How does Stretch Zone determine its allowance for expected credit losses?

According to Stretch Zone's 2025 Franchise Disclosure Document, the company determines its allowance for expected credit losses by reviewing its historical losses. This estimate is then adjusted based on management's evaluation of current conditions, reasonable forecasts of future events, and any other factors the company deems relevant.

For a prospective Stretch Zone franchisee, this means that the company is actively assessing the risk of potential credit losses from its accounts receivable. The allowance for credit losses represents the company's best estimate of the amount of accounts receivable that may not be collected. This is a standard accounting practice to ensure that financial statements accurately reflect the company's financial position.

The FDD also notes that as of December 31, 2024, the allowance for credit losses was $80,000, while it was $0 as of December 31, 2023. This increase suggests that Stretch Zone recognized a higher risk of uncollectible accounts receivable in 2024 compared to the previous year. The adoption of ASU No. 2016-13, which requires immediate recognition of estimated credit losses, became effective for the company on January 1, 2023, but its adoption did not have a material impact on the company's financial statements.

Overall, understanding how Stretch Zone manages its allowance for credit losses can give a franchisee insight into the company's financial management practices and its approach to assessing and mitigating financial risks. Reviewing the historical trends in the allowance for credit losses can also provide a sense of the financial health and stability of the company.