We’ve all seen the commercials for investment advisors with the memorable disclaimer “past performance does not guarantee future results.” While this may seem intuitively true, this statement underestimates just how incredibly instructive past performance can be.
History provides us with a crystal clear vision of what worked and what didn’t in any given situation. It allows us to plan, predict, mitigate risk, and position ourselves to capitalize on opportunities. The future is and always will be an unknown; however, if we study our past and learn the lessons of history, we will be more ably equipped to profit in the future.
In this age of digitized everything, there is an ever growing reserve of actionable data available for analysis McDonald’s Owner/Operators and their financial advisors have at their disposal.
Sorting through and making sense of this enormous volume of facts and figures can seem daunting, but it doesn’t have to be. One method of analyzing past performance and planning for those future results is known as Trend Analysis.
What is Trend Analysis?
Trend analysis is the process of comparing business data over time to identify any consistent results or trends. You can then develop a strategy to respond to these trends, in line with your new or existing business and financial goals.
Trend analysis helps you understand how your business has performed, as well as predicts where current business operations and practices might take you. Done well, it will provide ideas about how you might change things to move your business in the right direction.
It’s important you know where your fiscal strengths and weakness may lie, and how your key financial ratios will be affected by next month’s performance. By analyzing and familiarizing yourself with these trends (specifically those of your most recent trailing 12-month period), you will be more able to make sound business decisions that will positively impact your future results as well as keep you fully informed on the current state and potential future of your business’s financial viability.
Speaking of Financial Viability…
With McDonald’s new 10-point financial viability scoring system, knowing where you are and where you are headed – in terms of financial viability – is more critical than ever. Concannon Miller’s Financial Viability Assessment tool provides the pertinent trailing 12-month reports for liability turnover, cash-flow coverage, G&A and Owner/Operator draw activity, and debt service that make trend analysis simple and future planning much more meaningful. When looking forward and trying to predict where your financial viability may be 1 month, 3 months, or even 6 months in the future, it is imperative you look back within the relative trailing 12-month period to see what historical performance may be falling off of the calculation, and when.
For example, say your most recently completed month is September and your TTM cash flow coverage ratio, as of September, is 1.07. Keep in mind that your cash flow coverage ratio of 1.07 is the average of all of the individual preceding 12 months’ cash flow coverages ratios (from October to September). In order to simply remain at a 1.07, your current year October cash flow coverage ratio must be at least equal to the cash flow coverage ratio of the previous October (assuming all other factors are unchanged).
In other words, if you had a single month cash flow coverage ratio of 1.80 last October, you will need at least a single month cash flow coverage ratio of 1.80 this October. You can see how important it is to stay well versed in your historical performance, if for no other reason than to avoid unpleasant and unnecessary surprises.
READ MORE: McDonald's Financial Viability Assessment (FVA)
The Power of Analytics
Another term for the process of data analysis described herein is analytics. As discussed, trend analysis or analytics is a power tool, with almost unlimited application. Many McDonald’s Owner/Operators already (perhaps unknowingly) employ analytics when mapping out a marketing strategy or when reviewing financial statements with management.
With marketing, one potential result of the use of analytics is the identification of the most appropriate or impactful discounting days. For example, one could aggregate all of the previous months’ (or any historical period, really) sales by weekday (Sunday-Saturday) to determine which day, on average, yields the highest sales volume and which day yields the lowest.
Using this information, you may be able to increase sales on your weakest day by running a promotion or increasing targeted marketing efforts. Conversely, you may be able to boost cash flow on your strongest sales volume day by removing an existing promotion or discount in the hopes that overall foot traffic / guest count will remain constant.
Trend analysis, or analytics, allows you to look at large and complex amounts of data to identify business trends and true drivers of performance while controlling for variables that may otherwise lead to incorrect conclusions. This data-driven approach can help McDonald’s Owner/Operators better understand where they are strong, where they need improvement, and how to use valuable resources effectively in order to achieve their goals.
