WORKING CAPITAL STRUCTURE COMPARISON 5
WorkingCapital Structure Comparison
Workingcapital structure comparison for Yum and the McDonald companies
Workingcapital refers to the general means and ways used to quantify theliquidity of a company, to gauge its efficiency, in terms of growthand potential to productively expand (Kim,Kim & Woods 2011).The working capital structure on the other hand refer to thecomponent within a working capital that indicate the componentswithin an organizational structure that is responsible for thehighest amount of working capital (Rauh& Sufi, 2012).Due to the current highly competitive business environment, most ofthe companies are forced to adjust their strategies in terms of goodfinancial management to gain competitive advantage and sustaingrowth. Below is a close dissemination of the working capital of twofast foods companies the McDonald franchise and the Yum brands oneof its closest competitor.
Thoughventuring in the same business field, their business components andworking capital are very distinct. The MCD Company employs a muchconservative approach in working capital whereas the Yum takes a moreaggressive approach in raising its working capital. McDonald Companyhaving a positive working capital in relation to its assets andliabilities takes a much conservative approach of ensuring that itsmanagement is centralised. This facilitates much of its operations tobe done promptly, as well as its ability to operate at a higheroperating profit margin(Rauh & Sufi, 2012).On the contrary, Yum outlets operate on a higher gross profits marginas compared to a much conservative approach taken by the MCD Company.
Ofthe two companies, the MAC franchise taking a much centralisedapproach ensures that their supplies are top quality withoutcompromise to ascertain the quality of their production (OSFinancial Trading System 2011).This means that they operate on a very high supply budget compared totheir opponents the Yum who seek competitive prices in theirsupplies. Additionally, their main differences arise from their salesand management in such a way that their operating margins can be sodistinct thus their gross profit. The Yum undertaking a muchaggressive approach to its operations increases their sales turnoverand production amid the high risks involved as compared to theirrivals the MAC franchise (OSFinancial Trading System 2011).This aggressive working capital approach facilitates the Yum to payfor its inventories by delaying their suppliers at an agreedduration. This aims at increasing their working capital withoutnecessarily increasing their assets a case that is totally contrarywhen it comes to the much asset stable MAC franchise.
Theaggressive working capital management employed by the Yum Companyputs it at a higher risk of bankruptcy and assets liquidation. Sincethe trend of delaying the payables to maintain higher cash floatcycle might lead to other unanticipated challenges, it mightconsequently lead to failure to pay the debts owed to its suppliers(Rauh& Sufi, 2012).On the other hand the centralised conservative working capitalmanagement approach employed by the MAC Company puts it at a lesserreturns turnover. On the flip side, it gives it power to regulate itsquality supplies and maintain consistency with no much financialuncertainty as compared to their rivals, the Yums. The reason behindthese differences is brought by the stability of the company in termsof assets and in relation to the company’s liabilities. The MACCompany is more stable in terms of assets and working capital. TheYum has to be more aggressive to make more sales and improve itsreturn turnover in regard to its few assets in relation to its manyliabilities.
YumCompany should aim at educating its management to understand thatworking capital volume should not be solely based on collection ofdebts and delaying payment(Kim, Kim & Woods 2011).They should aim at improving each of their components to improvetheir programs to long term operation that they strive to achieve inthe short term. This would improve its working capital without thecompany risking bankruptcy. On the contrary, the MAC Company shouldembark on accounts receivable optimization to improve its returnturnover and in turn invest their returns in improving production(Kim, Kim & Woods 2011).This will improve their profitability and give the company a bettercompetitive advantage.
Comparinginvesting in the two companies, for quick return of your capital, itis more advisable to invest in the Yum Company over the MAC Company,since the former’s aggressive approach is more profit oriented,through improving production(Kim, Kim & Woods 2011).This working capital approach is best for short term investmentswithout being assets oriented.
Interms of lending money to one of the two companies, it would be saferfor the bank to finance the MAC Company over the Yum Company. This isin consideration of its vast assets in relation to its liabilitiesthus raising it working capital to positive as compared to YumCompany which has a higher liabilities than assets. This guaranteesthe long term functionability of the company and lowers its risk ofdefaulting from loan payment (Rauh& Sufi, 2012).
Inconclusion, both working capital and workingcapital structureare critical to the success of any organization both in the short andlong-term. Working capital refers to the ways which are employed toindicate the liquidity and efficiency of a firm in regard to growthand potential to productively expand. On the other hand, workingstructure is that aspect within an organization responsible for thehighest amount of working capital. From the above, the McDonaldfranchise employs a much conservative approach in working capital ascompared to Yum which employs more aggressive approach in raising itsworking capital. By employing an aggressive capital approach, YumCompany runs at a risk of liquation as compared to MAC franchise. Inthis light, there is the need for Yum Company to educate themanagement on the fact that, working capital volume should not besolely based on collection of debts and delaying payment. Based onthese facts, it would be advisable to for any investor to invest inMAC Company instead of Yum Company.
Kim,J., Kim, H., & Woods, D. (2011). Determinants of corporatecash-holding levels: An empirical examination of the restaurantindustry. InternationalJournal of Hospitality Management, 30(3),568-574.
OSFinancial Trading System (2011), Centralizedversus Decentralized Business Strategy: Which is better for growth?Retrievefrom:http://www.ftsmodules.com/public/modules/valuationtutor/casestudy/YUMMCDFSA.pdf
Rauh,J. D., & Sufi, A. (2012). Explaining corporate capital structure:Product markets, leases, and asset similarity. Reviewof Finance, 16(1),115-155.