What McD operators should know about reviews
Businesses evaluated on financial benchmarks

By Freya Myers, CPA
McDonald's operators typically know what to expect from the operations part of their annual business reviews but often may be surprised with the financial part. 
The first thing to know is that a financial analyst for each operator's region reviews the Trailing Twelve Months' financial data, five-year sales histories, top 25 percent and 50 percent norm opportunity reports, and required reinvestment detail for each store.  
Each business is evaluated based on certain benchmarks. The following balance sheet ratios are computed to make sure the business is performing within McDonald's Corporation's targeted guidelines:
· Net Equity Percentage (target of at least 25 percent) - This measures the value of the business compared to the debt against it.  The value of the restaurants is computed by multiplying the Trailing Twelve Month's cash flow by 4.5.  McDonald's notes that the discounted cash flow method produces a more accurate result; however, they use this quick method for simplicity.
· Liability Turnover (target of less than seven days) - Liability turnover measures the number of days' sales needed to cover the previous month's working capital deficit.  Working capital deficit is the amount that current liabilities exceed current assets.
· Cash Flow Coverage Ratio (target of at least 1.2) - This ratio measures the ability to repay long-term debt. Banks use this measurement extensively.  When McDonald's notifies an operator that he or she is below the ratio, the operator should notify us as soon as possible so that we can verify that correct data was used.
If an operator's debt summary is not submitted to McDonald's monthly, McDonald's may not be aware of loan payoffs or other changes that would cause the computation to be incorrect. Another item that is often mistakenly included in the computation (due to the way that the FFS system combines G&A expenses) is the depreciation in the administrative section of the P&L statement.
Remember that distributions decrease the cash flow coverage ratio. A tip to help operators meet the standard is to monitor the impact of any large distributions.
Operators should be aware that cash from the sale of stores is not included in the cash flow coverage ratio. Ideally, the operator would use the cash from the sale of a store to repay debt; however, this is not always the case when large prepayment penalties exist.
There can also be problems with meeting the ratio when an operator sells a store and then takes a large distribution to pay off personal debt. These proceeds are not included in the ratio computation but the distribution is included.
Sparkmon & Associates typically computes the cash flow coverage ratio for clients based on their June and December financial statements; however, we can compute it more frequently if requested.  Some operators prefer that we compute this ratio on a monthly or quarterly basis so that they can keep a close watch on it.
· Profit and loss days (target 25 days, but recommended 15 days) - McDonald's financial review takes into account the average number of days that P&L information is submitted. McDonald's requirement is 25 days but 15 days is recommended so that operators can quickly identify and correct any cost issues.
· Norm opportunity reports - The top 25 percent and 50 percent norm opportunity reports are thoroughly analyzed in annual business reviews. Operators should review these reports regularly to identify opportunities for increased profitability. 
· Restaurant reinvestment - This is another key component of the operator financial review.  A three-year reinvestment plan for each restaurant will be presented. Repairs, remodels and equipment replacements that are needed are listed. Rebranding or rebuilding may be suggested for some stores.  The POS upgrade requirements will also be discussed.
It is essential that operators plan for the significant upcoming reinvestments. The new five-year reinvestment tool can help with planning. It is very user friendly. The tool can be found at www.mcdinvplan.com.  Operators' passwords were emailed to them earlier this year; however, there is a "Forgot Password" link on the Website that will email a new password.
Please call us if you have any questions or need assistance with any part of your annual business review.

Freya Myers is a CPA with Sparkmon & Associates and has been a member of Sparkmon's Tax Team since 2002.

Don't let a natural disaster become a personal one
Protect documents, valuables from loss

Planning what to do in case of a disaster is an important part of being prepared. The Internal Revenue Service encourages taxpayers to safeguard their records. Some simple steps can help taxpayers protect financial and tax records in case of disasters.
Listed below are tips for individuals on preparing for a disaster.

1. Electronic recordkeeping ­- Take advantage of paperless recordkeeping for financial and tax records. Many people receive bank statements and documents by e-mail, which is a great way to secure financial records. Important records such as W-2s, tax returns, home closing statements, insurance records and other paper documents can be scanned onto an electronic format. These can be copied onto a "key" or "jump drive" periodically and then kept in a safe place. (We have covered various data backup options in previous newsletters and memos. Please call our office if you would like more information.) Remember to secure all records with a password.
2. Document valuables - The IRS has disaster loss workbooks for individuals that can help compile a room-by-room list of belongings. One option is to photograph or videotape the contents of the home, especially items of greater value. Those photos should be stored in a safe place away from the geographic area at risk. This will help recall and prove the market value of items for insurance and casualty loss claims.
3. Update emergency plans - Emergency plans should be reviewed annually. It is important to have a reliable way to receive severe weather information and know what should be done if threatening weather approaches. Those who have a NOAA Weather Radio should make sure it has fresh batteries.
4. Use resources at the IRS - The IRS has valuable information that can be recovered if personal records are destroyed. Those impacted by a federally declared disaster may receive copies or transcripts of previously filed tax returns free of charge by submitting Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, clearly identified as a disaster related request.

For more information type "Preparing for a Disaster" in the search box on the IRS.gov homepage.

Are you getting the most from your life insurance policy?
Take a fresh look at this critical investment

Circumstances in life change, and so could the needs of one's life insurance policy. It is advisable to review from time to time the goals of the policy and products  that are available to make sure this critical investment tool is working optimally.
The following are some questions to ask when analyzing one's life insurance policy:

• What is the need, purpose and goal of the existing policy? A policy that was originally taken out to provide supplemental income for a surviving spouse may now be needed only to pay estate taxes or to pass on additional wealth.
• Has the insured's health improved since the policy was purchased? If so, then the policyholder may be able purchase a policy with the same coverage at a lower cost.  If the insured's health is the same, some companies could charge less in premiums due to greater longevity.
• What is the policyholder's estate tax exposure?  On Jan. 1, 2011, the estate tax exemption is scheduled to move to $1 million per estate. If the insured's assets are low enough or have decreased in value, he or she may no longer need the policy to pay estate taxes and could reduce its death benefit, cancel it or try to sell it. Alternatively, one's life insurance needs may increase with the upcoming increase in estate taxes.
• What is the policy's design? Many policies issued 10 or 20 years ago were designed to endow at age 100, which means the cash value would equal the death benefit. Policies are now available that do not endow. Those who want only a death benefit could pay less in premiums.
• Does the insurance company have a good credit rating? It's a good idea to request a financial report for the company that issued the current policy and that of any new policy the insured is considering.
• Would it be feasible to exchange the policy for cash value? It might be worthwhile to surrender an existing policy for its cash value, pay the tax on it and buy a new policy.
• Is the policy meeting projections? It is advisable to run projections on every life insurance policy to see how it will perform until life expectancy. For example, interest rates may have been higher when the policy was purchased, which means the policy projection would have shown a lower premium outlay than with lower interest rates.
• Who owns the policy? A policy will be included in the owner's estate for estate tax purposes. However, it can be owned by other entities, such as a trust, which would keep it out of the policyholder's estate.
• Is the insurance professional involved independent? It is important to know whether the insurance agent is product- and company-neutral. Many non-independent agents cannot sell all products on the market, meaning the policyholder could be missing out on crucial investments. 
• Is term life insurance or universal coverage the better option? Investors should evaluate how comprehensive they need their life insurance policy to be. For some, pure death benefit protection, as provided by term life insurance, may be sufficient. Term life insurance provides coverage of the policyholder's financial responsibilities upon death. Term insurance is the least expensive coverage, but it may not meet the insured's long-term needs. On the other hand, permanent life insurance, such as whole, universal or variable universal, provides coverage insurance as well as offering an investment piece.

Please contact us if you have any questions or need further information.

Sources: Capstone Wealth Management LLC in New York City and Journal of Accountancy, April 2010.

McDonald's Corp. considered a 'model' business
Company named among 5 most influential business models

Bu­siness strategy may not be a science, but using the right method with the right materials in the right place at the right time can create explosive results. HowStuffWorks.com gathered some examples of the most successful business models that have gone on to make lasting impac­ts on industry, consumers and the world at large. One notable point is how each of the following companies rode to success largely on the strength of their business models. Sure, McDonald's has a great-tasting burger, but it was the business model that catapulted the company (and ultimately the fast-food industry) to widespread popularity and renown. Here's a look at five of the most influential business models that changed the face of their industries:

1. Wal-Mart - The advent of supermarkets in the 1930s proved to the business world that cutting costs to deliver low prices can turn a profit. Retailers brought this logic over to general stores soon afterward. By sparing the frills and getting back to the bare necessities, stores could save money on presentation. They also saved money by cutting back on personnel, which meant less personal service. But saving money in these areas meant the store could charge competitively low prices, which drew customers in despite the bare-bones setup.
   Sam Walton saw that general stores were turning a good profit, but he found a way to perfect the business model. Instead of catering to heavily populated areas, which conventional wisdom would advise, Walton started building stores in rural areas. Specifically, he built stores in towns with populations of 5,000 to 25,000 people. Customers preferred to shop at these stores rather than drive to the nearest city. Because Walton was the first to go after these small markets, he had a significant advantage over any competitor that dared enter that terrain afterward. Today, Wal-Mart wields so much power that a company's survival may depend on landing a deal with the retailer.
2. Microsoft -  At the emergence of the computer age, Microsoft got a head start by developing the operating system (OS) for IBM's personal computer in 1981. Since then, Microsoft's ability to adapt to new developments and challenges has kept it at the top of the industry.
   In the race to develop software for the non-techie community, Microsoft used its OS to dominate the market. What's more, any other company that wants to develop software that's compatible with the OS has to pay royalties. This market dominance allowed Microsoft to get in on the rising Internet phenomenon in the 1990s. Though Microsoft was a relative latecomer on the scene, the company developed a Web browser, Internet Explorer, and pitted it against Netscape, which was considered a superior browser. But by attaching Explorer to the rest of its successful applications in the Office suite, Microsoft gained a stronghold in the information superhighway and beat out its competition.As Microsoft spread its software influence, the company outpaced competitors in other arenas, which today includes not only operating systems and Internet browsers but also gaming.
3. McDonald's Corporation - Two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame-seed bun: That's good food. But speed, quality, consistency and real estate? That makes for a great business model. When the McDonald brothers had the brilliant idea to incorporate the assembly line into the restaurant business, they c­reated fast food. However, it wasn't until a salesman named Ray Kroc came along that this new industry discovered its full potential. By partnering with the brothers and eventually taking over the business, Kroc started McDonald's Corporation, a company dedicated to franchising the restaurant. Franchising wasn't a radical idea: McDonald's and other restaurants had been doing it before Kroc came along. But Kroc took a different slant on the concept.
   Kroc kept strict control over his franchises, making sure that every restaurant across the country upheld his business practices and standards of cleanliness. His business methods turned off large investors, and the cost of leasing land made it hard for Kroc to turn a profit, so he adopted a policy of subleasing his properties to the franchisee. Real estate provided the cash flow Kroc needed for more down payments on additional land for his growing franchises. As a landlord, McDonald's Corporation has built the largest restaurant chain in the world, and its business model inspired enough imitators to launch the fast food industry.
4. Amazon.com - In the mid-1990s, entrepreneurs were scrambling to find ways to take advan­tage of the Internet, which was still in its infancy. Although it was thought to be­ a considerable gamble at the time, Jeff Bezos's plan was one of the few that ultimately worked. His business model proved the axiom "slow and steady wins the race," even on the information superhighway.
   Challenging brick-and-mortar bookstores, Bezos started Amazon, an Internet company that sold a wider collection of books than stores could carry. Bezos bought warehouses to hold a vast inventory so Amazon could offer direct-to-consumer service. Bezos allowed readers to criticize products through reader reviews, and he built a faithful community of users. Amazon earned interest on immediate customer payments before paying its suppliers.
   Although it didn't see profits until the early 2000s, Amazon survived the burst of the dot-com bubble. It began offering products ranging from CDs and electronics to apparel. Amazon also fueled profits by acting as a portal for third-party affiliates, who handled the warehousing while the company took a share.
5. Dell - Until Dell came along, a vast inventory was considered a necessary evil for computer companies, who watched as their shelves of pre-ordered parts grew outdated by the­ second. Dell adopted a process Toyota used first in the 1960s called the Just-in-Time (JIT) method. Under this process, Dell no longer had to predict the right parts to order. Instead, it almost completely eliminated inventory. At one point, this meant keeping one week's worth of inventory on hand, and later as little as two hours' worth of supplies.
   The JIT method combined with Dell's direct-to-consumer process made for a dynamite business model. In the end, Dell was able to cut out the retail middleman and instead sell its products directly to the consumer. This cut down on costs (resulting in a competitively low price for the consumer), and it also contributed to faster service.
   Customers order what they want, and after they pay, Dell orders the necessary parts from suppliers and builds the custom PC. Dell can wait up to a month before paying its suppliers, so the company earns interest on customer payments in the meantime.

Source: HowStuffWorks.com "5 Influential Business Models" by Jane McGrath

The Internal Revenue Service requires us to inform you that any tax advice contained in this letter cannot be used for the purpose of avoiding penalties under the Internal Revenue Code or for promoting, marketing or recommending to another party any transaction or matter addressed herein.

In This Issue

McD's Annual Business Reviews

Safeguard Against Disaster

Life Insurance Check

5 Influential Business Models

Tax Tip

Free Credit Report?

Visit us online!

www.sparkmon.com

Tax Tip

Personal income tax payments paid out of the business are considered personal distributions. The timing of distributions should be monitored as they impact your cash flow coverage ratio, which in turn impacts your ability to get financing.

Free? Not always

It's a good idea to keep an eye on your credit score, but make sure you're getting your money's worth. One of the more popular sites, freecreditreport.com, is not exactly what its name implies. The site, owned by Experian, offers a free one-week trial, but then it automatically signs up subscribers for $14.95-a-month credit monitoring. Visit annualcreditreport.com for a truly free report once every 12 months.