These financial records are simply a process of measuring and reporting the financial information of the business operation. This is a record of the flow of money, assets, and resources through a company. These records provide the franchisor and staff the information necessary for making appropriate and important business decisions. The financial statements provide a written documentation or recording of all business transactions and give the franchisor the basic format and information necessary to run a headquarter's organization. The franchisor is responsible for the functions and operations of the business. You, as the owner, should keep financial records in accordance with commonly held principles of accounting. These rules and regulations are referred to as the generally accepted accounting principles (GAAP). They include widely agreed upon definitions, procedures, forms, and are used to develop statements which may be compared with other businesses and other industries. Because of their commonality to formal standardized procedures, anyone familiar with the accounting principles should be able to read and understand them.

The Basic Financial Statements

The financial statements of a business are informational pictures of that business for a specific period of time. Franchisors needs to develop the financial statements for their own use as well as providing any possible investors or potential franchisees the opportunity to analyze and evaluate these financial statements. The franchise disclosure rule requires that all franchisors disclosure three years of audited financial statements to all prospective franchisees. Therefore, the franchisor's records should be audited each year and should be reviewed by the management team on a monthly basis.

There are three major financial statements which should be used by the franchisor and include:

1. the balance sheet -- statement of financial position

2. the income statement -- the statement of earnings

3. cash flow statement -- cash budgets

These three financial documents are used by financial decision makers. So that you will be able to easily understand how they are constructed and their use, each one will be described and illustrated.