How to Avoid the Five Most Common Bookkeeping Mistakes Franchisees Make

Doing the bookkeeping for your business is never anyone’s favorite task but it is one of those things you have to take on as part of becoming a business owner. The challenge is that although it can seem simple it often is a little more involved than most people realize. Combine that with a tendency to put it off and you can see why many people quickly run into problems with their books. The good news is the problems franchisees have are predictable and avoidable if you just follow a few simple steps.

Don’t wait to get started

This is the number one most common error new owners make and it is also the easiest to avoid. In all the excitement (and terror!) of opening your new location, getting the books done is often low on the list. You’ve got agreements to sign, people to hire, marketing material to order, insurance to sign up for and on and on. Since no one is asking for your bookkeeping to be done right now, it is easy to let slide.

The problem is all those expenses I just named need to be captured so you don’t overpay your taxes. You also want an accurate record of how much you’ve invested in the business so you can make sure you’re getting a good return. And you want to keep a close eye on cash flow because you want to reach breakeven as soon as possible so you don’t run out of cash to keep the operation going. All of these things require good books and trying to get it all figured out after the fact is much harder and more likely to result in lost information.

It is also easier to start when things are still slow and you have time to develop a processTT rather than waiting until you are so busy you don’t have time to even figure out if you are doing it right. If you aren’t going to do it yourself or you find it continuing to fall to the bottom of the priority list then at least connect with a quality bookkeeping service to take care of it for you.

Get the correct chart of accounts

The Chart of Accounts is the list of places that money can go in your business. Most owners are at least passingly familiar with the profit and loss report, which shows income and expenses. All of the line items on that report are accounts in the Chart of Accounts. Less well known is the balance sheet, which shows you things like your bank accounts, loans, credit cards, taxes owed and the amount of equity you have in your business. All those line items are also accounts.

There are lots of reasons to have your chart of accounts set up properly. For one, your franchise may have a standard one they want you to use so your reporting is consistent with other units and they can review your books according to a standard system.

Another reason to have your accounts set up properly is it makes life easier for you in keeping your books straight. If all of your income is lumped into one account, you can’t tell what portions of your business are doing well and which aren’t. If you have an office expenses account and an office supplies account, you may have trouble remembering what goes in which and that in turn will make your numbers jump around inconsistently.

You also want to make sure you have your loans, lines of credit and equity accounts straight so you aren’t counting loans as income or investments into the business as taxable. It will also ensure you are getting credit for interest expense you are paying and that loans balances stay accurate.

Overall, having your Chart of Accounts set up correctly and efficiently for your operation is going to save you time and headaches down the road and possibly avoid costly mistakes with taxes. This is the foundation of your accounting so doing it right helps make sure everything else is going to be able to be done right as well.

Make sure you understand how the royalties are calculated

Each franchise system is a little different in how they do things and it is in your best interest to understand exactly how they will calculate what you owe and make sure you are in agreement! For example, one of our clients, a ServPro franchisee, does a fair amount of work that is outside the franchise agreement for royalty payments and so we helped him set up his books correctly to break out that work from his other income so he could pay the correct royalty amount and he had plenty of back up if there was ever a question from the home office.

We also have a client who is an Edible Arrangements franchisee who had some questions about their merchant account and how things were being recorded. Fortunately, we were able to help spot problems and get them resolved quickly, before they ended up overpaying royalties for money they weren’t actually getting.

The whole basis of joining a franchise system is so that you can take advantage of existing brands and systems and the cost for that is your payment to the franchisor. Since that can often represent a big investment, and a big chunk of what would otherwise be money in your pocket, make sure you are paying the correct amount and can demonstrate that if it ever becomes a question. It’s really the only sensible way to run your business.

Taking care of taxes

Most franchisors are good about helping you get yourself established with the proper tax authorities when you are getting started, but by the time you actually have to start making payments they are often out of the picture.

The problem many franchisees run into is that they are generally unfamiliar with business taxes and so they can miss deadlines, thereby accruing penalties and interest on top of their unpaid balances. Getting an early start on collecting the correct amounts and putting aside enough savings to cover those payments as they come due is as crucial as any of the other day to day operations in the business to ensure your long term success.

One of our clients is a Fiesta Insurance franchisee and we have helped him out by taking care of his payroll in addition to his books. Prior to working with us, he wasn’t aware of the due dates and requirements for filing all of his payroll taxes and compliance forms and could have easily gotten himself in hot water. Fortunately, we were able to help him plan ahead and make sure he had the funds ready and was aware of the deadlines so he had no issues. We have had more than one client however who have had to spend months, or in one case years, digging out from a tax hole created by ignorance and bad advice on the part of prior advisors. Making sure this is proactively managed as part of the business bookkeeping is well worth the time and effort.

Consider having qualified outside help

With all you have to do to make your franchise business a success, you may not have the time needed to devote to the bookkeeping. Many people find they simply don’t enjoy the task and so put it off, ultimately making it worse. For those who do attempt it, they frequently discover it is more complicated than just writing a few checks or downloading transactions into software. Bookkeeping requires accounting knowledge as well as familiarity with whatever software program you are using, usually QuickBooks or Xero.

As a result, many people turn to outsourcing the task, which can be very helpful as long as whoever you turn to knows what they are doing! There are lots of good bookkeepers available but finding someone who isn’t can be worse than not having one at all. I’ve put together a fairly extensive guide on choosing a good bookkeeper on our website, but here are a few general tips:

  • They should quote you a fixed price, not an hourly rate
  • They should have direct experience with your specific type of business and with franchisees
  • They should have lots of positive reviews and references
  • They should be quick to respond to you and without charging for communication
  • They should be able to handle payroll, sales tax and other compliance issues
  • They should be up to date on the current mainstream software and technology
  • They should not have to require a lot of input on your part once things are set up
  • A firm is preferable to a solo practice for consistency and longevity
  • A dedicated bookkeeping firm is preferable to a generalist accounting or CPA firm

Conclusion

A franchise can be a great vehicle to achieving financial freedom and becoming a successful entrepreneur (especially if you can get into multiple units) but there are going to be challenges along the way. Taking care of the books is one of them, but it doesn’t have to be a burden as long as you follow some simple steps and make sure you are proactive about getting them done. If you do that, then checking the books to see how much you’ve made may actually become one of your favorite activities!

About the Author: Matt Remuzzi is the owner of CapForge Bookkeeping, a firm that works with dozens of franchise owners to make their bookkeeping painless. He is a serial business owner himself and works with clients to help them become successful above and beyond simply balancing the books. If you need help with your books or just have general questions, you can reach him at [email protected]