It is important to have a good understanding of any basic accounting know-how for a franchisee. Help from a local accountant is not enough, you should understand the figures so you can assess the franchise.
Listed below are few important basic accounting know-how for a franchisee.
Reasons to Predict Cash-flow
The cash-flow forecast includes the expected payments to be received and made. Profitability and cash flow crunch can exist together. Likewise, healthy cash levels can still show loss. Not just profits, but cash will ensure timely payment for loans taken. Hence cash flow prediction and management is crucial for the business.
For instance, outstanding payment for electricity consumed. Similarly, outstanding payment to be received from Debtors or customers at the end of the accounting period.
It is safe to advise to have a monthly/quarterly review of the management accounts, in addition to the annual accounts. It is normal for banks to request for 1-3 years of cash flow statements. This helps identify the working capital needs for the business. Be realistic rather than optimistic in your estimates.
Understand your Profit and Loss
Business Plans usually include a Profit and Loss forecast. This can include monthly/quarterly projections for two or three years. This is to help you or potential investors understand the business viability for long term.
Ask your franchiser if you do not understand the information and how it was arrived at in the Profit and loss statement. This could include figures based on the different levels of franchisee performance, or perhaps showing different sizes of outlet. The figures should be based on actual franchisee performance for existing franchise. Likewise, based on the operation of the pilot units for new franchise. Ensure you add back deductions that vary with different franchisee. For instance, depreciation, drawings and salaries.
Law requires that a limited company must produce a profit and loss account each financial year. Self-employed sole traders and partnerships are exempted. However, they will need to complete a self-assessment tax return with similar information. If you are considering taking a bank loan, it will be useful to keep formal accounts ready.
Break-even analysis
Break-even point shows how much sales volume your business needs to start making a profit. Have a realistic expectation on what you can sell for a week/month. Gross profit shows the difference between sales and direct costs. Net profits deducts the indirect costs that do not directly vary with sales.
Balance sheet content
The balance sheet is a statement of the assets and liabilities of the business. Liquidity refers to the excess of current assets over the current liabilities.
Gearing refers to the ratio of the borrowings of a business in relation to its capital, expressed as a percentage. The capital is normally shareholder funds and any retained profits. If its borrowing exceeds its capital, the business is highly geared. This means it is vulnerable to increases in interest rates which drain cash flow.
Understand the reasoning for the items in the balance sheet
Accounting conventions can affect the balance sheet.Try to understand the reasoning for the items in the balance sheet.
Stock can be overvalued or undervalued. For instance, if it is valued on conservative basis at cost and realistic basis in resale, it results in a hidden reserve. On the other hand, the valuation might include a proportion of old stock that is in reality unsaleable so this stock would be overvalued.
These basic accounting know-how for franchisee can only help you understand the financial part. Money is not always the only factor in choosing a franchise. Quality of life and the satisfaction of being your own boss, with support from the franchisor and the franchise network, are also very important.
Read: Tips to Consider in Buying a Franchise for additional information
Read: Franchising – A Safe Haven for Investors & Brand Owners
Source: Franchise World
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