Under what conditions does the Gokhale Method reserve for receivables?
Gokhale_Method Franchise · 2024 FDDAnswer from 2024 FDD Document
Accounts receivable is primarily comprised of net royalty receivables from franchise, teachers, or class fees collected by GME.
The Company utilizes the allowance method of accounting for doubtful accounts. The allowance is based on management's review of all past due accounts. As of December 31, 2022, management believes that all receivables are collectable after year end.
Source: Item 22 — CONTRACTS (FDD page 34)
What This Means (2024 FDD)
According to the 2024 FDD, Gokhale Method uses the allowance method for doubtful accounts, basing the allowance on management's review of past due accounts. As of December 31, 2022, Gokhale Method management believed that all receivables were collectible after year end, so no allowance was necessary at that time. This indicates that Gokhale Method reserves for doubtful accounts when management identifies specific past due accounts that they believe may not be fully collectible.
For a prospective franchisee, this means that Gokhale Method assesses the collectibility of its accounts receivable, which primarily consist of net royalties from franchisees, teacher fees, and class fees collected by Gokhale Method Enterprises (GME). The allowance for doubtful accounts is an estimate of the amount of accounts receivable that the company may not be able to collect. This is a standard accounting practice to ensure that financial statements accurately reflect the company's financial position.
The FDD indicates that management's assessment of collectibility is based on a review of past due accounts. This implies that the older an account receivable is, the more likely it is that Gokhale Method will consider it doubtful. However, the FDD does not provide specific criteria or thresholds for determining when an account is considered doubtful. It is important to note that management believed all receivables were collectible as of the end of 2022, which may not always be the case in the future.
As a potential franchisee, it would be prudent to inquire about the specific criteria Gokhale Method uses to determine the allowance for doubtful accounts. Understanding these criteria can provide insight into the company's risk management practices and its expectations for franchisee payment behavior. Additionally, it would be beneficial to understand the historical trends in accounts receivable and the allowance for doubtful accounts to assess the potential risk of non-payment by franchisees or other parties.