What stories do your numbers tell? Our guest columnist explains how to use financial statements to make smart business decisions. Are you taking too much cash out of the business? Are you investing enough?
Jose Casto, president of Maaco and one of our clients, recently reminded me that franchisees really care about only two things: making money and building a legacy to pass down. Focusing on operations and the back office is not something they want to do when they could be spending more valuable time on other, revenue-increasing activities.
The abacus still works, but more sophisticated accounting methods are better suited for a 24/7/365 operation.
Since I started my career in accounting, I’ve focused on improving business processes to save time. Based on working with all kinds of franchises around the country, I’ve come up with five accounting strategies every franchise owner ought to know.
No. 1: Bye-bye Excel. While it’s easy to reach for the spreadsheet, the first and most important step to ensuring the financial health of your franchise is to use professional accounting software. Many franchises start with MS Excel because they think it will save time; there’s virtually no learning curve or difficult setup. However, a spreadsheet is really limited because it doesn’t integrate with any operations software, does not provide insight into your business and is difficult to keep updated on a regular basis.
No. 2: Keep impeccable paperless records. Clean records are, of course, something any business wants to have, but they are especially helpful for accounting, tax, budgeting and even reviewing your profitability. If you can go as paperless as possible, it’s even better. Paperless solutions allow you to store receipts and other important documents, nearly eliminating the need for paper files.
Data can easily be scanned and transferred from paper, emails, PDFs and word processing files, and saved in a digital form that is standardized, legible, accessible and organized. The information can then be entered or, in many cases, scanned and populated, into accounting applications like QuickBooks with minimal errors and a full audit trail. Security, workflow, invoice processing time and organization are all improved.
No. 3: Live, breathe and make business decisions using reports. Many franchisees use their accounting records to file their tax returns, get a business loan, or determine whether they made or lost money. Yet, what they’re missing out on are the stories the numbers tell that will help them determine how to staff, where to expand and even how to measure customer loyalty. Franchise owners must generate monthly financials, including profit and loss, balance sheet and cash flow statements, to get an accurate picture of the business and how to improve it. What do these reports tell you?
Income statement: This report shows your current financial activity by month or year. Also known as the P&L (profit and loss statement), it includes noncash items such as equipment that is depreciated over time. The income statement answers all kinds of questions: Is there enough gross profit to pay the bills? Are you taking too much cash out of the business? Are you investing enough in the business to grow it? A series of income statements reviewed over several years identifies trends that can help you address the highs and lows of your business.
Balance sheet: A balance sheet includes assets and liabilities, such as cash and any outstanding loans. It helps owners identify strengths and weaknesses of the franchise over its life and answers questions such as whether the business is cash strong, how long it can survive on its current holdings and whether there is too much debt or enough working capital.
Cash flow: A cash flow statement starts with net income and then adds back any deductions such as depreciation or amortization. Essentially, it shows your bottom line, and, for example, what the bank is interested in when you apply for a loan.
No. 4: Avoid fraud by reviewing monthly statements. Fraud, big or small, is incredibly common in today’s business environment. If a check forgery, personal or business identity theft, or another kind of fraud were to occur, would you even know about it before it’s too late?
Reconcile credit card and bank statements to ensure all expenditures are legitimate. Follow best practices to protect yourself from personal or business fraud. For example, buy a security micro cut shredder that turns paper into confetti, use a credit card rather than a debit card, and subscribe to a credit monitoring service to ensure no one gets access to your personal or business information.
No. 5: Get training. Don’t know a lot about accounting? Unsure how to use accounting software? While your bottom line is to get new customers and retain the ones you have, as a franchisee, you must also spend time on staffing, marketing and customer service. A bit of training on setting up your accounting systems and making the software more efficient will help you retain and recruit customers, save you time and build your confidence.
If your headquarters office does not pass down or provide the kind of accounting programs you need to efficiently operate, you’re on your own. However, that doesn’t mean you should neglect your back office or send it to the back burner to work on when things slow down. Accounting is a 24/7/365 process, so ensuring you’re maximizing your systems and processes is key to short- and long-term success.
Marjorie Adams is president and CEO of AQB, a business process and software consulting firm headquartered in Austin, Texas. Reach her at (800) 931-2120, ext. 701, or [email protected]
