Keeping your McDonald’s business financial sound requires that you pay close attention to the financial data you are generating every day. You must generate enough income to meet your operating expenses and debt service, while allowing for growth. Tracking the numbers is essential if you are to ensure financial viability.
McDonald’s corporate accesses the financial viability of its franchisees through four measures:
- Balance Sheet Ratios:
- Cash Flow Coverage
- Working Capital
- Liability Turnover in days
- Organizational Equity
- Timely payments to McDonald’s and other vendors
- Accurate and timely transmission of financial information
- Does each restaurant’s level of reinvestments meet NRBES?
Working Capital, WC, is the measurement of a business’ ability to pay its 30-day liabilities. The primary reason people look at a balance sheet is to determine a company’s working capital, or current position. The target for your WC ratio is to be greater than zero or “positive.” McDonald’s guidelines call for WC to be greater than $1, which means there should be at least $1 in total current assets for every dollar of 30-day liabilities.
Going hand-in-hand with WC is Liability Turnover in Days (LTD) which calculates the number of days of next month’s sales that are needed to meet this month’s liabilities. In other words, how long will it take you to earn enough revenue to pay off the bills you will accumulate during the month. McDonald’s guidelines call for an LTD of up to 7 days.
Here is an example of a positive WC. Keep in mind your numbers may vary.
| Notes Payable (Current Portion): | $120,000 (principal due within the next 12 months) |
| Notes Payable within 30 Days: | $ 10,000 (equals current note portion ÷ 12 months) |
| Total Current Liabilities: | $500,000 |
| Notes Payable (Current Portion): | $120,000 |
| Notes Payable within 30 Days: | $ 10,000 |
| 30 Day Liabilities: | $390,000 |
| Total Current Assets: | $450,000 |
| Working Capital: | $ 60,000 (total current assets less 30 day liabilities) |
Here is an example of the calculation when the WC is negative. This example assumes the same facts as above but with current assets of only $350,000.
| Notes Payable (Current Portion): | $120,000 (principal due within the next 12 months) |
| Notes Payable within 30 Days: | $ 10,000 (equals current note portion ÷ 12 months) |
| Total Current Liabilities: | $500,000 |
| Notes Payable (Current Portion): | $120,000 |
| Notes Payable within 30 Days: | $ 10,000 |
| 30 Day Liabilities: | $390,000 |
| Total Current Assets: | $350,000 |
| Working Capital: | ($ 40,000) (total current assets less 30-day liabilities) |
| Trailing Twelve Month Sales: | $2,800,000 |
| # of days open for the year: | 363 |
| Average Daily Sales: | $ 7,310 |
| Working Capital Surplus/Deficit: | ($40,000) |
| Average Daily Sales: | $ 7,310 |
| Liability Turnover in Days: | 5.47 |
The more you can build the Working Capital ratio over $1, the better your company’s ability to pay its liabilities and not be burdened with debt over the long term.
Here are some steps you can take in your organization to increase your WC:
- Increase Cash and Current Assets (build cash in your organizations)
- Decrease Current Liabilities
- Increase Sales
Here are some situations that may have a negative effect, or decrease your WC:
- Decrease Cash and Current Assets
- Increase Current Liabilities
- Decrease in Sales
Companies with negative working capital may lack the funds necessary for growth and reinvestment. In some cases negative working capital may be an indicator of a more serious problem. It is almost always advisable to build cash within your organization.
Financial business planning and tracking key indicators such as these financial ratios should be a part of the management plan for every McDonald’s Owner Operator. Spend some time with your CPA to develop a proper plan and reporting format for this information so that it can be reviewed and analyzed in a timely fashion.