Financial health is critically important to your success as a McDonald’s Owner. To help you measure your financial health, we’re doing a series of articles on the McDonald’s financial standard ratios, what they entail and how to improve them.
If you missed them, check our prior articles Your Next McDonald’s Ratio: Estimated Net Equity Percentage, Understanding and Managing Financial Ratios for McDonald’s Franchisees, An Important Metric for Franchisees: Trailing Twelve-Month Liability Turnover and Cash Flow Coverage Ratio: The Most Popular McDonald’s Ratio.
As mentioned in our previous articles in this series, the Financial Standard has three measures.
We talked in great length in previous articles about the Financial Viability Standard and its three components. The other two standards are: submits timely and accurate financial statements and pays McDonald’s and others on time.
- Submits timely and accurate financial statements: This requirement generally suggests using a CPA that is familiar with McDonald’s accounting and systems for uploading financial information. All operators are required to submit financial statements and loan information via WebFFS for each month by the 25th of the following month. For example, July financial statements and Debt Summary are due by August 25th. There is a compliance report that allows you to monitor your financial statement submission and compliance. The report is on WebFFS and includes information for the past 12 months.
- Pays McDonald’s and others on time: This requirement is pretty self explanatory. To facilitate this process, you can review your iReceivables account to see McDonalds invoices, pay McDonald’s invoices and manage banking information. Invoices for rent, service fees, and other McDonald’s related charges are all handled through iReceivables.
Other Financial Considerations
Employer Retention Tax Credit (ERTC) and Impact on Cash Flow Coverage Ratio
Based on McDonald’s reporting requirements, ERTCs need to be reported in the non-operating G&A section when submitting your WebFFS financial statement. As a result, the ERTC funds do not increase your cash flow before debt service, resulting in the amount being omitted from cash flow from restaurant operations.
However, since receipt of ERTC is a taxable event, additional monies will be taken from the business to satisfy this additional tax liability. In most cases a significant reduction in the CFCR will be the result. McDonald’s Corporation addresses a similar situation in its Business Review FAQ #4:
How does a non‐operating and/or non‐recurring event affect an organization’s financial viability measurements?
All business transactions should be recorded in accordance with GAAP and reflected on the financial statements appropriately. Any transactions or non‐recurring events will be evaluated by McDonald’s as part of the financial viability assessment where the transaction alters the overall financial condition of the organization.
For example, in situations such as a sale of restaurant(s) where a significant amount of cash may come into the business and then be subsequently drawn out, the draw may be excluded from the CFCR calculation for purposes of reviewing financial viability.
In addition, McDonald’s has indicated in its correspondence to Owners that consideration will be given to the PPP/ERTC funds as an offset to withdrawals as they have done in the past for other non-recurring withdrawals such as for restaurant sales. This treatment will offset the previously mentioned tax draw and, therefore, adjust the Owner's FVA to reflect restaurant operating activity only.
Things to consider in planning for the future with your FVA:
As you begin to plan for the new year, some items to consider:
- As interest-only periods expire, you debt service increases without you incurring additional debt. As a result, your CFCR will be negatively impacted.
- Develop a strategy to distribute excess cash/working capital or amounts needed to minimize your CFCR impact.
As we stated in the first article of this series, these standards not only provide a historical perspective of your business qualities but should also be used as planning tools to assess the viability of the future plans of your business.
They can and should be used annually when planning for income taken and whenever planning for succession, major reinvestments or significant personal cash needs. Planning coupled with these standards not only satisfies McDonald’s financial criteria but is also sound business practice.
Concannon Miller’s clients receive full FVA reports every month so that they are always up to date on their financial viability standing. Are you looking to be better informed? Contact us to find out more.
