A Franchise Audit Program – To determine whether revenue is accurate, auditors follow transactions from the point of sale. The franchisor knows of the revenue, and. tax returns which are shared with the federal and state governments.
Any franchise system needs to have a very well-defined franchise audit program in place. At sparkle minds, we emphasized designing a comprehensive audit plan. A systematic and structure franchise is developed.
About Franchise Audit Program
Franchise audits also have to provision for destroyed records or at times very little cooperation from a few franchises. In most franchise systems, putting a franchisee on an audit check notice is relatively difficult.
If we consider honest and compliant franchisees; the procedure of auditing will be faster. The most efficient manner and ensure that everybody in the system is on the same platform. The non-compliant franchisees are always bleeding the system in one way or the other.
Franchise audit reviews ensure that the franchise is systematic in an orderly manner and the franchises are following the manuals and systems are kept in place.
Hence it ensures that such franchisees are dealt with firmly through the audit mechanism (provided the franchise agreement is in sync with the actions the franchisors can take. Honest franchisees are incentivized for adding value to the system.
What does a Franchise Audit Program include?
One approach to check on franchisee compliance is through audits. Putting a franchisee on notice that it will be subject to an audit is a challenging step for the majority of franchise systems. It’s considered by some franchisors to be incompatible with creating and growing a cooperative business partnership.
Most systems focus on adding new locations rather than checking the compliance of the ones they already have. However, if an audit project is well thought out, presented, and carried out, these concerns can be allayed.
What to expect during a Franchise Audit?
Franchise owners should regularly audit each franchisee. These regular “check-ups” are especially helpful when a store is just starting or when performance is declining. They are to identify signs of bad performance and handle issues before they get out of hand.
#1. Keep Track of Royalty Payments
A franchisor’s main source of income is royalties. Auditor attention focuses on the franchisee’s revenue reporting procedure because royalties are a proportion of revenue.
Auditors follow transactions from the point of sale:
- To determine whether revenue is appropriate.
- The franchisee’s accounting documents.
- reported earnings to the franchisor.
- the submission of tax returns to the federal and state governments
#2. Verify that all operational procedures are being followed
Auditors spend a lot of time determining if the franchisee has complied with the franchise agreement in addition to testing income.
They take into account issues like:
- Is the franchisee investing the necessary sum in marketing?
- Does its signage adhere to the brand’s guidelines?
- Does the franchisee buy products and supplies from recognised suppliers?
- Does the human resources manager carry out the necessary background checks on new hires?
#3. Visiting the Franchisee’s site regularly
A franchisee’s books and records analysis can only provide so much information. There is no replacement for speaking with the owner-operator in person.
During site inspections, the auditor has the chance to review business operations from the viewpoint of the customer, assess the state of the equipment and the employee morale, and speak with the management team.
These questions assist the auditor in learning how the company runs and in looking into any irregularities discovered during testing and analytical procedures.
Sparkleminds 3-step approach to designing an audit plan
#1. Creation Of A Detailed Outline
Typically, all processes from the selection of franchisees to remittances of royalties, functioning with adherence to the operation manuals to the annual recognition of franchisees are performing well from an audit perspective in consideration. We could relate this to a diagnostic test outline.
#2. Testing the results of adherence to the outline
Each outline must have a clear measurable way of testing the results including statutory filings. Along with the other mandatory and voluntary submissions which franchisees make or are to make. This could be the actual testing process.
#3. Recording the audit and compliance with the results
The final emphasis is on the levels of adherence that the franchise system needs to maintain and how the franchisees have to either improve their functionalities or ensure that they are within the permissible limits of the audit findings. We call it the franchise audit cure with clear prescriptions for individual franchisees. This franchise audit checklist enables tracking deviations and solving issues at the starting stages themselves.
Hence, it’s just not about measuring if the franchisee is under-reporting the sales or is remitting lower royalties but covers the entire functionality in a far more comprehensive manner.
These audits would also include expected gross profits and emphasize operational expenses, employee costs and other areas at unit levels; hence franchise audit requirements are very much needed in the franchise ecosystem
Thus and hence not every franchisee may be able to control or monitor. Hence, the franchisee gets clear guidelines. To improve profitability from these audits. It works to the advantage of the franchisee business in question.
What is the Franchise Audit Process?
We also bear in mind greatly that any franchise audit process has key metrics which are achievable. At the end of the exercise, it adds to the profitability in one way or the other.
Many franchisors also penalize the franchisee for crossing the lines drawn by the audit outlines. A Franchise auditor helps in this aspect. Beyond this, the costs of audits are to be borne by them.
The franchise audit financial statement acts as evidence to both parties concerning the performance and evaluation. Benefits received through a proper audit always outweigh the costs that the franchisor incurs. It must.
As franchising becomes competitive and the need for proper coordination between the franchisor and franchisee is inevitable regular on-the-field audits.
To sum up,
Therefore, it would be a prerequisite for any successful franchise program. Thus, make your franchise system more efficient and compliant. Therefore, contact our senior franchise consultant for a more detailed discussion on how we can help you franchise better through the audit mechanism.