New Metrics for the Franchise Accounting Health Check
Accountants are key folks to constantly measure the health of a business, but the metrics and tactics during the COVID-19 pandemic have changed in a few meaningful ways.
According to Jamie Hogan, president at Specialized Accounting Services, the crisis has meant rethinking the franchisee accounting health check. He said the company started doing formalized checks after helping an accounting client who was struggling.
“This originated with a client that was really struggling and was having troubling getting access to capital,” said Hogan. “We were looking at invoices and phone bills and insurance bills—just peeling back everything to see where every penny is going and what is necessary and what isn’t.”
Sound familiar? Just about every operator across any industry has done their own health check to one degree or another as the pandemic changed things overnight. Hogan said a routine health check is a good practice in any economic situation, but when times are good, it tends to get overlooked. What operators find, however, can be surprising.
“We even had a discussion about operator’s management style. Pulling in their managers and discussing what their goals were, setting goals and meeting regularly to look at how close they were getting to their goals. So, you could call out management by objectives,” said business development director Jack Ruskin at Specialized. “For a lot of owners, it’s a surprise to hear that they could change their style and even include store managers in the profits.”
Taking a hard look at everything gives a holistic view of the books and can help plug potential leaks. And during a crisis like COVID-19, the smallest leaks look big when sales are down drastically—even the phone bill.
“It’s classic that a phone company would keep charging you during a pandemic. So, just doing a deep dive in all your expenses and what goes into each of them and negotiating a reduction” can be very effective, said Hogan.
He also pointed out insurance as a key item that operators should explore. With a skeleton crew or no dining room to insure, that’s another potential reduction.
But there were two new additions that he advised for all businesses: measuring cash burn and measuring COVID-era expenses closely.
“You’re adding additional metrics during a time like this. Understanding your cash burn rate that is so critical but it’s not something we had to worry about before this,” said Hogan. “By understanding what the cash burn rate is, you can see if these initiatives are enough or if you have to have additional initiatives.”
He said that comes down to working with an accountant to create a cashflow model and how that will eat away at cash on hand when sales are down so drastically. It’s a basic metric for Silicon Valley where companies work toward profits, but not a typical metric for businesses that are used to counting money.
And for those companies that seek funding from the various COVID-19 financial packages, from the disaster loans to the Paycheck Protection Program, measuring the proverbial new normal is really important. Not only could that be necessary for getting loan forgiveness under the PPP but also for new loans, M&A transactions and other financial machinations. Separating out crisis-era from pre-COVID could be important for all finance activities for years to come.
“We’re asking our clients if they can to set up a separate bank account for the rescue loans. That just creates a cleaner accounting of it. Maybe if they’re using QuickBooks, they set up a new code,” said Hogan. “It all comes down to the documentation, and every bank has their own list of information that they need, so that’s a challenge, too.”
And as the guidance changes week by week and new programs are set to emerge from the Small Business Administration, the Fed and the Treasury, a full accounting now is going to be much easier than untangling the books down the road.