Short Changing the Books

Most franchise systems take training seriously. New franchisees learn the operating model, brand standards, technology, and, depending on the concept, everything from managing inventory to exactly how many pickles belong on a particular sandwich.

And then comes the financial training.

All too often, that portion can vary in approach and much can be expected from operators who can vary as well. They may be new to the business, or familiar with foundational concepts. They may lack familiarity with the specific way things are handled by the new system. Training can be compressed into a few hours during onboarding, tucked into an operations manual or handled with some variation of, “Here’s the accounting software, and here’s when royalties are due. Any questions?”

There really should be questions. Lots of them.

A franchisee can be an outstanding operator, salesperson, relationship builder or community ambassador and still struggle to understand why a business showing a profit can be short on cash, or not performing as hoped. Financial fluency is a separate skill set, and like any other business skill, it needs to be taught, reinforced and updated.

For franchisors, this is not an individual franchisee issue. Lara Buitrago, a SingerLewak LLP Partner and CPA, one of the firm’s Franchise Assurance and Compliance professionals, says, “weak unit level financial literacy can reduce visibility into potential issues that may impact system performance downstream. It’s important to take two steps back to evaluate training to ensure it is not only for compliance but will be an important tool to support strong financial performance.”

Initial Training Alone Isn’t Enough for Long-Term Success

Initial training is essential, but it generally happens at a uniquely hectic moment.

New franchisees are absorbing a ton of information while at the same time preparing to hire employees, work with vendors, launch marketing, learn new systems and open a location.

The financial questions a franchisee faces before opening are not the same as those that will come up in six months or five years further down the road. A new operator may be focused on startup costs, working capital and cash reserves. The more mature franchisee may need to understand labor efficiency, margin compression, debt service, capital expenditures, unit-level benchmarking or whether the economics support adding another location.

Circumstances evolve.

Bad Accounting Records Can Create Bigger Risk Across the Entire Franchise

Among the biggest risks in the system is a franchisee who takes the almost comically wrong “what you don’t know won’t hurt you,” approach and just ignores the numbers.

That happens.

Potentially as bad is the franchisee looking at numbers that are incomplete, inconsistent, outdated or simply wrong.

Chris Stone, a SingerLewak LLP Director and CPA, also one of the firm’s Franchise Assurance and Compliance experts, says, “I’ve seen enough financial statements to know a spreadsheet can look super official but tell you very little.”

Both Buitrago and Stone recommend – “Think about what can happen when unit-level bookkeeping is weak:

• Expenses are coded inconsistently from one location to another.
• Payroll liabilities aren’t reconciled correctly.
• Loan payments are sometimes recorded entirely as expenses instead of separating principal and interest.
• Owner distributions are confused with operating costs.

It’s important to understand the level of knowledge within the system. For instance, it’s entirely possible that the numbers person hasn’t kept pace with the complexity of the business.

At that point, the franchisee may be making pricing, purchasing, operational or expansion decisions based on a distorted picture of performance. And the franchisor may be doing the same due to reliance on franchise operator information.

Franchisees Must Understand the Fundamentals: Cash Flow, Accounting Basics, Profitability and Unit Economics

One of the most important concepts for any business owner to grasp is that a profitable business can still have cash-flow problems.

A unit can be simultaneously busy and unhealthy.

Sales may be growing but labor costs are growing faster. Revenue can look strong while debt payments or food/product purchases are consuming available cash.

A franchisee may delay paying vendors, stretch tax obligations or use a line of credit to cover recurring operating expenses. None of these issues necessarily appear in a weekly sales report.

Warning signals often start with a whisper.

• Labor costs creep upward.
• Food, product or material costs increase incrementally.
• Replacing equipment is postponed.
• Accounts payable stretch from 30 days to 60, then 90.

Owners often focus on revenue because it’s easy to see, while cash flow and margins quietly deteriorate.

Ongoing financial education will help franchisees recognize patterns earlier.

The goal isn’t to turn every franchisee into a CPA. The goal is to help franchisees become financially capable owners who know what questions to ask, what reports to review, and when something does not look right.

Qualified Accounting Support Matters

A question franchisors should ask more often: Who is actually doing the books at the unit level?

Is it the franchisee? A spouse? Someone who set up the system three years ago but has never returned?

There’s no right answers, just risky answers.

A one-unit operator manages with relatively simple processes. A multi-unit owner may face multiple entities, complex payroll, debt obligations, intercompany transactions, capital planning and increasingly sophisticated reporting needs.

Where Do We Go From Here?

As business becomes more complex, it makes sense to ask Doesn’t an Ongoing training program make more sense?

“Ongoing” doesn’t mean dragging franchisees into a monthly three-hour accounting seminar.

A strong program can be practical and layered.

• Refreshing Understanding on the Basics: Accounting, Bookkeeping, Key Metrics, Franchisor Standards
• Quarterly financial workshops on topics that are meaningful to the Franchise
• Ad Hoc webinars on meaningful topics
• Financial Literacy – equipping operators with more knowledge for consistency
• Annual Refreshers
• And much more.

This content should adapt to the business and the business climate.

Ongoing Financial Education Helps Protect Franchise Growth and Brand Value

Franchising is built on replication, consistency and shared strength.

Enough struggling units can bury the brand’s reputation.

At SingerLewak, our Franchise Assurance & Compliance professionals work with systems to strengthen reporting and build more reliable foundations for growth through Franchise Financial Business Education services.

Better financial information does more than improve the books. It helps improve decisions behind the entire brand.

We believe in this topic and know how important it is to the industry. Let’s talk more about your experiences and what’s keeping you up at night.

Lara Buitrago
Partner, Business Services Group
818.251.1331
[email protected]

Christopher Stone
Director, Assurance & Advisory
949.623.0471
[email protected]