction is what leads to quality franchisee validation, which leads to future franchise sales, which then becomes an upward spiral of growth. These conversations can become a springboard to talk about the franchisee’s vision and future growth, especially as that franchisee starts to mature beyond their first year or two of operation. They’re no longer as focused on, ‘can I pay my bills?’ They’re starting to think about, ‘what’s next from here?’ And that’s a great opportunity to grow the brand that all starts with having accurate and accessible financials.”
Shared Reporting Portals and Mandatory Reporting
Established brands that operate at a high rate of scale often follow useful practices that emerging brands can learn from. One of the particularly helpful strategies related to financial accuracy is the implementation of reporting portals.
Reporting portals enable franchisees to submit regular P&Ls and balance sheets, providing real-time visibility into their financials. Requiring mandatory reporting and partnering with specialty accounting firms helps brands grow by protecting their reputation and supporting franchisees’ success through accurate financial data.
This also helps franchisees maintain records beyond the basic necessity of accurate tax filing. Many emerging brands will only require franchisees to send in top line revenue reports for royalties. That practice doesn’t help or motivate franchisees to have accurate accounting data below their top line, nor will they gain financial insight into their own operations.
DuFore sees this as a common oversight: “especially for new franchisees and just new business owners in general, having accounting that’s just suitable enough for tax purposes isn’t good enough to run and lead a business and to make business decisions.”
Mandatory reporting of financial data beyond simple top line revenue can help ensure franchisees set themselves up for success. It also provides franchisors the opportunity to help catch issues as they arise, provide suggestions for getting things back on track and ensure the integrity of their brand.
Specialty Accounting Firms Can Help Protect the Bottom Line
While new business owners may find it sufficient to know that their bank accounts are in the green, that basic level of accounting doesn’t help owners understand where there may be leakage detracting from their bottom line. In order to ensure a more profitable business and protect the bottom line, franchise owners need a clear picture of their financials.
Franchise businesses have a host of accounting requirements that single-unit operations don’t. A local bookkeeping service or non-franchise specific accounting firm that simply prepares income and sales taxes won’t give franchise owners a clear insight into their financials. That’s where a specialty accounting provider can really help to ensure profitability. OnePoint Franchise Accounting has the experience and industry knowledge to help franchise operators identify problems, correct processes and plan for better outcomes by using actionable financial data.
While DuFore urges caution around mandating partners for franchisees to work with, having a set of preferred vendors – based on a proven track record and quality of service – can provide franchisees an incredibly helpful starting point. For any brand considering recommending a provider to their franchisees, DuFore suggests running a trial with a limited number of locations. This provides franchisors the opportunity to ensure the quality of their preferred vendors and better support their franchisees.
Supporting Franchisees by Encouraging Better Financials
Ultimately, franchisors want to protect the integrity of their brand and support franchisee satisfaction. Top line financial awareness isn’t enough for long-term sustainability and growth. The best way to ensure franchisee profitability is with clear insight into financial data. Franchisors can support financial clarity through a common chart of accounts, benchmarking and shared unit metrics, as well as mandatory reporting and shared reporting portals.
Partnering with an expert franchise accounting firm can help with all these aspects of financial insight. OnePoint Franchise Accounting provides franchise owners access to reliable, accurate and comprehensive financial data. This leads to better strategic decision making, sustainable business practices and forecasting for future growth. Successful franchisees make a successful brand, and bottom line success starts with effective financials.
July 2023
