Accounting Principles: The Hair Emporium - Case Study Example

While a franchisor should ideally provide assistance and financial advice to their franchisees as discussed previously, it is important to understand that it is highly unfavorable for Rolando and Rosa to disclose certain types of accounting records and financial records to their franchisees. Most importantly, the financial information that should not be supplied to the franchisees includes computations of costs per unit and other unit-based data which has the potential to outline the inputs of the Hair Emporium in a comprehensive manner.

The reasons why Rolando and Rosa are discouraged from providing this information can be represented in terms of the inadequacy and misleading nature of these figures and the competitive threats that are posed by the public disclosure of this data. For example, if provided with unit performance including variable costs that are incurred on material, labor, and supplies the franchisee may be misguided by the financial records as they cannot be applied to the franchised outlet of Hair Emporium. Moreover, the availability of this information to the businesses’ U.

S-based competitors would threaten the success of the hair salon in the new country. The completion of balance sheets and operating statements on a monthly and yearly basis is critical to the analysis of the company’s financial position. An accurate examination of a firm’s financial position not only facilitates decision-making but also equips managers and business executives with the tools that are required to evaluate the present scenario and future possibilities for the business.

By assessing the financial statements, senior management can discern whether the company has been able to achieve the designated corporate objectives such as profit-maximization, survival, or increase in market share. Through the completion of the balance sheet and operating statements in a timely manner the financial position of the firm and the result of business operations can be examined (Solomon et al. 1990) to detect any impending risks that may adversely impact the organization and develop a contingency plan to cope with these risks.

As owners of the franchised business, Rolando and Rosa can opt to complete their balance sheet and operating statements on a quarterly basis rather than creating these financial statements for every month. This decision would allow them to keep track of the business’ financial position as it appears every three months in the financial calendar. However, a consequence of this selection would be that Rolando and Rosa would not be able to continually assess the development of their business in the United States during the first crucial year of the commencement of operations.

At this point, it is imperative for Rolando and Rosa to closely monitor the progress of Hair Emporium in order to identify any potential problems and issues that may hamper the growth of the business. Thus, adopting a quarterly system for the completion of financial statements would not be suitable in this scenario. Under the provisions of the franchise agreement, Rolando and Rosa would be entitled to provide the franchisee with initial services that also involve the formulation of financial records and advice related to bookkeeping (Epstein, Nach and Bragg 2009).

Local conditions, regulations, and laws that operate within the United States imply that the franchisees should adhere to the standards that are present in the country in order to effectively manage regular operations and keep track of the financial progress of the business. However, the uniformity of services, standards, and specifications is a critical and decisive factor in the success of business franchising as a result of which Rolando and Rosa should recommend their franchisees to adhere to the same principles of recordkeeping and maintaining financial records.

Furthermore, Rolando and Rosa are also experiencing difficulties in managing the variations in local procedures and the taxation system, which is why it would be beneficial for them to insist upon their franchisees to maintain uniform accounting standards after justifying their recommendations. The hair care industry in the United States presents an extensive range of prospects for potential franchisors as the activities and operations of the industry amount to a staggering $16 billion. The current status of the industry presents a positive scenario for Rolando and Rosa who wish to introduce the Hair Emporium in the United States, thus it is expected that if the business is marketed well then it would be able to benefit from the booming industry by accumulating a significant portion of sales revenue.

In order to assess the financial health of the business, it is important to compute the profitability and liquidity ratios for the organization, which include the gross profit ratio, the net profit ratio, the current ratio, and the liquid ratio. As stated previously, Rolando and Rosa are expected to assist their franchisees by providing initial services which involve an evaluation of the expected income that the franchisees are expected to generate as a result of the agreement. This can be computed by applying the net profit ratio to assess the expected sales and expected profits after the commencement of operations.

However, the working capital of the business currently ranges between $5000 - $10,000 which is an alarming situation and reflects the possibility of a liquidity crisis. Moreover, the fixed cost of the business including the expenses that would be incurred on rental and improvements amass $2000 - $5000 and $15,000 - $65,000 which should be minimized to avoid financial problems in the future.