Franchise Finance: A Guide for Understanding Accounting Basics

Alice Tuffery, writer

Published at 11/01/2021, Updated on 23/10/2024 , Reading time: 6 min

Franchise Finance: A Guide for Understanding Accounting Basics — Photo © Franchise_Finance_Basics.jpg

Ever feel overwhelmed by your accounting responsibilities as a franchise business owner? You’re not alone; managing franchise finance can be complicated, time-consuming and energy-sapping. In this guide, we’re covering the bookkeeping basics you need to learn to understand how to read the numbers.

We know franchise finance can be a headache, especially if you’re new to business ownership. Let’s demystify the world of accounting by running through some of the key areas you should understand.

Franchise finance key terms

As a business owner, there are five key aspects of accounting to grasp:

Revenue, income or earnings - all money coming into the business
Assets - any money, items or resources owned by the business
Expenses, expenditures, overheads or outgoings - money paid by the business for any items or services, including staff salaries, rent and utilities
Liabilities - the business’s debts or other financial obligations, such as bank loans
Equity - the business’s total assets, minus the sum of its outstanding liabilities

Getting started

Because of the complexity of franchise finance - and the severe penalties that can be incurred if you get it wrong - you may want to consider using helpful digital tools. Many business owners manage their accounting with the use of Excel spreadsheets, but there is an increasing number of excellent tech solutions out there.

If you decide to use a digital tool, you could opt for a desktop accounting software package or a cloud-based programme. These days, there are even mobile apps to help you manage franchise finances on the go.

A quick guide to accounting basics

Creating a balance sheet

A balance sheet presents a business’s current assets, liabilities and equity. You can use it to get a sense of how well your company is performing; if your liabilities equal more than your assets, there’s cause for concern. Conversely, if you can see you’ve got cash reserves, you can make the decision to grow your business, hire more staff or invest in new equipment.

Ideally, business owners should log their financial transactions regularly. Putting off bookkeeping tasks can result in mistakes and may end up costing you more than you’d otherwise spend.

Creating a profit and loss (P&L) statement

This document records a business’s finances over a period of time. Usually, it includes two parts: operating costs, for income and expenses relating to your everyday activity, and non-operating costs, covering separate items such as interest, payroll and insurance.

The profit and loss statement is ideal for judging how your business has performed over a given time period and making predictions for the future health of the company.

Creating a cash flow statement

Keeping on top of your cash flow is vital for the success of your business. By creating a statement to monitor it, you can quickly see where your money is going and where it’s coming from. In short, cash flow statements hold many similarities with profit and loss sheets, but they don’t take into account non-monetary elements like depreciation.

Using your cash flow statement, you can prepare for any financial complications and plan your next move if you’ve made a good profit.

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Single-entry vs. double-entry bookkeeping

These terms may look like jargon at first glance, but they’re fairly easy concepts to grasp. People use them to describe the way you log your income and expenses.

Single-entry bookkeeping involves noting down just one figure. Every time a sum of money is put into or taken out of your account, it’s logged in either the income or outgoings column.

In contrast, the double-entry bookkeeping method requires two different actions. You note down both a debit (Dr) and a credit (Cr). This system is more useful for most businesses than single-entry bookkeeping, and most accounting software packages use it as default. You always have balanced books and can see exactly how your profit margins look.

Setting up a credit control system

Taking this step is a good idea for any business owner. It involves putting processes in place to help protect against financial issues. To make sure you’re never left in the red, you could establish credit limits, draw up a payment contract for your clients and formalise a procedure to chase late payments.

Meeting your tax obligations

Here comes one of the most dreaded elements of franchise finance: tax. The good news is there are plenty of easily accessible resources out there to help you navigate your responsibilities. Your franchisor will probably also be more than happy to resolve any queries or concerns you have.

Here’s a quick run-down of the key tax payments you’ll need to make on a regular basis:

Income tax
Corporation tax
Value added tax (VAT)
Business rates
National insurance (NI)

Before you can do anything, you’ll need to register with HMRC. You can find more information in our ultimate tax checklist or on the GOV.uk website.

Sorting payroll

Keeping on top of payroll admin means making an organised log of all your employees’ details, including their name, address and tax band. Throughout their time working at your business, you should make a note of any overtime or sick days they accumulate.

In the UK, employers must store information relating to the last three tax years, and certain payroll software packages can take care of your records for you.

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Forecasting and anticipating problems

Knowing how to read the numbers is one thing; interpreting them in order to plan for the future is another skill entirely. However, it’s important if you’re going to protect your business throughout tricky periods.

After you’ve been up and running for a month or so and developed profit and loss statements, you can start to anticipate how your business will perform in the future. Here are a few finance tips to help you get cracking:

Complete market research to find out how your target customers are behaving and whether there are any trends impacting your business. If certain products or services are proving more popular, consider focussing on them to cater to market demand.
Keep an eye on your least popular products. When you know which items are selling slowly, you can make the decision not to put lots of your money into stock that won’t fly off the shelves.
Learn to spot red flags, such as payment-dodging clients and the release of innovative new products.
Try to avoid being overly optimistic - if you set out with limited expectations, you’ll be pleasantly surprised if you exceed your profit goals

Managing franchise finances - more information

We recommend you consult an accountant with experience in the franchise industry, as they’ll be able to guide you as you progress and flag up any potential issues or opportunities.

Also, it’s vital you check regulations for your country or region, as they can vary across the world.

Finally, you can find further details about mastering franchise finance right here at Point Franchise. Read up on the eight steps for getting help from a bank or see our entire catalogue of business guides. Alternatively, just use the search box to find answers to a specific question.