A franchise agreement can open the doors to loads of excitement and adventure with a lot of advantages including a proven business model, streamlined methods of operations, ongoing marketing activities, and huge support from experienced business owners in setting up and running the business. The brand is established, and this attracts the loyal audience based on past successes with not much involved in marketing efforts.
However, buying a franchise also extracts commitment for many years with a huge lump sum deposit. One should be aware of franchise risks and their effective management too.
Advantages of Franchising Business:
Here are the top advantages of Franchising Business.
- Lower Failure Rate: Buying a franchise, helps you start a business with an established successful concept. Statistics reveal that franchisees always enjoy a better chance of success than others who run independent businesses. Most individual ones have a 70 to 80 percent chance of losing out to the competition and not surviving in the initial years. Franchisees on the other hand boast 80 percent chance of survival and gradual success.
- Help with Start Up: While starting your business, franchises work as turnkey operations. You receive all the equipment and supplies along with training that is required for the business. In many cases, franchises help with ongoing training and with leadership, management, and marketing. Your franchise can ultimately benefit from the parent company’s national marketing efforts too.
- Staff Wages and Taxes: Count the staff wages plus superannuation tax with regards to Australian Taxation Office norms before you get to hire them. Know that the training period will not earn you a single cent from the business. Be aware of ongoing staff costs before taking the plunge. You should consult with your tax agent.
- Buying Power: Your franchise benefits immensely owing to the collective buying power of the parent firm as the equipment and supplies are bought in bulk, and the savings are passed along to franchisees. Inventory and supplies are lower compared to when one runs an independent company.
- Star Power: Many well-known franchises already have earned their brand-name recognition. Owning a franchise gives in built-in customers to the business too.
- Profits: A franchise business is most profitable because it relies on proven, popular operations and habits introduced by them. Sample McDonald’s that do have high franchise costs but also deliver incredible ROI.
Risks Associated with Franchise Business:
Along with advantages you will find risks associated with Franchise business.
- Ongoing Costs: Besides the franchise fee, most franchises are expected to pay royalties and a specific percentage of their business revenue to the parent company, each month. The franchisor can also charge additional fees for the cost of advertising etc.
- Ongoing Support: Not all franchisors are known to offer support in starting a business and ensuring its successful operations. Some franchisors make promises of training and support but just don’t follow up on their promise.
- Cost: Buying a franchise with a well-known brand is very expensive. One needs to have deep pockets or the necessary financing to go ahead. One should also tally in operational costs and capital requirements for fast food franchises.
- Rules & Guidelines: The main risk of a franchise is conformity to rules and policies of the franchisor. Some franchisors even exert control even though you are an independent business owner could find it troublesome and full of hassles. Depending on the agreement, the franchisor can dictate terms on business location, operation hours, product pricing, digital signage, venue layout, resale terms, and products being used.
- No Guarantee: Buying a little-known franchise which is inexpensive can prove to be a real gamble. Franchises are not a guarantee that it will be successful since some perform reasonably well but sometimes never scale the owner’s expectation of profitability.
Inexpensive franchises may or may not be worthwhile, but one should know what one is getting into, with a proper investigation of buying needs and the business.
Franchisee Accounting Tips:
Alternatively, suppose you’ve found a franchise that is interesting to you and appears to be a brilliant opportunity for a franchisee. Here are some franchise accounting tips that can help you in the long run.
- Start-Up Debts: Use lump sum savings or borrow money from lenders including friends or banks to purchase the franchise rights. You need to understand and plan cash flows in this case, since you have to clear your debt and pay off compound interest charged by these lenders.
- Extra Overheads: Some franchisees are stipulated changes to the store before commencing operations, which imply extra capital involved. Plan for unforeseen circumstances with extra capital that could be required for routine operations.
- Extra Demands: Apart from cash flow issues, franchisors also force franchisees to boost sales so that they receive ample in royalties. Also, some have strict procedures in place that every franchise needs to follow.
How Accounting Can Help to Manage the Franchise Risks:
To effectively manage franchise risks, the following accounting strategies can help.
- Accounting Software: Since you are already spending thousands of dollars on a franchise, one should invest in accounting software that can work for you. Maintain your books regularly without delay with relevant KPIs including sales targets, and understanding of all incomings and outgoings. Opt for useful accounting software such as Quickbooks that can help you maintain books efficiently. Also, you can send in your financials and BAS statements to the franchisors regularly without hassle lodged to know the business performance. The software can even help in satisfying the taxman to keep them updated that you indeed meet your tax obligations.
- Plan your Cash Flows: One needs to plan cash flows every day so that you have enough reserve working capital to pay for employee wages, overheads, debt and of interest along with your own take-home amount. Cash Flows can be easily maintained through a simple excel sheet or plan them efficiently with scores of software available online. Plan ahead for the day, week, month and year too.