How to Manage Franchise Royalty using Franchise Management software
Franchisors tend to determine their royalty predicated on a proportion of the gross sales of the franchisee, and usually collect those expenses on a weekly or monthly basis. Increasingly, franchisors use Electronic Funds Transfer to transfer royalty payments, where the franchisor concurs to allow the franchisor to debit directly from their bank accounts. In formulating their royalty payments, however, there are many differences used by franchisors. This can be done with the franchise management software. The franchise management software helps to take care of all the variations properly to properly structure the royalties, invoices and the franchise incomes. Well, there are certain methods and features that are used by the franchise management software which are as follows:
Fixed Percentage of Gross Sales using Franchise Management Software
This process is taken care by the franchise management software properly. All the steps of this royalty technique are done properly by the software so that it becomes easy for the franchise to take care of the royalties. It is the most prevalent continuing structure for royalty. After making certain approved modifications, the franchisee reports gross sales (taxes, bad debts, returns, etc.). The royalty is calculated by applying a fixed percentage, traditionally on a monthly or earlier basis, to the adjusted gross sales. It is often the simplest fee structure to be administered, but may not always be the preferred approach for either the franchisor or the franchisee to ensure a proper equilibrium.
Variable Percentage of Gross Sales using Franchise Management Software
This is another technique that is used by the franchise management software to calculate the royalties and incomes. The franchise owner needs to just enter the values and the franchise management software takes care of all the calculations. As the overall gross sales rise, this arrangement has the franchisee paying a lower percentage of gross sales. Some franchisors agree that reducing the percentage royalty on increasing revenue is fairer for the franchisee, since it offers an extra incentive for better results and also provides a reasonable rate of return for the franchisor.
Some also feel that a decreasing proportion allows franchisees to more accurately disclose overall sales. The measurement basis can be done in different ways, such as on monthly sales or calculated for annual cumulative sales. For monthly sales, for different amounts of monthly sales, the franchisor sets various royalty rates. The royalty rate goes down as the monthly revenues rise. For cumulative annual sales, rather than individual monthly sales, the franchisee proposes a declining royalty percentage based on cumulative annual sales. The cumulative sales amount is expressed in the royalty report, and as the franchisee meets the target sales.
Minimum Fee Structures
In order to ensure that they meet minimum performance requirements, there are certain conditions or markets in which the franchisor chooses to enforce financial performance standards on a franchisee. Many franchisors also want to earn a higher return than they can get from the franchisee in their previous operations, while the franchisor’s costs are higher for providing its services. It is simpler to set a minimum royalty in those circumstances than any of the other methods available for the franchisee to calculate market penetration or performance.
The franchisee will pay the latter of the set minimum royalty or the percentage royalty based on unit sales when a minimum royalty arrangement is used. This can also be done with the franchise software. A fixed charge that is not affected by unit sales is this royalty. Every month, the franchisor is assured of a fixed dollar return, while the franchisee gets the maximum profit from increased unit sales. Without any sales override, the fixed royalty basis is equivalent to a commercial contract. Usually, the fixed fee is annually changed depending on a CPI or another basis.
Starting Up Period Adjustments
Franchisors accept that the franchisee will have higher costs for setting up its company during the initial phase of service and, at the same time, lower sales before they reach maturity. Some franchisors will eliminate or reduce the royalty rate during the development period to assist their franchisees during this period with the help of the franchise management software. The amount of royalty not received is either regarded as owed or can be deemed to be charged at a later date as a deferral or loan.
Transaction-based expenses are quite prevalent in some industries, like the hospitality industry. Equivalently, franchisors may charge a fee above what is needed in the franchise agreement based on additional benefits rendered to the franchisee. Training is a prevalent a la carte fee charged to franchisees depending on the number of individuals sent through the training of franchisors. This can also be done with the franchise management software.
Hence, you can understand by now about the different types of processes that can be used to manage royalties and how the franchise management software helps to manage the royalties. Get in touch with us today for more information.