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System sales is a calculation of total funds brought in by a franchise during a given accounting period, usually a year. This includes the total for all products and services sold under the branding of the franchise over the course of the accounting period. The actual revenue of the franchise is lower than the system sales, as each franchise outlet keeps a share of the proceeds. Franchises report revenue and system sales for the benefit of stockholders and prospective franchise members. They must also report this information on tax declarations.
Companies that operate franchises can choose to run individual outlets directly as well as licensing materials to third parties who run their own franchises. A hotel chain, for example, might open up new hotels it operates itself in addition to having franchise partners who open hotels and use the chain's branding and materials. Franchising provides an opportunity to rapidly grow and penetrate markets, as each franchise operator bears the start-up costs associated with expansion.
Tracking system sales allows the head franchise to monitor its growth. When this number rises, it means that franchises are expanding and increasing sales. Large numbers indicate more market penetration and broader reach. The goal is to create a steady upward trend of constant growth. Third parties who want to open franchises usually look at system sales to determine if starting a new franchise would be a good business decision. Shareholders and investors also want to see system sales numbers as an indicator of growth and prospects in the next year.
The actual revenue comes from businesses the company operates directly and the share of revenue from franchise operations. This will be lower than system sales by default, as the franchise only gets a percentage of the income earned by partners. One issue with the handling of revenue reporting is the possibility for inflation through taking over franchise operations to put them under direct management and count their revenue as part of that of the parent company.
Information on the latest numbers is often available through trade publications. These will also provide a breakdown of statistical data to offer insight into what it means. In a poor economy, for instance, system sales may drop, but this is not necessarily a sign of economic problems for the company. Another source of information can be legally mandated disclosures. Publicly traded companies must disclose this information to investors, and they often publish it on their websites for convenience as well as prepare printed reports.
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