McDonalds Business Report 2012

Date: 24/04/2012

Company Overview
McDonalds Corporation is a global leader in the fast food industry. Over
the years the company has posted impressive financial results. Today,
McDonalds still remains remarkably competitive in this hungry market.
Both the domestic and international sales have been significantly high. In
2009, sales in the U.S exceeded more than $1.5 billion (Oches, 2001). Its
consolidated revenues for 2011 amounted to $27,006.2 million. McDonalds
serves more than 68 million people globally, and operates in 119 countries
(McDonalds, profile 2012)

McDonald’s history dates back to the 1940’s, having first started off as a
barbecue restaurant. It steadily developed over the years and has grown to
occupy a leading position among the top quick service restaurants
(McDonald’s, History 2012). A crafty businessman by the name of Ray Kroc
helped develop McDonalds to what it is today. His vision in 1954 persuaded
brothers Dick and Mac McDonald to expand their business domestically and
in 1955 ‘McDonalds’ was officially founded (McDonalds, Ray Kroc, 2012)
“I’m loving it”, really describes McDonald’s fast food. The menu may
include French fries, Big Mac, Egg McGuffin, Apple Pie, Chicken McNuggets,
Shrimp burgers, and even Rice & bean burgers among others (Adams, 2007).
McDonalds caters for all ethnic groups and serves a variety of people. “The
company focuses on uniform menu along with global variations as per the
demand of the local consumers and their preferences” (Morning Star, MCD
10-K report, 2011)

Vision of McDonald’s:
‘To be our customer’s favourite place and way to eat’ (McDonald’s,
2012)
McDonald’s Promise:
‘To provide simple easy enjoyment to every customer at every visit’
(McDonald’s, 2012)
Budgeting process: McDonalds Corporation clearly focuses on alterations
in the financial reporting requirements, accounting principles, and other
related practices when considering the budget of the financial statements
and accounts of the company (Morning Star, MCD 10-K report, 2011). By
concentrating on what is most important within the market, McDonalds can
also get a clearer picture in regards to customer needs, and accordingly
budgets its financial statements. Its corporate thinking of “Plan to win”, the
company concentrates on holding a competitive position in the fast food
industry by further focusing on differentiation. The company expects
changes in sales and other related aspects with a focus on the changing
market conditions and customer preference. McDonalds has roughly
estimated the addition of 12% of revenues from its restaurant sales across
the globe, 2010 (8% in regular currencies). The company assumes no sudden
change in its cost structure, but it anticipates an increase of 1% sales in U.S
and European markets (Morning Star, MCD 10-K report, 2011) “By listening
to our customers’ needs and optimizing our menu, we can become a better
company” Jim Skinner, McDonald’s chief Executive (McDonalds , 12/08/2011,
Report)

The budgeting process of restaurants is classifiable into five essential steps.

The first step is to set business targets. These targets are compared with
already consolidated historical data. The final step in the budgeting process
is determining the break-even point; this can be measured in units and sales
(Putra, 2009). A preparation of corporate strategies is then carried out and
finally a master budget is compiled after receiving and taking into
consideration the inputs of all related departments.
Due to the ever-changing business environment which can result in an
unexpected increase or decline in demand, the restaurant uses forecasting
techniques to ensure that there is a relative consistency in its business
strategy. By analysing previous monthly results, managers can use the data
to revise business strategies. A new forecast can be prepared based on the
previous month’s findings, and then a final forecast is put in place for a
financial year. “Training employees to perform one simple task repeatedly is
an effective and efficient way to achieve business goals. Today, McDonalds
uses this method” (Capozzi, 2012)
Management accounting systems: Planning for its management accounting
systems McDonald’s focuses on, Enterprise Resource Planning. “An ERP would
provide the company with a positive solution to its 10 most challenges ” (Davidson,
2006) these include Customer satisfaction, Franchisee monitoring standards, Threat of
substitutes, Changing customer eating habits, Growth capital Investments, Obsolete
strategies, Decentralization, Franchisee alienation, and investor relations.

All transactions and related sales are processed through an online computerised system
which is connected to head office who systematically records all relevant information of
products sold internationally. For example, the restaurant sells its main items in large
quantities for which it also needs to purchase orders of raw materials from its regular
suppliers. Placing orders means the transaction is in process and the required
information of such transactions is stored accordingly. This data usually includes
quantity ordered, customer related details, and other important information. The
integrated management accounting system ensures that headquarters have all the
relevant data for better control of the business (McDonald’s, 2012). These systems
provide update information to managers who in turn make decisions based on concrete
information rather than speculation. Solid information is effective for smooth operations
(Landis-Stewart, 2012)

Managing accounting systems at McDonalds also incorporates information systems in

management accounting to ensure efficient dissemination of information for informed
decision making. Among the most important information systems in place are decision
support systems (DSS), management information systems by integrating people, and
technology & information as resources. Other information systems may include scale of
point system or the Hyperactive Bob system for effective monitoring of traffic towards
the restaurant. Bob has been tested in a number of fast-food restaurants including
McDonalds and Burger King (Shropshire, 2006)

“As all businesses face challenges on a daily basis, McDonald’s greatest

hurdle is managing stock. The stock management problem is how to meet
customer needs and to minimize waste” (The Times 100, 2012)
Costing processes: McDonalds Corporation strongly focuses on Activity based
costing system (ABC). There are three ways of serving that represent the cost pools for
McDonald’s activity based costing. For each of these pools, cost drivers are identified.
By utilizing the cost drivers identified managers are able to control the cost of activities
involved in take-out service, eat in service, and drive through services which are distinct
from each other. Cost drivers from the basis of charging the cost of each and every
activity in the product. Activity based costing allows McDonalds to study the costs of
meals served in each of these services (McDonalds website, 2010)

“Nearly 75% of McDonalds shopping bill comprises mainly of 10 different

commodities, the company strongly focuses on a handful of goods approach to analyse
the cost of the commodities which is expected to increase by 4.5% to 5.5% in America
and 2.5% to 3.5% in Europe for the 2012 fiscal year” (Morning Star, MCD 10-K report,
2011) By breaking down the processes into individual sta ges and allocating costs for
each of these processes helps assess the true cost of manufacturing.

Capital decision making: McDonald’s capital expenditure for 2012 is expected to be

$2.9 billion and half of this will be used to open 1300 new restaurants, and the rest for
reimaging about 2400 existing restaurants globally (Morning Star, MCD 10-K report,
2011). In evaluation of its projects McDonalds Corporation applies capital asset pricing
model (CAPM). The main advantage to this method is its sensitivity to market risk and
rates of return, (McCracken, 2009) which substantially affects a variety of related
organizations. McDonalds must be able to obtain strategic making decisions for future
growth of the company. These processes will include gathering info rmation, setting
goals, and executing a strategic plan (Thinking bookworm, 2012)

When making capital decisions McDonalds evaluates the performance of its franchisees
and restaurants. The company’s cost control strategy also affects capital decision
making. For example, McDonalds concentrates on existing stores to match to the
demands and expectations of the customer. Non-profitable restaurants are shut down
while new ones are opened globally. During the period between 2003 to 2004
MacDonald’s spent $490 million from its capital budget to refurbish more than 1,000
existing stores (McDonalds, 2010) Half of the capital expenditure for 2012 ($2.9
billion) will be spent on reinvestment of existing resta urants (Morning Star, MCD 10-K
Report, 2011)
The company’s revenue from its franchised restaurant amounted to $8,713.2 billion. But
regardless of these outstanding figures McDonald’s corporation frequently makes cuts
to its capital budget. By reducing its debt the company hopes to strengthen its financial
position and stay number one in the fast food industry. Also, by cuts in the budget the
company is able to repurchase shares. The earnings per common share in 2011 were
($5.27 and 15%) compared to 2010 ($4.58 and 11%) – (K-10 report, 2011)
“It is difficult to forecast accurate results due to currency exchange rates so, McDonalds
mitigates exposure by financing currencies, hedging certain foreign cash flows, and
purchasing goods and services in local currencies” (Morning Star, MCD K-10 report,
2011)

Capital Acquisition and structure: The capital is generally acquired by its franchise
restaurants internationally and strongly focuses on spending the capital on its market
base... McDonalds also concentrates on acquiring debt obligations, loans from public
and private sectors, and bank loans. “By selling 600 Boston markets, which serves a
variety of food, the company can focus on expanding its international market” (Burrit,
2007). The company analyses its capital structure using the debt to equity ratio. Over
the years McDonalds has maintained a low debt to equity ratio. During the last 5 years,
the ratio has had a minimum of 0.5176 in September 2007, and a high of 0.9394 in
September 2011. The average ratio for that period has been 0.7709. By maintaining a
low debt to equity ratio, the company’s business strategy is heading in the right direction,
and implies less risky financing (YCharts, 2012)

Conclusion: The company’s impressive results speak for itself. This is the outcome of
many strategic moves that it has adopted. The budgetary process is well coordinated
with provisions for adjustment thus reflecting the true market conditions. Its activity
based costing has been instrumental in cost control. Furthermore, a solid capital
structure is depicted through the company’s efforts to keep the debt to equity ratio low.
McDonalds has always been strategic in gaining and maintaining a large market share
and lived by its word. With its different concepts and focus on cleanliness and speed,
the company has successfully made its presence in the global market (McDonald’s,
2012)
Information source: For collecting the information and data about the management
accounting and financial practices of McDonalds, the K-10 report, 2011, from the
Morning Star was most useful. Other sources included McDonalds Corporate website,
and online related sites. These sources provided valuable and creditable information in
regards to the company’s profile, budgeting process, accounting information systems
(MIA), costing process, capital decisions, capital acquisitions and structure.

Methodology: By researching online sites and analysing relevant information, I found

this to be the easiest method to increase the accuracy of data.

References
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Chris Burrit, August 6, 2007. Bloomberg. McDonalds to sell Boston Market.

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