A franchise financial statement serves multiple functions at the same time. It’s a way of gauging the current and past performance of a franchise business as well as helping to project future performance. It is also used in valuing a business that one wishes to sell in order to get a fair market value. Furthermore, franchise financial statements can be used to present the success of your business to a lender with the aim of acquiring funding. And last but not least, financial statements (particularly audited ones) are required for accurate reporting, proper accounting and to help shareholders or future investors make informed decisions about the business.
Depending on which industry accounting reporting standards you are required to use – GAAP or IFRS – there are some common franchise financial statement requirements. It is worth noting that a financial statement is not just one document but comprises several numerical sheets with different names. These names include the balance sheet, the income statement, the cash flow statement and others.
Reading a franchise financial statement can seem like a daunting task but it can be simplified. If one considers the fact that a balance sheet looks at the assets and liabilities of an organisation, it’s important to look at the positives and negatives of each column to determine the business’ net assets position. With regard to the income statement, it is generally accepted that the higher the income (based on past performance) and the lower the business expenses are, the better the business is performing. As for the cash flow statement, which looks at how a business generates its income and is run, you should be looking at criteria such as operating activities, investing activities and financing activities.
There are several ratios that can be helpful in helping you read a financial statement. For the balance sheet these ratios are the solvency and liquidity ratios as well as the safety ratio. Other ratios include profitability ratios and asset management ratios. Each has its own criteria for measuring how a business is run, how well it is performing and the impact of the business efforts on the bottom line.
For a prospective franchisee to make informed decisions about investing in a franchise, it is necessary to be able to read and understand the basic principles of financial statements. However, if you do not have such experience or knowledge, it’s highly advisable to let an experienced accountant or financial advisor assist you. These professionals will let you know that the financial statements you will be looking at must be audited. Furthermore, there must be at least three years worth of financial records to examine (if the franchisor has a history of operating for three years or longer). Once you have the right records and financial statements in hand, the qualified expert will be able to help you read and understand the ratios and what they signify about the franchise business’ historical, current and anticipated future financial performance.
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