If investors would like to protect and invest their investment or savings in stock market during this slow economy, they must ensure not put all their eggs in one basket, and need to diversify their investments in different companies with great management (e.g., Procter & Gamble, McDonald's, Southwest, or Wal-Mart), industries or trades (e.g., food, or high-tech business, especially in risk analysis or management software), and locations or nations. In 2008, the average number of customers served per day in McDonald's restaurants advanced to more than 58 million in 118 countries (about 32,000 outlets worldwide and 14,000 of them are in the U.S.—2 million more than a year ago, and not all them are in recession). According to NASDAQ.com.,  as compared to other food services chain stores’ current EPS (Earnings per share): Yum ($1.91), Starbucks ($0.59), and Darden restaurants ($2.68); McDonald’s Corporation ($3.67) was the highest one (MC, 2009, p.1). In practice, top executives of McDonald’s recognize and ensure its business – a) coffee that compete with Starbucks or Tim Horton’s (e.g., in Ontario, Canada, it offers $1.39 for a good quality regular coffee with a fresh muffin and butter plus refill); b) trendy, healthy, and broader menus (e.g., fresh salads or yogurt); c) improved services and speed in drive-through windows or counters that advance sales and revenues; and d) cut travel, expense, waste, or cost of production, and get better deals from suppliers, and advertising agents.Adamy (2009) analyzed the Company and claimed that excellent operations management and financial managing with up-to-date business data and evaluations not only improved the value of its franchisees or store owners’ businesses, and kept McDonald's in the top of the industry (with number 16 of the most admired world organizations in Fortune 500), but also help the organization preparing for difficult time currently or the coming years. Yes, again, as people state: Survival of the fittest. From my experience, in the business world, you are either a leader, or follow the leader. 

References

McDonald’s (MC). (2009).  NASDAQ.Retrieved March 12, 2009, from

       http://www.nasdaq.com/earnings/peratio.asp?symbol=MCD&symbol

Adamy, J. (2009, March 10).  McDonald's seeks way to keep sizzling. The wall

        street journal. Retrieved March 12, 2009, from http://online.wsj.com/article

   McDonald’s Corporation (or the Company), ticker symbol:  MCD (NYSE), mainly manages and franchises McDonald’s restaurants in the food service and fast food industry. McDonald’s food chain stores serve a wide-ranging but limited, value-priced list of options in more than hundred countries worldwide.  All McDonald’s restaurants are operated either by the Corporation, by independent investors, businesses and franchisees (under the tenure of franchise arrangements), or by partners and developmental licensees operating under contracts. Under the franchise agreement, franchisees or store owners not only provide the required funds by initially investing in the equipment or facilities (e.g., kitchen equipment or wares, signs, tables and seats) and interior decoration of their restaurants, and also by reinvesting in the enterprise and the store over time. The Corporation mostly contributes to the original investment by owning the real estate, land, construction and store or getting hold of long-term leases for restaurant sites. Franchisees and investors “contribute to the Company’s revenue stream through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees. The conventional franchise arrangement typically lasts 20 years and franchising practices are generally consistent throughout the world” (MC10-K, 2009, p.3). By owning or securing lasting leases and then getting fair rental returns from store owners are the most rewards and most important parts in its operations that providing stable revenues and excellent income to support  its costly franchising operations management (especially very vital and  necessary in its initial and early stage of business, or in a new location and new marketplace with less business risk and financial risk). Moreover, under the Company’s developmental license agreement, licensees invest principal funding for the entire business, together with the real estate interest. Although the Company usually has no capital offered or invested, it gets a royalty based on a percent of sales, and opening fees from franchisees that want to join the establishment and the brand.  In return, the Corporation’s operations management is aimed to promote the brand, and make certain or consistency and high quality at all its restaurants or fast food chain stores. In all, McDonald’s top executives would like to improve cost effective and efficient, enhance the values of its stakeholders, and ensure superior support of operations management with foster and strengthen customer services, management, and finance excellence.

     EVA (economic value added) is an assessment tool to measure a firm's financial performance and to motivate its management as well. The key reasons why firm may use EVA in addition to the standard accounting measure (e.g., GAAP) are due to the disagreement between an investment's net operating income or profits after taxes and the cost of funding (e.g., EVA = Net operating profit after taxes – Capital x cost of capital) ( EVA, 2009). EVA shows true profits and gets a more true assess than just profits, and increased correlation with stock price than only gets earnings per share (EPS). EVA takes the total cost of capital ( equity and debt capital both), and not cost of debt or interest expense. EVA considers R & D as a capitalized expense on future development and not as a term expense only. Therefore as EVA value increases that also means stock value may follow—all these would help and improve overall performance. Companies uses EVA put more on allocating assets and not accounting profits only—it would intensify the development of new goods even it decreases present earnings (Gitman, 2009). In all, EVA tries to capit the real economic profit of an organization.

     Erik Stern, president of Stern Stewart & Co., that develops EAV, and claims the most challenge to take and apply EAV is to change organizational compensation structures. EVA “seeks to measure the extent to which companies create value above the cost of capital. But most compensation structures are driven by budget considerations, or worse, by negotiation and politics, and do not hold employees accountable for the capital they are entrusted with.” (Cua, 2006, p.1). The aim of EVA is to create a standard of value creation for all stakeholders and investors. Staffs must care for capital cost or expense as if they are their own money. A upward of EVA shows the management is creating value or a downward means the firm is losing its purpose or direction—a basic standard of business operation for many many hundreds of years, East or West. Employees must think and act just like owners—for those want to open a new venture, or self-employed, EVA is the first and basic tool.

References

Economic valued added (EVA). (2009). Dictionary of accounting terms. Retrieved

     March 8, 2009, from http://www.answers.com/topic/economic-value-added

Cua, G. (2006, August 28).  When pay structures become hurdles; they get in the way of

     firms adopting wealth-added mindset: Stern. The business times Singapore.

     Retrieved March 8, 2009, from LexisNexis Academic database

.      EVA is economic value added, a management tool. EVA supporters claim it helps to find out a firm’s ability to create wealth than the traditional measurement of EPS and return on equity. Carrick (2007) points out, by using EVA approach, “you take the profits a company makes and then subtract the full cost of generating those profits. If the company has profits left over, it's adding economic value; if the costs of generating a profit exceed the profit, then value is being destroyed” (p.1). The object of EVA method is to find out the real profits (or promotes the wisdom of entrepreneur, and innovation in organizational management) from the business, and not just politics, or paper work.  

Franki

References

Carrick, R. (2007, September 1). For lowdown on wealth earners, check the EVA. The globe and mail (Canada). Retrieved March 07, 2009, from LexixNexis Academic database.

Gitman, L. (2009). Principles of managerial finance (12th edition). Boston, MA:  Pearson Prentice Hall

     In order to improve risk management, and financing, this is why when we get new projects with new customers, we take more caution and ask them to pay enough deposits or ensure they have good finance back up before taking their orders. We just completed a project for a sport retailer with full payment ahead and gave them 2% discount in the deal—at the end, both sides were very happy and pleased the result. Good management and approaches that deal with business risk and financial risk, or plan ahead are very important to a small business, and the same toward a large organization.

     In this global economic crisis, as business risk and financial risk are increasing everywhere, and slow down business, some tech companies (e.g., CA, BMC, McAfee, Symantec, HP, SAP, Fortify and NitConnect), however, are entering a wave of new ventures.  Preimesberger (2008) analyzes and claims, “Vendors that sell software for risk management, secure and managed file transfers, e-discovery, e-mail archiving, and enterprise search are positioned for a boom as the business and financial sectors call on their services… This financial mess is one colossal example of poor risk management” (p.1).  The firms that concentrate and specialize in risk assessment systems, as the above, will keep busy for a while or until the dust is settled. For some  business enterprises, new risk may be another new opportunities.

Reference

Preimesberger, C.  (2008). Benefiting from troubled times. eWeek, 25(19), 20-22. Retrieved March 07, 2009, from firstSearch database.

  When we invest or make business decisions, business risk and financial risk are all together like rewards and penalty; the more risk, the more returns. For instance, in the subjects of new projects, the cash flows related to capital budgeting projects in general have all kinds of risk, therefore, it is vital to include risk considerations in capital budgeting. In this situation, various behavioral approaches (e.g., the breakeven cash flow, scenario analysis of cash flow and NPVs, and simulation of statistics) can be used to deal with project risk (Gitman, 2009).  Managers must understand the significance of recognizing risk in the examination of capital budgeting projects or implications of these beliefs on deciding which new ventures to finance. No plan and no gain.

      In investment world, both business risk and financial risk are related to benefits, profits and rewards, or failure and punishment as well-- all these also are parts of human behavior, patterns, and civilization. However, individuals, or organizations must take full responsibilities, and keep up with business ethics and moral management, or at the end, they may hurt others as well. Pulfer (2008) examines the business risk of investors or speculators in the Wall Street crisis and claims, “short sellers, who were supposedly spreading rumors about companies’ liquidity to drive down their stock. New York attorney general Andrew Cuomo announced that he is launching a wide-ranging investigation into short-selling, in relation to the pressure that Lehman, AIG, Morgan Stanley and Goldman Sachs…” (P.1). Some of these famous stocks on the Wall Street fell from hundred dollars per share to less than 50 cents in a short period. The business risk and hazard of short sellers, day traders, or speculators were not only just their financial risk, but also led to others’ layoff , impair or damages, plus worldwide recession. Why many hard working employees or business people lost their jobs, income, or businesses, and got the upshot from this financing risk? John Berlau (director of the Center for Entrepreneur-ship think-tank in Washington, D.C.) analyzed, “[Business failure is not only a permissible outcome of capitalism, it’s a necessary one. For innovation to flourish and the standard of living of the populace to improve, the market must be free to reward success and punish failure]” (Pulfer, p.1). One wonders if this were true capitalism, why the government now owned more than 79.9% of  AIG’s debt capital and equity capital. Where is the end of issuing new equities and changes? (Pulfer)

References:

 Gitman, L. J. (2009). Principles of Managerial Finance (12th ed.).Boston, MA: Prentice Hall.

Pulfer, R. (2008). Nightmare on Wall Street. Canadian business 81 (17), 9-11. Retrieved March 07, 2009, from firstSearch database.

      In some cases, we can use payback period method (simple to compute and easy to understand:  cost of project divided by annual cash inflows) to get a quick idea of what kind of investment we deal with, and then consider whether to go ahead or not (with detailed  Net Present Value approach later). For instance, in a fast moving market, such as in commercial and investment property markets, investors can use payback period method to find out how long, or which one has the shorter payback period. The reason behind this is that "the shorter the payback period, the greater the liquidity, and the less risky the project" (Payback period, 2009, p.1). However, it must be very carefully (with good investment experience and have good real estate broker and lawyer to draft and present your buy and sale agreements) when make use of this approach.

Reference

Payback period. (2009). Dictionary of accounting terms. Retrieved March 02, 2009,

     from, http://www.answers.com/topic/payback-period.

      Cash flows not only show whether the firm will be able to pay suppliers, wages, or other high priority expenses (e.g., rent, or bank interest), but also demonstrate a clear picture of a firm’s power or ability to repay loans (for lender’ view) and whether the firm is financially sound and good (for investor’ view). Financial Times in London on February 12, 2009, reported that even AIG (now 80% owned by the U.S. government) generates about $10 billion of cash flow per year (from commercial property and casualty business as well as its Asian life insurance—life policies mainly come from Hong Kong, Taiwan, and Japan), and assume half of them are utilized to pay down debts and the firm would owe for about $70 billion of debt in five years (Financial Times, 2009). Because of AIG gets into the right markets and sells the right policies, and gets high cash flows, this is why it can hold on and keep the company running.

Reference

Financial Times. (2009, February 12). AIG against the wall.Retrieved on February 28, 2009, from ProQuest Database.