When doing FFA’s in bulk, I can usually spot trends. Two trends that stick out from this year’s review are the use of the account Payroll Expenses and the way franchises book Subcontract income and Subcontract expenses.
First, many franchises have switched to a payroll service instead of taking care of payroll in house. If, for example, you now have QuickBooks assisted Payroll taking care of the process, you still need to set up the payroll items correctly. Franchises set up the payroll item but often do not edit the item to point at the right Salary and Wage account. The default is the Payroll Expenses account, which is not on the Servpro Chart of Accounts. It is a two-step process that most franchises seem to be unaware of. It may take a bit of time to get the payroll set up correctly prior to the first paycheck, but it is better to spend the time upfront rather than have a call come in at the end of the year from our office requesting the PR and taxes get broken out correctly.
The other area that gets analyzed each year is subcontract income versus subcontract expense. There should be a 1 to 1 ratio of expense to income. For example, if you have a line subcontract debris hauling income, there should be a subcontract debris hauling expense line. Hopefully, when the customer is billed, the line item subcontract income is used-with a markup. Not only will this indicate whether the franchise is making money using subcontractors (hopefully), it will save the franchise money when it comes to paying royalties. The royalty rate for subcontract income is lower than the normal revenue rate. There should be a 20% difference between the subcontract expense and income categories. Most of the time franchises book the expense correctly, but fail to separate the subcontract income out from the total revenue line item. Even when a franchise is busy, it is definitely worth the time to break these two lines out on an invoice! Keep the money in the franchise!
The beginning of the new year is a great time to review the franchise processes for both of theses trends, hopefully avoiding any difficult reconciliations at year end.