Getting your accounting right is absolutely crucial for your franchise’s success. New franchises often face unique challenges due to franchising being a strategic business model for expansion and operation.
Many new franchisees struggle with managing their finances, and if these issues aren’t tackled early, they can quickly escalate. Understanding these pitfalls early offers significant benefits, such as better financial control and smoother growth.
Choosing the Right Accounting System
Choosing an accounting system is more than ticking a box—it’s a decision that impacts your business long-term. Your franchisor will often recommend specific platforms to ensure alignment with their reporting requirements. Selecting and implementing an accounting system means evaluating your business needs, understanding processes, and ensuring smooth integration with franchise operations.
Consider whether a cash-based or accrual-based system suits you. Cash accounting is straightforward, but accrual accounting provides a more accurate financial picture.
If possible, hire a bookkeeper familiar with franchise operations. Their expertise helps avoid common mistakes and ensures your accounts are set up correctly from the start. Many franchisors offer training and resources to help new franchisees use the accounting system effectively.
Don’t wait until tax season to set up your system. It’s far better to have everything in place before opening, so you can track every penny from day one without stress. Proper training on your chosen system makes a big difference in managing finances confidently and accurately.
Keeping Accurate Financial Records
Accurate record keeping is the backbone of successful franchise accounting. Open a dedicated business bank account immediately—mixing personal and business finances only causes confusion and errors.
Keep detailed records of:
- Daily sales figures
- All business expenses (keep receipts safe)
- Payroll details
- Royalty payments to the franchisor
- Inventory purchases and stock levels
- All financial transactions (income, expenses, transfers)
Establish a bookkeeping routine that suits you—daily, weekly, or monthly. Leaving it to pile up will only cause headaches later.
Regular account reconciliation is essential to ensure your records match your bank statements.
Using apps to photograph and digitally store receipts can be a lifesaver, saving you from rummaging through paperwork.
Ensure your staff understand the importance of recording every transaction accurately.
Selecting Suitable Accounting Software
Good accounting software is a real asset, helping you stay organised and reducing errors. Look for software that:
- Integrates with your point of sale (POS) system
- Meets the specific needs of franchise businesses
- Offers online access for flexibility
- Provides comprehensive reporting tools
- Can scale as your business grows
Popular options include QuickBooks, Xero, and Sage, but always check if your franchisor prefers or mandates a system. Certified public accountants or chartered accountants can recommend software tailored to your needs.
Avoid overly complex software that might discourage regular use—complexity often leads to mistakes.
Consider both initial costs and ongoing fees. While free versions exist, paid plans usually offer better support and features that prove invaluable when issues arise.
Make sure you and your team receive proper training. Even the best system is useless if no one knows how to use it properly. Consulting with a professional firm can help ensure compliance and efficiency.
Avoiding Bookkeeping and Financial Management Mistakes
Keeping on top of your finances is vital for a franchise to thrive. Franchisees have important responsibilities to manage their finances accurately and comply with franchisor standards. Good bookkeeping helps you spot issues early and make informed decisions to guide your business towards success.
Neglecting these duties could leave you liable for financial mismanagement.
Categorising Expenses Correctly
Properly sorting your expenses matters more than you might think. It’s not just about tax—it’s about understanding where your money goes. New franchisees often lump everything together and regret it later.
Set up clear categories: operating expenses, capital costs, and discretionary spending. Track each category carefully to avoid overpaying. For example, royalties are calculated as a percentage of your sales, so it’s crucial to categorise and monitor these payments correctly. Office supplies differ from large equipment purchases that may require depreciation.
Keep business and personal spending completely separate. Use a dedicated business account and credit card for franchise expenses to avoid confusion at audit time.
Choose software that allows you to customise expense categories to suit your franchise. QuickBooks, Xero, and Sage offer templates—make the most of them.
Review your categories every few months to ensure they still reflect your actual spending. Businesses evolve, and so should your records.
Tracking Revenue and Cash Flow Effectively
Cash flow problems can sink even a seemingly profitable franchise. Keeping a close eye on your income and outgoings is essential.
Record every payment promptly—date, amount, payer, and method. Don’t let this slip or you’ll lose track quickly.
Try preparing weekly cash flow forecasts. It takes effort but helps you spot shortfalls before they become emergencies. Regular tracking also clarifies your profits, enabling better business decisions.
POS systems integrated with your accounting software are invaluable. Less manual input means fewer errors and up-to-date figures.
Be mindful of seasonal fluctuations. Many franchises experience busy and quiet periods, so plan accordingly to avoid surprises.
Monitor accounts receivable closely and set clear payment terms. Chasing late payments is unpleasant but necessary to protect your cash flow.
Regularly audit your revenue records to ensure accuracy and that your financial statements reflect your business performance.
Managing Taxes and Deductions
Tax mistakes can be costly and attract unwanted scrutiny. Knowing what you owe and when is half the battle.
Register for all relevant taxes—VAT, corporation tax, PAYE if you have staff—and keep track of deadlines where you’ll see them.
Keep thorough records to support every possible deduction. Common deductible expenses include:
- Franchise fees and royalties
- Rent and utilities
- Staff wages and benefits
- Marketing costs
- Professional services
Limited companies may qualify for different tax deductions compared to sole traders, especially regarding capital assets and franchise fees.
If possible, enlist an accountant experienced with franchises. They’ll spot deductions you might miss, assist with tax planning, and keep you compliant with UK tax laws.
Set aside money for taxes as you go to avoid last-minute cash flow problems.
Monitoring Financial Statements for Errors
Regularly reviewing your financial statements is essential to catch errors before they escalate.
Reconcile your bank accounts monthly. It may not be glamorous, but it helps identify missing transactions, duplicates, or mistakes.
Every quarter, examine your profit and loss statement and compare it to industry benchmarks or projections outlined in your franchise agreement. Unusual spikes or drops usually signal an issue. Companies must also comply with financial reporting laws, ensuring all statements are accurate and meet statutory requirements.
Double-check your balance sheet, especially accounts payable, receivable, and inventory, as errors here can distort your overall financial picture.
Implement internal controls by involving different people in recording and reconciling transactions. This reduces errors and helps ensure legal compliance.
Schedule quarterly meetings with your accountant to identify and resolve issues before they become serious.
Franchise-Specific Accounting Considerations
Franchising offers a proven business model, making it an attractive option for entrepreneurs. Franchise opportunities span many industries, allowing you to enter established sectors with valuable support and guidance.
As a franchisee, you must balance your franchisor’s requirements with your own business needs. The franchise agreement grants you a licence to sell branded products and services under an established brand. Each franchise operates under consistent rules to protect the brand and promote success.
Many established franchises are supported by organisations like the British Franchise Association, which provide resources and best practice guidance to help franchise owners navigate market complexities and maintain compliance.
Understanding Franchise Fees and Capital Requirements
Franchise fees come in several forms and aren’t just a one-off cost. The initial fee can range from £10,000 to £50,000, depending on the brand and support. This fee is usually capitalised on your balance sheet and amortised over the agreement term.
You’ll need to track:
- Initial franchise fee (one-off payment)
- Ongoing royalties (typically 4-8% of gross sales)
- Marketing fees (often 1-3% of gross sales)
- Technology fees (for franchisor-provided software or systems)
These fees are part of your financial obligations to the franchisor.
Additionally, you’ll require sufficient working capital, often between £50,000 and £250,000, depending on the franchise model.
Before signing, prepare a cash flow forecast covering at least two years to understand when your business will comfortably cover its expenses.
Managing Start-up Costs and Investments
Start-up costs often exceed initial estimates. Beyond the franchise fee, budget for:
- Property costs (deposits, renovations)
- Equipment (essential and optional)
- Initial inventory
- Training (travel, accommodation, staff wages)
- Legal and accounting fees (setting up your company, contracts)
Plan to pay these expenses as they arise and explore financing options if needed.
Keep pre-opening expenses in a separate category, as some may be treated differently for tax purposes or capitalised rather than expensed immediately.
Create a chart of accounts that distinguishes franchise-specific costs from regular expenses. This helps you identify areas where your franchise stands out or needs improvement compared to others.
Aligning with Franchisor Reporting Standards
Most franchisors have strict rules about how and when you report your figures. Expect to:
- Submit regular (usually monthly) reports using their templates
- Use their preferred accounting systems
- Follow their chart of accounts
- Adhere to their revenue recognition policies
Professional accountancy standards, upheld by public accountants and certified public accountants (CPAs), ensure accurate and compliant financial reporting. CPAs are licensed professionals who have passed a rigorous four-part examination, demonstrating their expertise and commitment to ethical standards.
Many franchisors use cloud-based systems that sync with your software, aiding compliance. However, keep your own records too—they’re essential for your own management decisions.
Automate as much reporting as possible to save time and reduce paperwork. This way, you meet your franchisor’s requirements while maintaining control over your business.
Franchise agreements often allow the franchisor to audit your records, so keep them organised. It’s not just about avoiding issues—it’s about protecting your investment.
Get Professional Help
Handling your franchise’s finances doesn’t have to be a solo effort. Professional support can save you time, money, and stress.
At Diamond Accounts, we’ll help you set up your financial systems from the start, so you’re not rushing later.
We can:
- Set up your bookkeeping systems
- Ensure you’re tax compliant
- Assist with future planning
- Identify potential deductions you might miss
- Manage the reporting your franchisor requires
Our accountants stay up to date with the latest tax rules and regulations, helping you navigate complex financial matters with confidence.
Franchise accounting isn’t just about keeping the books—it’s about creating a financial roadmap for your business. The right partner can make all the difference.
Don’t wait until problems arise. Get in touch early to avoid mistakes that could affect you for years.