How does Chesters determine the allowance for doubtful accounts related to accounts receivable?

According to Chesters's 2025 Franchise Disclosure Document, the company's accounts receivable primarily consist of trade receivables from customers. These receivables are presented at the amount Chesters expects to collect, net of an allowance for doubtful accounts. Chesters extends credit to customers based on an evaluation of their financial condition, making the potential for loss dependent on each customer's individual financial stability.

Chesters's management determines the allowance for doubtful accounts by considering historical losses and current economic conditions. This suggests that Chesters reviews past instances where receivables were not fully collected and also takes into account the broader economic climate to predict potential future losses. The FDD indicates that Chesters analyzes delinquent receivables regularly. When receivables are deemed uncollectible, they are written off through a charge against the allowance.

For a prospective Chesters franchisee, this means that the financial health of their customer base is critical. Chesters's approach to managing accounts receivable and determining the allowance for doubtful accounts is a standard accounting practice, but the specific amounts can vary significantly based on the franchisee's location, customer base, and local economic conditions. As of December 31, 2024 and 2023, Chesters recorded an allowance for credit losses of $7,726 and $46,653, respectively. Franchisees should inquire about the typical range of these allowances for similar locations to better understand potential risks.