Hair Emporium

Hair Emporium There are a number of different types of accounting systems. The Hair Emporium must choose a system based on its business situation. As a franchisor, one of the most important things to remember is that the cost of the franchise includes the systems associated with running the business. This means that they should have an accounting system in place. In addition, if they receive any fee based on revenues or net income from the franchisees, then they will need a consistent method of accounting.

In addition, any lender will want a consistent and professional accounting system set up throughout the organization. It is recommended therefore that a computerized system is used. The system should be based on generally-accepted accounting principles as well. A cash accounting system is not appropriate for a professional business, and in this case it will not allow either the franchisee or franchisor to maximize the tax benefit from interest payments or depreciation. Of the different types of systems, a computerized general accounting system is recommended (No author, 2011).

This type of system allows the computer to do most of the calculating, which reduces errors. It also can be tied into the cash register, so that revenue transactions are recorded immediately. A computerized system is also more organized than a spreadsheet, especially if either Rolando and Rosa or their bookkeeper is going to design the system. The user-friendly aspect of a computerized system is a significant benefit. Lastly, although some training is required to use any computerized system, it is a basic function of management that should be mastered.

In addition, for taxation purposes have a professional and foolproof accounting system is essential for any business, but especially one such as a franchise where the head office will only have limited oversight and some franchisees may be lacking business experience. 2. Balance sheets and operating statements should be offered daily, weekly, monthly, quarterly and yearly. The reason for this is simple -- the computer is tabulating the information anyway so there is little extra effort required.

Quantitative feedback is something that is required to make any business better -- it removes biases that can cloud evaluation among other benefits. Whether the franchisees are new or not, it is good for them to know about demand cycles so that they can improve their scheduling and their ordering. Being able to track performance at frequent intervals provides more opportunity for reflection, analysis and correction.

Some of the best-operated companies, such as Wal-Mart, receive daily sales feedback and use it to improve their business constantly, rather than simply once a month or once a year. Balance sheets and operating statements are a critical component of feedback for business owners, in addition to customer feedback, sales figures, staff feedback and other signals. They provide a clear picture of the health of the business, so tend to have significant value to business owners, especially those who are new. For a franchisor, these statements are just as important.

It is important to know which franchisees are succeeding and which are not. This is important for both being able to lend assistance to those who are struggling and to grant additional locations to those who are not. There are no benefits to doing statements only once per year. Laziness is not a benefit to any business. The statements need to be produced more frequently for the feedback to be of any value. 3.

Obviously there should be common accounting procedures for all of the franchises, unless they start franchising outside of the United States. Income taxation for these businesses is at the federal level, so a nationwide standard just makes sense. More importantly, standardization is one of the benefits of being a franchise owner. Until the Hair Emporium has a strong brand name, the systems are the most important thing that the franchisee is buying.

An accounting system is one of these standardized benefits, especially since is a critical aspect of the business that many owners will not be experienced in. In addition to being able to accurately track profits for the franchisees, it is also important to have a standardized system of accounting to be able to compare performance against other units and over a time series. Another benefit of having a standardized accounting system is that the franchisees can learn from each other how to handle given situations.

The combined body of knowledge will improve performance throughout the organization. Lastly, a standardized, computerized accounting system allows the owners to spend more time working on improving their business, rather than accounting. Many manual accounting methods are not only inconsistent, but very time consuming as well. With a standardized system, the bulk of the work is in the beginning when the owner is learning how to use the system. Once the system is learned, the accounting function takes significantly less time and is much less frustrating. 4.

The academic literature covers many issues that can lead to recommendations for Rolando and Rosa. One such recommendation is to develop a system for accounting for the fair market value of franchise rights (Kohlbeck, Cohen & Holder-Webb, 2009). Since they plan to give franchises to people with hardly any money and no experience, they will probably have to buy back some of these franchises at some point.

The accounting of fair value for these buybacks is a current issue in accounting and auditing, and it would behoove Rolando and Rosa to have a system for measuring fair value as the standards regarding this issue evolve. Calegari (2010) raises another good point about accounting for franchises -- joint ventures. The case of Krispy Kreme Donuts highlights the need for adequate accounting of joint venture profits (or losses).

Rolando and Rosa may structure some of their franchise deals as JVs with existing hair salons looking for the boost that a franchise might give. This is especially possible if financing is not easy to find for hairdressers with just 25% of the up-front cost saved. A joint venture would allow R&D to act as de facto financier of the franchise, but this arrangement requires proper accounting.

If not, as the Krispy Kreme case notes, the expectations that external stakeholders have for revenues and net income from these ventures may be overly optimistic. Worse, R&R could over-report their income if the system they devise is too complex for them to truly understand. I also recommend that they implement GAAP in their accounting procedures. In addition, they should familiarize themselves with the other recommendations in the FTC Franchise Rule Compliance Guide (Gilbert & Loonam, 2008-2009). For example, there.