Finance At McDonald’s

Finance at McDonald’sStock ionTrainingCareersat McDonald’sTrainingGlossaryI.T.Customer ServicesEducationCustomer ServicesStock ControlFranchisingTalking onstructionFinanceFinanceTrainingGlossaryStock ControlFranchisingEducationStock ControlCustomer ServicesFranchisingTalking PointStock ingI.T.MarketingCustomer ServicesConstructionTalking PointStock singMarketingAlthough the realm of accounting and finance has oftenbeen viewed as dull ‘bean counting’, in today’s modern andcompetitive business environment, the finance departmentshould be at the heart of any company, encompassing avariety of functions that go beyond its traditional financialreporting nticeships to ensureit is stillpriority for accountantsa company’s financial statutory accounts meet legalrequirements, dynamic companies such as McDonald’s haveshifted the focus of their accounting and finance functionto additionally include the evaluation of past performanceand appraisal of future opportunities, helping to ensure thecompany maximises its strategic capabilities.Recruitment & Training McDonald’s Restaurants UK Limited, a wholly ownedsubsidiary of the U.S. parent company, opened its first UKrestaurant in Woolwich in 1974. There are now 1,200restaurants operating in the UK which, despite representingonly 4% of the total number of McDonald’s restaurantsworldwide, contribute 7% of global profits, making theUK a very important financial market for McDonald’sshareholders.McDonald’s understands the value of an integrated accounting and finance function, extendingfrom the restaurant floor up to the board of directors. Each individual McDonald’s restaurantis structured as an independent business, with restaurant management responsible for itsfinancial performance, supported by the centralised Accounting & Finance .FinanceEducationTrainingConstructionI.T.Customer NTrainingGlossaryCustomer ServicesTalking PointApprenticeshipsCustomer ServicesTalking PointApprenticeshipsEducationCustomer ServicesTalking PointI.T.ApprenticeshipsDEPARTMENT STRUCTURE & FUNCTIONMcDonald’s Finance Department has two key areas of responsibility: financial reporting andmanagement accounting. Although each of these functions has different priorities, workingtogether ensures the best financial position for the company now and for the future.UK Accounting & Finance DepartmentsVice President ofFinanceT ax &T reasuryExecutiveReporting& Real EstateAccountingCorporate AccountsPayrollAccountingCentreCommercial F inanceCompanyOwnedRestaurantsSupporting OperationsFranchisedRestaurants

Finance at McDonald’sPage FinanceTrainingFinancial ReportingGlossaryI.T.Financial reporting looks at historical performance with theprimary responsibility of the Corporate Accounts departmentbeing the preparation of annual financial statements andreporting McDonald’s monthly results to their parent companyin the U.S. Several specific functions are in place in order toachieve these requirements:CustomercentreServices is responsibleTalking Point A Educationcentralised accountingforprocessing all accounts receivable and payabletransactions, banking income, managing working capitaland also for the maintenance of the fixed asset registers.The accounting centre provides day-to-day support to everyMcDonald’s restaurant. Treasury and tax experts ensure compliance with tax lawsand make sure the company has sufficient cash flow andappropriate finance in place in order to meet businessneeds. Payroll staff are responsible for the accounting andpayment of wages to all 68,000 staff.Management AccountingThe Commercial Finance department has a predominantlyforward-looking focus, using management accounting toanalyse past financial performance in order to project andimprove future results and aid commercial decision-making.Key to the decision making process is information about ourcompetitors and the market environment. This is provided bythe McDonald’s Business Strategy & Intelligence departmentwhich specialises in internal and external data collection, forexample consumer research.The Commercial Financeteam helps define andmeasure several key targetsknown as Key PerformanceIndicators (KPIs) whichMcDonald’s must achievein order to succeed in itsbusiness strategy. Althoughthese indicators are bothfinancial and non-financial toensure a balanced scorecardapproach, the CommercialFinance team concentrateson the results of the financialKPIs. (See examples of theselater on.)Apprenticeships

Finance at McDonald’sPage FinanceProfit fromRestaurant SalesSalesFood & sOtherProfitTrainingGlossaryI.T.HOW DOES MCDONALD’SMAKE A PROFIT?100 McDonald’s has two sources of profit:(30) Sales made by company-owned restaurants(30) Rental and royalty income from franchised restaurants.(5)(3)Customer ServicesTalking PointApprenticeships(3) RestaurantSales(2) McDonald’s retains all of the profit earned by company-owned30 restaurants. An example Profit & Loss Statement for arestaurant is shown left and highlights how food and labourconstitute a restaurant’s largest costs.In addition to variable costs, which increase or decreasedepending on the level of sales, McDonald’s also incurs coststhat are largely fixed, for example utilities and advertising,which need to be paid for even before the restaurant makesany sales.Increasing sales and controlling costs are fundamental toensuring the profit of each restaurant is either maintained orincreased.Franchise Rental & Royalty IncomeThe owner of each franchised restaurant, known as thefranchisee, keeps all of the profit they make through salesafter paying McDonald’s a royalty for trading under the brandname and rent for operating in a McDonald’s owned property.The benefit to McDonald’s of operating franchised restaurantsis that these restaurants guarantee a stream of incomefor McDonald’s at a reduced level of risk while enabling thecompany to maintain a single brand presence. The risk toMcDonald’s is reduced because much of it is borne by theFranchisee. The Franchising Accounts team works closelywith franchisees to provide the support they require to growtheir profitability.

Finance at McDonald’sPage FinanceTrainingGlossaryI.T.WHAT DOES MCDONALD’S DO WITH ITS PROFITS?It is the responsibility ofthe senior management atMcDonald’s to reinvest theprofits made by the companyin order to generate futurecash flows and returns forthe shareholders.WhetherEducationCustomer Servicesthis is done by building newrestaurants, reinvesting inexisting restaurants, payingoff debt to reduce financingcosts or paying a dividend toshareholders, their decisionswill be based on financialappraisals carried out by theMcDonald’s Finance team.Restaurant generates cashHow should this cash be used?Talking PointOpen NewRestaurantsApprenticeshipsRe-Invest inExistingRestaurantsThe investment strategy of McDonald’s UK has changednotably over the last decade. During the 1990s, McDonald’sactively opened a large number of restaurants in orderto grow market presence and increase market share. Inrecent years, however, McDonald’s has taken a much moreconsolidated approach by focusing on fewer restaurantopenings and instead investing in the re-imaging of its currentestate. This investment strategy is intended to maintainthe perception of McDonald’s as a modern, progressivecompany and enable us to upgrade the customer experienceand maintain market share in an ever-increasing ceBorrowingsPayDividend

Finance at McDonald’sPage FinanceTrainingEducationGlossaryI.T.FINANCIAL TARGETS & MEASURESA key role of the McDonald’s finance team is to helpformulate relevant targets for the business and reportactual performance against these targets. Analysing thisdata allows us to highlight areas where improvementsmight be made within the business. As with all McDonald’sperformance analysis, financial measures are consideredalongside non-financialmeasures,and in consideration of longCustomer ServicesTalking PointApprenticeshipsterm effects, so as to evaluate the activity from a balancedposition.Key Performance Indicators include:Comparable Sales GrowthMeasuring increased demand and market expansion isdone by comparing like-for-like sales, year-to-year, day-to-day.McDonald’s breaks this down further into the comparablesales for different areas of the business so as to identifyareas of sales growth opportunity and enable it to adaptquickly to changes in the market. For example, comparing: Sales at different times of the day Sales at restaurants located near each other Sales of specific products over timeProfit GrowthReturn onInvestmentROI Annual Profit Investmente.g.If McDonald’s pay 15,000 for a shakemachine and therestaurant sell 20,000milkshakes with a profit of10p on each, the returnon investment is :10P X 20,000 15,000 13.3%Increasing the bottom line profit in the long-term throughsales growth and improved efficiency in cost management.Return on InvestmentMcDonald’s is evaluated by its shareholders on how wellit invests its money. Shareholders require a certain levelof return which means it is important for McDonald’s tofocus on making decisions that satisfy and maximise thisreturn. For each project undertaken, the potential return oninvestment (the estimated profit return as a percentage ofthe initial capital investment) is an important measure used bymanagement in considering the viability of the project.There are specific targets for McDonald’s larger capitalinvestments, such as new restaurant openings which mustachieve a 20% return over a 10 year period and re-imaginginvestments, which must achieve a 20% return over a 5 yearperiod.