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McDonald’s Managing Financial Principles & Techniques

Executive Summary McDonald’s plan to extend its operations to the UAE is a good move. The company should establish the best pricing method to use as well as come up with an appropriate budget for the anticipated expansion. The report recommends that McDonald’s should price its products/services below the competition in order to survive the stiff competition that is present in the restaurant industry. McDonald’s sales budget is approximately $ 2000000. This figure represents a variance of 5.7% that the researcher considers immaterial considering the huge budget that is associated with the anticipated expansion. In order for McDonald’s to operate within its budget, it should opt to expand to the UAE through a merger as it is the most economical as well as effective strategy the expansion.

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Introduction

McDonald’s has greatly expanded since its foundation in 1948. McDonald’s is the leading chain of restaurants worldwide. McDonald’s offers fast food such as hamburgers, fries and meat pie, as well as chips. The success of the McDonald’s can be associated with its strategic pricing method that has ensured that it provides its products/services at affordable prices to its targeted markets. The mission of McDonald’s is to illustrate customers’ favorite places to eat. McDonald’s is committed to five basic features that entail people, place, promotion, products, and prices. McDonald’s uses different pricing for different market segments.

For example, a McDonald’s restaurant that is located on a roadside or shopping mall in an exclusive neighborhood offers its menu at a higher price than a McDonald’s restaurant that is not located in an elite area. McDonald’s segments its customers by location. This strategy of pricing is a very effective method of availing the same product at different prices in various market segments. In addition, McDonald’s has developed pricing policies tailored for prices increases, as well as for economic downturns.

McDonald’s differentiates its prices by introducing cheaper menu such as cheeseburgers, chicken burgers as well as drinks that cost $ 1, which target low-income families. Because of the recent economic recession that has existed since 2008, McDonald’s was able to realize profits and particularly in 2010, from the profits generated from the sale of Dollar Menu sales (Ghosh & Sidana 2012).

Main body

Many new business ventures fail for lacking adequate knowledge about strategic pricing methods. There are some important marketplace factors to consider when determining prices for new products and services, including the market segment, distribution costs, as well as level of competition. In order for business owners to succeed in selling goods and services, they should stay abreast of the factors that affect prices and respond swiftly. There are three important factors in pricing. Price alone is very insignificant when the context of operating costs is not considered. One essential consideration in pricing is labor cost.

Labor cost is the money for paying for work done. Other essential considerations include material costs as well as overhead costs. Overhead costs are expenses that cannot be termed as either material or labor costs. They include expenses such as advertisements. Overhead costs are variable or fixed. Another important factor to consider when pricing is the costs of goods sold. Cost of goods sold entails the overall business costs for producing the products a company sells or the overall costs for purchasing products for sale. Delivery, as well as freight charges, are inclusive (Brodsky 2000).

All methods of costing consider the three aforementioned factors in order to avoid offering products and services at a loss. McDonald’s may opt to price its products above the competition. This process entails setting the prices of its products and services above the prices being offered by competing firms. This pricing strategy will enable McDonald’s to realize higher profits. However, the big challenge that will accompany this option is whether consumers will be willing to pay for the higher prices, and mostly at this moment when people are regaining from the aftermath of the recent economic downturn.

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Because of the high competition present in the restaurant industry, McDonald’s should consider pricing its products/services below the competition. Through this pricing strategy, McDonald’s will be in a better position to compete healthily with other international fast-food restaurants such as King Fisher. This pricing strategy will entail setting the prices for its products and services at a price below that of substitute products from its competitors.

In order for a business to be in a position to price their products/services below the competition, they should be in a position to save their costs per unit. One method McDonald’s can be able to adopt this pricing strategy is by keeping its operating costs down. This is because pricing below the competition reflects small profit margins. However, because of economies of scale, companies are able to generate reasonable profits. In order for McDonald’s to enjoy good profits, it should put a tight regulation on its inventory. In addition, it should maintain its rental as well as labor expenses down. Furthermore, McDonald’s should consider looking for economical foodstuffs suppliers (Ghosh & Sidana 2012).

McDonald’s should, in addition, review its pricing model according. Whereas it is important for it to price its products and services below the competition, it should consider adjusting its prices above the competitions in instances of economic booming in order to enable it to enhance its profit realization to facilitate its subsequent expansions as well as enhance the shareholders’ wealth (Lucey 2002).

Organizations that are able to succeed in their missions are those that are able to accurately project their future performances in order to lay appropriate foundations in advance. McDonald’s can opt to use either qualitative or quantitative techniques to forecast its future price changes accordingly. The use of qualitative methods entails gathering data from primary as well as secondary sources and attempting to predict the demand level in the future. The qualitative method of forecasting is mainly used to generate future prices of commodities and services through the use of creativity methods.

This strategy is mainly employed by a few people who are experts and highly knowledgeable about the demand trends. The quantitative method is another strategy that is highly employed to project future prices of goods and services. Quantitative methods are well known for analyzing future developments of numerical data. Econometrics, as well as quantitative techniques, explicitly employ simple models to generate future prices of goods and services by inputting the current and pasts demand in services and products. The trend projection method is a very effective quantitative method that can be used to project McDonald’s future prices of goods and services.

The method entails determining the trend depending on past consumption and projecting future consumption by extrapolating this trend. For example, the future price of a commodity can be gotten from the relationship Yt= a+ b t, where Yt represents demand for year t, a, and b represent constants. The use of quantitative methods to forecast future prices for McDonald’s products and services is better than qualitative methods. This is because quantitative methods enable the manipulation of data consistently and reproductively. This makes it more possible to compare data as well as study rates of changes than when qualitative methods such as data mapping are used (Lucey 2002).

McDonald’s aspires to extend its operations to the United Arab Emirates (UAE). The decision to expand to the UAE lies in its expansion strategy meant to tap into the UAE booming market. There are various methods that McDonald’s can use to source the capital required for the expansion. McDonald’s can opt to use the money it generates from its sales to finance the expansion strategy instead of sharing it as dividends among its shareholders. This source of funds is very important, as there are no interests that will that accompany the money invested. However, McDonald’s restaurants have not performed quite well of late.

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Owing to the fact that this is the period that the world economy is recovering from the aftermath of the recent economic downturn. Therefore, McDonald’s restaurants are not generating considerable revenue that it is enough to put into place a significant investment to attract the potential UAE market (Ronald 2008). Another alternative that McDonald’s can opt to consider in order to fund its project is approaching a financial institution and seeking a loan. This method will be appropriate as it will enable the company to get enough funds to finance the project. However, this strategy also has some shortcomings.

One of the shortcomings associated with borrowing money from a financial institution is the high interests that accompany the loan. Apart from paying the principle that the company will be awarded to finance the project, McDonald’s will be required to pay an extra on top of interest. However, the greatest challenge that is associated with borrowing funds from financial institutions is that if McDonald’s fails to raise the amount of money borrowed as agreed, the financial institution may sell the assets that McDonald’s has given as collateral in order to recover its money. In order for McDonald’s to be able to raise the money required to finance its project, it can also consider a merger or an acquisition.

These processes will require McDonald’s to a partnership with other traders that are doing similar businesses in order to raise the required capital required to carry out the expansion. Similarly, McDonald’s can opt to sell some of its shares in order to raise the required money for expansion. Selling of the shares, as well as the use of mergers, are the best options that McDonald’s should consider using to raise the amount of money required for it to extend its operations to UAE. These processes are appropriate because they do not have additional costs that are associated with them.

McDonald’s will require a mastery budget for the expansion project. A mastery budget is considered a summary of an organization’s plans that set sales targets, production, distribution as well as financing activities. It consists of the budget income statement, cash budget, and budget balance sheet. It usually encompasses future management plans, as well as the strategies for achieving the plans. The budget selected for McDonald’s is important, as it will indicate where McDonald’s aspires to be as well as what it requires to do in order to be there. The mastery budget will also be important as it will allow McDonald’s to genuinely project future cash flows that will enable it to get certain types of financing (Davidson 2009).

Other Budget References
Sales Sales Budget $2,000,000
Less cost of goods sold Sales budget, Ending finished goods inventory budget 1,300,000
Gross margin 700,000
Less selling and administrative expenses Selling and administrative expense budget 577,800
Net operating income 122,200
Less interest expense 14,000
Net income $108,200

The Variance = (Sales Budget –actual budget)/ Actual budget. The variance = ($2,000,000- 1891800)/ 1891800 X 100 = 5.7% McDonald’s has a sales budget of $2,000,000; however its actual expenditure is 1891800. Considering the huge capitals that accompany the expansion strategy, an overrun of 5.7% is immaterial for McDonald’s anticipated expansion. The 5.7% overrun may have been caused by fewer administrative costs that were associated with the expansion since expansion through the merger will result in the company recording increased performance and efficiency in human capital in its new venture as the employees of the existing company are conversant with the environment (Saren & Brownlie1983).

Multinational corporations that are vulnerable to unpredictable events use flexible budgeting to mitigate the effects. This is because flexible budgeting has an overrun, which is readily available for swiftly mitigating the market demand. However, static budgeting does not respond to changing business conditions and is mainly appropriate for businesses that are not greatly affected by unpredictable events. McDonald’s operates with flexible budgeting because of the various unpredictable factors that affect its operations. The presence of a budget variance is essential in helping the restaurant respond to the market demand swiftly.

Conclusion

In conclusion, the decision for McDonald’s to extend its operation to UAE is superb. However, the company should require coming up with an appropriate strategy it will use to price its products. The researcher recommends the company adopt the pricing strategy that entails pricing its products/services below the competition in order to enable it to compete healthily with other international and local brands. The company sales budget is $ 2000000, which represents an overrun of 5.7%, which it considers insignificant, considering the huge budget associated with the investment. The researcher also recommends the company use a merger for its expansion as it is the most economical as well as strategic expansion approach.

List of References

Brodsky, N 2000, Street Smarts: Raising Prices, Prentice Hall, New York.

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Davidson, I 2009, Budgetary Control in Modern Organization: The role and impact of management style, corporate culture and management policies, Prentice Hall, New York.

Ghosh, R & Sidana, D 2012, McDonald’s Customer Acquisition and Retention. Web.

Ronald H 2008, Managerial Accounting, McGraw-Hill-Irwin.

Saren, M & Brownlie, D 1983, A review of technology forecasting techniques and their application. Cambridge University Press, Cambridge.

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