From the 20 approved project topic recommended by Oxford Brookes University, I have selected topic 8 "An evaluation of the business and financial performance of an organisation over a three year period" for my Research and Analysis project (RAP). The organisation selected as the focus of my research work is McDonald's (International) Corporation.
Started in 1954 as a small burger restaurant in California by a man named Ray Kroc, McDonald's has become one of the world's leading food service retailers. It has in excess of 32,000 restaurants serving more than 60 million people in more than 100 countries every day (McDonald's, 2010). McDonald's is famous for its hamburgers such as Big Mac and Quarter Pounder and its irresistible French Fries. McDonald's also offers milkshakes and mouth-watering desserts. Acknowledging the growing concern regarding obesity trends and the healthiness of its product, McDonald's include salads, wraps and fruits which contain healthier nutrition to its menu.
Reasons for choosing project topic
Covered in ACCA syllabus
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This topic is being examined in the ACCA syllabus. Having completed paper P3 Business Analysis recently, this research gives an opportunity for me to enhance and extend the knowledge and skills that I had gained. Furthermore, I am keen to put my theoretical knowledge into practice.
Sharpen analytical and evaluating skills
Embarking on this topic will enable me to improve my analytical and evaluating skills. This set of skills has proven to be essential in completing my ACCA studies and also for my future careers as a successful professional accountant. The ability to evaluate and analyse information is a very important graduate attribute.
Nurturing the ability in analysing and evaluating business performance
It has always been an interest of mine to start my own business someday. This topic can help me to nurture my ability in analysing and evaluating business performance.
Reasons for choosing the organisation
Well established company
McDonald's has been in existence for 56 years and expanding. It is a global reputable company. Its market capitalization, trading volume and importance in an industry that is vital to the U.S. economy have resulted in McDonald's inclusion in the Dow Jones Industrial Average (DJIA) since 1985 (Annual report, 2009). McDonald's highly attentive, attractive and innovative product also its fast services have rendered its success compared to other fast food chains.
Readily available information
Being a highly publicise corporation, the required information for this research regarding the company such as its annual report, journal and articles is readily available and easily accessible. The precision of McDonald's official websites also contributed to ease of information gathering. Information could be gathered efficiently and effectively saving time and costs.
Personal preference towards organisation
Personally, growing up with McDonald's as well as still being one of its loyal customers, drives my preference towards the company. This research gives me the opportunity to analyse its financial and business performance and better understand the factors that contribute to its tremendous success over time.
Project objectives and research questions
To analyse the financial performance of McDonald's on a 3 year period by applying financial ratios.
How has the company performed financially over the past 3 years, that is, from 2007 to 2009?
Has there been any fluctuation in the key financial ratios over during the 3 year period?
How well has the company performed compared to its competitor?
To evaluate the business performance of McDonald's
Are the customers satisfied with McDonald's product and services?
How efficient is McDonald's in its operations?
Are the employees satisfied with the working environment at McDonald's?
Have there been any new products introduced and how successful had McDonald's been in its innovation in the market?
To enhance my analytical and IT skills for future professional development and employment role as well as to extend my overall communication and interpersonal skills
Overall research approach
The overall research approach I developed to meet the project objectives are firstly to understand the requirement of the topic chosen. As the topic requires an analysis and evaluation of the business and financial performance of the company selected, I therefore refreshed my knowledge on the methods and models of financial and business analysis learned during my ACCA studies especially from my Paper P3 Business Analysis textbooks.
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Secondly, I spent endless effort and time assembling information on the background of McDonald's, its product, services, its activities and the industry in which it operates. It is important for me to have an adequate understanding of the company first before making an analysis of its performance. I then selected McDonald's close competitor Burger King (BK), which operates in the same industry for benchmarking exercise.
Thirdly, I did extensive studying of McDonald's annual report which provides full details of performance of the company. Extraction of information from the financial statement included in the annual report is then conducted for the financial analysis. For the non-financial aspects of McDonald's, information is gathered from the annual report, corporate responsibility report and also from related articles and analysed using the non-financial perspective of a balance scorecard.
Lastly, as this is my first research conducted, I did thorough reading on citing and referencing according to Harvard Referencing System. This is to ensure I understand perfectly its requirement and that my RAP has been cited properly with correct referencing format.
PART 2 - Information gathering and accounting/business techniques
Sources of information
Primary sources of information are original materials that provide first-hand accounts of an event, conditions or phenomenon, which has not been interpreted by anyone other than its creator (University of Georgia Libraries, 2004).
In another word, primary sources are documents that come directly from the first person who recorded the event at the time it happened or occurred. Examples of primary sources are feedback obtained from an interview, records of an observation and results from market survey conducted.
The disadvantages of using primary information are the process involved in collection of required information can be very time consuming and costly.
For my RAP, primary sources of information will not be used. This is because due to the nature of the topic, I was able to complete my research by using only secondary sources of information.
Secondary sources of information are created later by someone who did not experience the event, conditions or phenomenon first-handed (Village, 2006).
Secondary sources analyse, interpret, and discuss information about the primary source (CustomPapers.com, 2010).
Secondary information is readily available and accessible at a low or sometimes no cost with lesser time needed to search for secondary sources.
Secondary sources that I used in this research are:
Annual reports - Included in the annual report are information in details of the company such as its Statement of comprehensive income, Statement of financial position, Statement of cash flows and other useful information. Such information helps in the calculation of ratios to analyse and interpret the trends in the financial statements.
Textbooks - They are used to better understand the definitions of the ratios and the accounting or business techniques required to be used in this research. Textbooks also provide direction on applying the ratio and guidance on the interpretation on the outcome of the ratios calculated.
Articles - Articles are very beneficial as it could further enhance my knowledge about the company. It brought to my attention of any recent or past issues and key highlights relating to the company that could support in analysing the company business and financial performance.
Methods used to collect information
McDonald's annual report is directly downloadable from its official website at http://www.aboutmcdonalds.com where its annual reports up to year 2009 from year 1996 are available. I also visited McDonald's competitors' official website to download and analyse their annual reports which can provide a clearer picture of McDonald's performance compared to its competitors.
As a student of Sunway University College, its library facility, Tun Hussein Onn Library (THOL) is used to facilitate in searching for appropriate textbooks and other resources that can be used as reference. The searching of information is relatively easy with THOL search engine. The assistance received from THOL librarians made the whole process very convenient as they are always available to answer my queries.
I had used search engines such as Google and AltaVista to extract relevant publication relating to McDonald's. Although a mass of information can be found, thoroughly reading and careful selection is required as some information provided on internet may not be accurate.
Limitations of information gathering
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Information gathered can be subjected to biasness of the information providers. For example, when searching for materials regarding McDonald's, the person responsible for the compilation of the information may have reasons to provide an extra optimistic or more pessimistic results of McDonald's which does not mirror the true image of McDonald's.
The genuineness and truthfulness of information gathered using secondary sources are unknown. It is also difficult to determine the quality of some of the data in question. To verify the overall quality of secondary information, it may be necessary to know how the data were collected, what the sampling plan was, and what data collection method was used (Wrenn et al., 2007).
Some of the information from textbooks is very old and out-dated. This is because there are newer editions of the book published which brings fresh ideas to the older versions. In gathering for information, I attempt to seek information from the recent editions. Up-to-date information is necessary to mirror an accurate analysis.
Annual report did not state McDonald's gross profit. Thus gross profit margin cannot be calculated and the impact of its cost of sales was unable to be determined. Other than that, McDonald's Corporate Responsibility Report (CRR) for year 2010 was not published yet. As such, I had to make use of information available on McDonald's CRR for year 2009 which excludes the information relating to year 2009 itself.
Ethical issues that arose during information gathering
Integrity is one of the ACCA fundamental principles. Integrity indicates that a member should always be straightforward and honest in all professional and business relationships (ACCA Rulebook, 2010). In the course of preparing my RAP especially in the process of information gathering, plagiarism is a serious issue that is often associated with integrity.
Plagiarism is presenting or submitting someone else's work, writings, or ideas
intentionally or unintentionally, as your own (Oxford Brookes University, 2010). Plagiarism is one of a number of practices deemed by universities to constitute cheating, or in university-speak: 'a lack of academic integrity' (Neville, 2010).
The Harvard Referencing System is used to resolve plagiarism issues to acknowledge the work of others by citing all sources and present the full details of information undertaken in the list of references.
Objectivity issue is also a matter of concern. Objectivity means members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements (ACCA Rulebook, 2010).
I was able to resolve this issue by not relying solely on one source of information in gathering the data for my analysis. I made sure I gathered plenty information on the same topic or areas so as to verify the accuracy and consistency of the data provided.
Accounting and business techniques used and their limitations
Balanced scorecard (BSC)
BSC is a strategic planning and management system that is used in business worldwide to align business activities to the vision and strategy of the organization, to improve internal and external communications, and monitor organization performance against strategic goals (Balanced Scorecard Institute, 2010).
The scorecard uses various perspectives to give a balanced picture of the current performance and the drivers of future performance (Carnall, 2007).
The four perspective of a BSC are:
Internal business process
Learning and growth
Diagram 2.1: The Balanced Scorecard
Source: (Matthews, 2008)
However, BSC also has its limitations. Some of its limitations are:
Poorly defined metrics
Metrics need to be relevant and clear. Customer satisfactions for example, are difficult to identify and quantify. Company may select non-financial metrics that are simple and readily available, such as length of customer service calls or time to answer. These measures however, encourage employees to cut calls short which lead to frustrated customers (Smith, 2010).
Lacks of a well-defined strategy
BSC depends on a well-defined strategy and an understanding of the linkages between strategic objectives and the metrics. Without this foundation, the implementation of BSC tends to be unsuccessful (NetMBA, 2010).
Most metrics are lagging
Majority of measures on BSC are measures that describe past performance. Almost all financial measures are lagging indicators. Leading measures are also needed to plan for the future performance (Brown, 2007).
Consider only the four measures
Emphasising on this four measures do not paint the overall picture for the company. BSC does not take into consideration other several important interest groups such as the suppliers and competitors (Levine, 2010).
Ratio analysis are most important technique of financial analysis where quantities are converted into ratios for meaningful comparisons, with past ratios and ratios of other company in the same or different industries which determine trends and exposes the strength and weaknesses of a company (Business Dictionary.com, 2010).
Ratio analysis may provide the initial warning indications that allow management to take action to solve the business problems before business is destroyed by them (ZeroMillion, 2009).
Ratio analysis that I used in analysing McDonald's performance can be categorized into 4 categories:
Shows how successful a company is in terms of generating returns or profits on the investment that it has made in the business (CreditGuru.com, 2009).
These ratios are important in measuring the ability of a company to meet its short term obligations (CreditGuru.com, 2009).
It measures the financial risk of a company's capital structure. Capital structure refers to the how an organisation is financed (BPP, 2009). The higher this ratio, the more risky the company is during economic downturn.
These are commonly used by investors to assess the performance of a business as an investment (tutor2u, n.d.).
Although ratios are simple to calculate and easy to understand, there are serious limitations to consider. Some of the important limitations are:
Ratios are calculated based on figures which have been recorded in the financial statements. Therefore, the ratios calculated provides past trends but not the future trends which are not very useful for future decision making (Financial Modelling Guide, 2010).
Firms of the similar business may widely differ in their size and accounting policies used to value certain items. Thus, makes comparison between ratios to be difficult and misleading (eHow, 2010).
Fluctuations in prices, costs or asset value at end of reporting period will make the ratios inaccurate in its assessment (eHow, 2010). Therefore, company are encouraged to use average values when such value are available.
Limited use of single ratios
A single ratio is unable to make an accurate analysis. To make a better interpretation, a number of ratios have to be calculated and combined which can confuse the analyst than help them in decision making (NetMBA, 2010).