Accounting for Franchise Restaurants

Accounting for franchise restaurants is a business function that’s absolutely critical to get right.

In an industry of thin margins and high-volume transactions, it’s not hyperbole to suggest that consistent and accurate accounting can be the difference between sustained, efficient growth and spiraling decline.

This guide exists to give franchise owners a strategic overview of how to do franchise accounting well. We’ll answer questions like:

• What are common terms in accounting for franchise restaurants?
• What makes accounting for franchise restaurants unique?
• What activities does franchise accounting typically include?
• What’s the best accounting software for franchise restaurants?
• What issues do franchises face in accounting?
• Can accounting for franchise restaurants improve profitability?
• Is outsourced accounting for franchise restaurants a viable solution?
• What is it like working with an outsourced accounting provider?

Our focus will be on high-level, strategic accounting information (as opposed to the tactical facilitation of, say, accounts payable processing), with an eye toward helping franchise owners make good accounting choices. In other words, this isn’t a guide to help you do accounting yourself. It’s a guide to help you understand what good accounting is so that you can implement the systems that will make it happen.

Ready? Let’s get started.

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What are common terms in accounting for franchise restaurants?

Accounting, like any other discipline, has its own language, replete with ideas, terms, and acronyms that you’ll need to understand if you hope to monitor the activities they represent. And franchise businesses have jargon of their own, too.

So, to begin, we’ll define a few key terms at the overlap between franchise businesses and accounting. Most of these terms are, admittedly, basic, but they’re foundational to understanding what franchise accounting is.

Generally Accepted Accounting Principles (GAAP)

In the United States, franchise accounting is required to adhere to GAAP, which, as defined at Investopedia, represents “a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB).”

GAAP exists to provide consistency and comparability in financial information. These standards are occasionally updated as things change; in May 2014, for example, new revenue recognition guidance was put into place that replaced pre-existing standards, with full changes taking effect at the end of 2019 for non-public entities.

Franchisor

The franchisor is the entity that owns the brand assets being franchised. So, McDonald’s, for example, is a franchisor.

Typically, a franchisor offers support like:

• Operating systems and processes
• Brand and marketing investments
• Employee training

To access these benefits (and to operate under the franchise brand name), franchisees pay a fee.

Franchisee

The franchisee is the entity that purchases the rights to operate a business under the franchisor’s brand. In other words, they’re the business that owns and operates 100 Taco Bells in the Midwest. It’s important to note that when we refer to “franchise accounting,” we’re typically talking about accounting for franchisees’ businesses.

Initial Fees

Virtually any franchise agreement includes an initial fee that gives the franchisee the right to operate under the franchisor’s brand. This typically includes conditions around name, trademark, and operating systems. Additionally, the initial fees may also pay for equipment, construction, or renovations that enable opening a franchise location.

Amortization

Amortization periodically lowers the book value of an intangible asset over a period of time. We’ve included the term here because it’s common practice for franchisees to amortize the initial fees associated with franchise startup. A common franchise amortization term is 15 years.

Royalty Fees

In addition to initial fees, franchisees are typically required to pay ongoing royalty fees, as well. These vary across different franchises, but typically the fee is a percentage of gross sales.

Marketing Fees

Many franchises also charge franchisees marketing fees, which power the marketing budget for the brand as a whole and presumably benefit franchisees in the process.

COGS

All right: our first technical accounting term. COGS stands for cost of goods sold, and it essentially refers to how much products cost to make. From Investopedia again: “This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and [equipment] costs.”

In accounting for franchise restaurants, COGS refers only to the ingredients that make up the items on the menu.

Prime Cost

Prime Cost refers to COGS plus labor costs. For franchise restaurants, this is a crucial accounting metric.

Revenue

Hopefully you know what revenue is – it’s the amount of sales brought in (as opposed to profit, which is revenue minus expenses). It’s basic. If this definition comes as a surprise, you will probably have business problems that this page can’t solve. That said, it’s also critical, and if your accounting is in disarray, it can be surprisingly hard to measure accurately over certain periods of time.

We cover some of these accounting terms in a bit more depth here.

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What makes accounting for franchise restaurants unique?

Okay, we’ve defined some common terms for franchise restaurant accounting. Now, let’s go a step further: why do they matter? What makes accounting for franchise restaurants any different from accounting in other industries?

There are a variety of factors that make franchise accounting a unique endeavor. Here are three of the biggest.

Franchise restaurants face stringent regulations for compliance.

First, accounting for franchise restaurants must comply with the regulations outlined by franchisors.

If you’re operating a standalone, mom-and-pop restaurant, you can operate with your own processes and nobody else will notice. If you’re running a restaurant franchise business, though, you’ve got to have your financials reported in a way that lines up with franchisor requirements. Franchisors need to be able to compare performance across locations and between many businesses. Standardization makes this possible.

Consequently, franchisors require compliance in financial reporting practices that make accounting in this industry unique. And, really, accounting is unique to each franchise – accounting for a Taco Bell franchise business requires different reporting than accounting for a Firehouse Subs franchise does, as different franchisors prefer to have data reported in different formats.

Franchise restaurants deal with high-volume purchases across many locations.

Additionally, the franchise business model is contingent on high-volume purchases across many locations. That’s a unique challenge; it means that there’s a lot of data that has to be sorted and a lot of places where accounting can go wrong. Additionally, franchise business operations commonly involve the creation of multiple LLCs, which can compound the complexity of accounting.

Franchise restaurants operate on thin margins.

Finally, franchise restaurants typically operate on thin margins. Successful franchise businesses capitalize on economies of scale to make the model work; when you’re selling a taco for a couple dollars, you’ve got to sell a lot of tacos to make a good profit. This means that optimizing every aspect and process of a franchise business is absolutely crucial.

Accounting for franchise restaurants provides a way to measure and improve efficiency.

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What activities does franchise restaurant accounting typically include?

There is an array of activities that fall under the umbrella of “franchise accounting.” Some of the most common include:

• Accounts payable processing: This is accounting that deals with the payment of the franchisee business’s bills (not including payroll).
• Bank reconciliations: This involves matching the balances in a business’s accounting records to the corresponding information on a bank statement.
• Business tax processing: This involves filing and managing business taxes.
• Cash deposit and credit card verification: This involves confirming that cash deposits and credit card payments are legitimate and finalized.
• Expense and loan accounting validation: This is accounting that validates loan payment amounts and expenses.
• Financial statement processing: This involves the preparation of financial statements for given periods of time (typically monthly, quarterly, or annually).
• Fixed asset accounting: This refers to accounting for fixed assets (assets that can’t be converted easily into cash, like buildings, equipment, or land).
• Operations reporting: This involves analysis of the business’s day-to-day operations to identify inefficiencies and areas for improvement.

Depending on the context, certain high-level, strategic activities may be included within the term “franchise accounting” as well (like CFO services, for example). Typically, though, accounting for franchises deals with tactical activities like the ones listed above.

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What’s the best accounting software for franchise restaurants?

We’ve looked at the activities included in franchise accounting. Now, let’s look at some of the software options that empower those activities.

There are a variety of options on the market. Many are general platforms that can be purposed for franchise restaurant accounting, but some are tailored to the franchise environment specifically. Options include platforms like:

Quickbooks

This is the most ubiquitous accounting software for a reason: it’s robust and it can be used across a wide variety of industries, including within the franchise restaurant industry. Its drawback is that it’s general software; it’s not built specifically for the franchise restaurant environment. It’s not, for instance, set up to deal with 13-period reporting over 4-week spans or built to easily handle multiple LLCs. There are work-arounds (usually through third-party integrations), but these can become tenuous, especially at scale. That said, it offers an impressive array of features – one of which (payroll), is illustrated in the following video.

TouchBistro

TouchBistro, on the other hand, isn’t technically an accounting software; it’s a POS system that derives most of its accounting functionality from integrations. So why are we including it here? Well, the reality is that many franchise restaurants rely on overlapping, complex integrations of myriad systems. TouchBistro is a prime example of a platform with crossover functionality. At the end of the day, while it’s not designed for accounting, it plays a vital role in accounting for the organizations that use it. Built for iPads, it’s made for ease of use in the restaurant environment.

Functions include: inventory management, payroll and tip tracking, and even employee time tracking. These data points are crucial for accurate accounting. TouchBistro does generate some basic accounting reports, but much of the heavy lifting is done by third parties (like Quickbooks) as data is passed through.

Restaurant365

Quickbooks is a general accounting solution that can be applied to a franchise restaurant context, while solutions like TouchBistro are restaurant-specific but not designed for robust accounting. In our view, the best franchise restaurant accounting software is Restaurant365 because it’s built for both; it’s operationally comprehensive (it can manage all back-office functions) and it’s designed specifically for the restaurant context.

Restaurant365 is cloud-based, easily integrable, and, best of all, built to make restaurant accounting easier. Unlike Quickbooks, it’s built with the food and beverage industry in mind. It’s geared toward 4-week / 13-period reporting, it’s equipped to handle multiple LLCs, and it provides a centralized system for data across functions (kitchen, POS, payroll) that makes accounting seamless, especially at scale.

We’ve written about the Restaurant365 solution in more depth here. The bottom line is that it should be strongly considered as you evaluate accounting software for your franchise restaurant.

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What issues do franchises face in accounting?

Regardless of the software that a franchise business chooses, there are also additional questions and issues involved in the accounting function. Here are a few of the most common.

Should the business choose an outsourced or internal accounting solution? In other words, how should the franchise restaurant business structure its accounting function? Internal resources are dedicated to the business and immersed in the environment, but tend to be more costly and less efficient. Outsourced solutions tend to be more efficient, but some businesses are wary of communication concerns or feel obligated to retain current employees.

It’s also common to use hybrid solutions, where outsourced accounting complements internal resources.

How can the business avoid data silos and generate accurate data? Dependable accounting requires dependable data. One of the biggest issues for franchise restaurant business accounting is managing data so that it’s delivered reliably and comprehensively to accounting personnel.

Choosing a comprehensive software like Restaurant365 can help with this, as there’s a central repository for data – this is an improvement over using different platforms for different functions. But if employees aren’t trained in the software and use it incorrectly, data can still be insufficient. Good software and steady compliance across the company are needed.

How should the business scale accounting as the company grows? This is a longer-term issue, but it’s worth considering, especially for growth-minded franchise restaurant business owners. As more locations are opened, will the accounting solution be outsourced? Will internal personnel be able to handle the additional workload?

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Can accounting for franchise restaurants improve profitability?

We’ve discussed common issues that arise in franchise restaurant accounting. Now, let’s cover the biggest benefit to the activity; the answer to the question posed in the preceding title is an emphatic “yes.”

Actually, that’s the end goal for accounting: to provide a clear picture of financial metrics so that businesses can optimize processes for increased profit.

The means toward that end are fairly straightforward. Good restaurant accounting shows financial metrics accurately. Once stakeholders have access to accurate data, they can make more accurate decisions. For example, franchise restaurant accounting might report payroll costs at unnecessarily high levels. Staffing would be adjusted accordingly to improve margins. Or the balance sheet might show a high number of accounts receivable, necessitating action to collect on those accounts.

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Is outsourced accounting for franchise restaurants a viable solution?

Outsourced accounting for franchise restaurants can certainly be a viable solution.

First, it’s cost-efficient and can be a strategic advantage. A few of the benefits include:

1. Additional time for critical personnel. In a scenario where the business owner was processing some of the accounting activities personally, there’s an obvious benefit to removing those responsibilities from their already-overloaded plate. Outsourcing accounting allows these individuals to reclaim some of the hours in the day and rededicate them toward areas of higher impact – perhaps freeing them to work on ensuring process optimization or giving them the time to plan for new locations. The same is true for internal accounting resources.
2. Access to financial expertise. One of our core beliefs is that businesses with access to financial expertise are far more likely to succeed. Outsourced accounting allows franchise restaurant businesses to tap into expertise that’s been developed across similar organizations. An outsourced provider has served other restaurant businesses and can bring insight from that background to bear to make processes run more efficiently.
3. Scalability. Internal accounting departments typically require one person per six restaurant locations, while optimized outsourced teams can serve twelve locations at a cost that’s lower than a single internal hire. Let’s say your business is planning to open 10 new locations in three years; it’s much easier to do that with an outsourced accounting solution than it is to grow an internal team over that time span.

Additionally, the best outsourced accounting solutions negate many of the concerns that business owners associate with outsourced providers:

• Good outsourced solutions communicate well. We ensure, for example, a dedicated point of contact for each account who often spends face-to-face time in ensuring client needs are met.
• Good outsourced solutions can complement the capabilities of internal teams. Internal and external solutions don’t have to be mutually exclusive, especially when you work with an outsourced provider that has experience in tailoring solutions to the restaurant environment.

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What’s it like working with an outsourced accounting provider?

As we’ve seen, choosing outsourced accounting for a franchise restaurant business can provide notable benefits. So, how does it work?

At a tactical level, here’s what’s involved.

Transition

This is the phase that most businesses often dread, but it’s also the catalyst to financial stability and improved performance. We typically begin engagements assuming a 30-day transitional period.

Here’s what the transitional period entails:

• We put together a checklist of items and activities that need to be transitioned. This may mean processing data or addressing security factors. It may also mean identifying and remedying historical issues – a pending sales tax audit, substandard accounts payable practices, etc.
• We gather information to create a calendar schedule for deliverables – vendor payments, payroll processing, required statements, bank reconciliations, etc. – to plan appropriate processes.
• We follow the schedule and begin to build the financial infrastructure that will enable consistency and future optimization.
• We hold regular status calls to monitor progress. The frequency of these may vary depending on client preference, but our goals are to ensure understanding of new processes and to quickly identify and remedy any speed bumps.

Maintenance

During this phase, processes begin to develop a consistent rhythm. This allows for a steady accumulation of data that will ultimately pave the way toward better insight and growth.

This period entails:

• The continual processing of included services.
• The generation of valuable reports from accumulated data – cash flow performance, etc.

Performance

The final phase of our engagements capitalizes on sound foundational accounting processes to position businesses for growth.

When our clients reach this phase, they’re no longer held hostage by chaotic financial situations. Instead, they’re free to view all of their data in order to make better business decisions – and we help to guide them as they do so.

This period entails:

• The continual presentation of impactful data. With the basics taken care of, we can present more data more consistently.
• Business process optimization. Thanks to a clearer financial picture, businesses are often able to identify areas where optimization could produce growth. During the performance phase, we help to point these areas out and work with businesses to improve them, sometimes in a CFO capacity.
• Increased transparency in finance and accounting processes. We take the time to build transparency into our engagements by producing trial balances and reconciliations that could be picked up and applied by anyone. This enhances freedom and eliminates the possibility of an accounting black box.

The Outcome

Here’s what a functional engagement looks like:

The business owner has a full understanding of financial data. On a monthly basis, all services are processed consistently and accurately like clockwork, and relevant parties can access financial documents as they’re posted via a secure portal from anywhere with internet access.

Communication over processes is fast and easy. A quick email or call to a dedicated point of contact can clarify information as needed.

And, best of all, the business’ financial functions are aligned with its goals – making meeting objectives much easier and unlocking the ability to scale in a way that previous solutions never could.

We’ve written about the process of outsourced accounting in more detail here.

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Want to Learn What Outsourced Accounting Could Look Like for Your Franchise Restaurant Business?

Hopefully, this page has been helpful as you consider what good accounting for a franchise restaurant business should look like.

If increased efficiency and full clarity into financial data sound appealing, let’s talk.

At Global Shared Services, we provide restaurants with outsourced accounting and financial services that are priced below the market and perform above it. Get in touch with us today to take the first step in empowering your franchise restaurant business with better accounting.