5 Things You Need to Know in Franchise Accounting & Compliance

Posted by Cedric Joshua Martinez

Nov 10, 2016 9:00:00 AM

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Owning a franchise adds multiple tasks to your to-do list. It can be easy to overlook a couple of things with how busy your schedule is, but you shouldn’t take these lightly. Forgetting something can have grave consequences, such as paying a hefty fine. You can find below a list of five items that you should remind yourself of while managing your franchise.

Review your documents (or get someone to do it for you)

Business involves a ton of paperwork, whether real paper or digital forms, and accuracy is vital. Without it, misunderstandings will ensue, your daily operations will slow down, and unwittingly, you might even be breaking the law. Franchise accounting is no different and is especially vulnerable to mistakes.

For example, preparing financial cash flow projections is crucial, as it affects both the franchisor and franchisee. Errors in these documents can be seen as deceptive and misleading conduct, which is a criminal offense that leads to the franchisor facing heavy consequences.

On the other hand, franchisees might end up with a bad purchase that could cost them dearly if their plans don’t match up with the real data. Whether you’re the buyer or seller, always make sure that the data is accurate. You can do this by hiring an independent accountant for advice.

Other examples include, but are not limited to: payroll records, employee data, and franchise annual tax reports.

Update your tax tables and pay rates

Award rates are updated every year. You may not see changes in the awards related to your industry, but it wouldn’t hurt to make sure you’re in the right. What would hurt is not adhering to the minimum wage dictated by awards, and subsequently being apprehended by law enforcement.

However, because of how the different states have their own governing bodies, you should…

Take into account international and local laws

Different states can mean different procedures, due dates, forms, persons of contact, and any number of variations. If you’re looking to expand your business beyond your country’s borders, you need to understand the particular laws and regulations that affect your branch.

For example, if you were to set up a branch of your Australian business in the United States, you are required to file business franchise tax which is based on the net worth of your franchise. If you were to set up or maintain a branch without knowing that, that could very well be tax evasion.

Take the time to study the laws that affect your business. Not only will you be avoiding any government penalties, but you may also find opportunities that are not present in your current state or country.

Revenue recognition for franchise fee

Franchise fees don’t stop at the initial purchase. There are ongoing costs and many other smaller expenditures that need your attention. For each, there are certain prerequisites for it to be considered income. Improper identification of finances can lead to the same problems mentioned in the above points, but can be prevented by simply knowing the different fees and the criteria for them to be considered income.

However, do note that the branch must be open to customers first before you can recognise any revenue from your franchise fees. If you’re looking for examples, the biggest one is the next point.

Complete the transaction when selling your franchise

You may decide to sell your franchise and use the money to look for opportunities elsewhere or even retire. However, it won’t be as quick as it may seem. You receive income from the sale only after you have provided all materials and services stipulated in your buyer’s contract. There are also standards that need to be fulfilled even if it is not specifically stated in the agreement.


With these reminders, we hope that your franchise does not suffer from any consequence that could have been easily avoided. If you have any questions about these reminders or franchise accounting in general, we’d be happy to answer them. Schedule a consultation with some of our brightest minds in franchise and bookkeeping.
 

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Topics: Franchise Accounting

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