Boston Chicken, Inc.
Boston Chicken developed a new segment of the fast food restaurant business, home-cooked food. To take advantage of this innovation the company sought to grow rapidly by signing franchise agreements with large area developers. However, it also provided sizable loans to the developers to help them finance new restaurants. These loans have, in turn, been financed through public stock and convertible debt issues made by Boston Chicken. The case is used as a comprehensive security analysis case, covering strategy analysis, accounting analysis, financial analysis and valuation.
Questions to Guide/Be Addressed in Your Case Analysis:
- Assess Boston Chicken’s business strategy. What are its critical success factors and risks?
- How is the company reporting on its performance and risks? What are the key assumptions behind these policies? Do you think that its accounting policies reflect the risks?
- What adjustments, if any, would you make to the firm’s accounting policies?
- What questions would you ask management about the company’s performance?
- How is Boston Chicken performing?
- What assumptions is the market making about the company’s future performance and risks? Do you agree with those assessments?
HYPERLINK “http://info.umuc.edu/acct-fin/fm-syll/msaf670/cases/boston_ch.xls” See attached excel sheet with financials (separate attachment)
Develop your case analysis as a paper with an introduction, statement of the issues/problems, body/analysis and conclusions/recommendations sections. See scoring template (separate attachment).You may include a post script to your paper, which comments on recent events associated with the company; however, do not let the “Monday morning quarterback” syndrome drive your analysis. Your analysis should be independent of what has transpired after the situation/time period described in the case
Boston Chicken case study
Question 1: Assess Boston Chicken’s business strategy. What are its critical success factors and risks?
The business strategy comprises of the art of management, formulating, implementing and evaluating of cross-functional decisions that enables an organization to achieve its long-term goals. There exist different business strategies such as growth strategy, product differentiation and price skimming strategy that can be adopted by an organization to further their long-term objectives. In this case, Boston Chicken firm has adopted product differentiation as their main mode of business strategy. Product differentiation is the procedure of distinguishing a product or a service from other by ensuring that it is unique in its own ways to make it more attractive to a specific target market. Through the provision of home cooked nourishment in the form of chicken at sensible costs, Boston Chicken has significantly and successfully differentiated their product from that of their competitors. Their food is accessible for on premises utilization and consumption as well as for brings home conveyance and delivery. The basic achievement and success factor of Boston Chicken is their ability to provide and serve high-quality food to their esteemed customers. Additionally, their good relations and ability to appoint to grow through the help of franchisees and attracting a large number of the customer base have significantly contributed to their success. However, the firm has treated and deals with several risks such as the failure of the franchises to return the credit they have been offered by the firm as well as the risk of losing their customers as they go searching for higher value money outlets (Bivand, n.d.). Finally, considering that Boston Chicken may be unable to control the quality of the product sold by this franchisee, they may end up producing low-quality products and in the process lose more customers.
Question 2: How is the company reporting on its performance and risks? What are the key assumptions behind these policies? Do you think that its accounting policies reflect the risks?
Despite the company reporting aggressively about its performance and risk, their reporting strategy is flawed from the word go. One of the biggest mistakes in their operations was their attempt to keep franchise losses from the public eye. The company reported large profits which included payments on royalties and loan repayment interests from the franchise and areas developers. Considering that the area developers accounted for 10 percent of the total notes receivable each, the company should have implemented bad debts accounts to recognize the fact that not all money will be returned. The area developers lost more than $ 50 million in 1994 thus affecting the performance of the company. Moreover, the company financial reports are not indicating the falling profits, as well as the declining demand for their products as more and more customers go to other companies in search of value based products.
The primary assumptions of the firm were the interest realized and the royalties received from franchises were a form of earning for the company. Moreover, the firm assumed that by reporting lower sales potential franchise will be disappointed and be heartbroken from getting into the business which in turn would have slowed down the rate of appointment of new franchisees. According to the reports, the company had reported that it had sold a total of $ 18,900 while in the real sense it had total sales of $ 23,000 per week (Bivand, n.d.). Additionally, the firm assumed by reporting lower revenue some franchisees would leave the company in search of greener pastures. However, the most important assumption made by the company was that if they reported the losses made by the franchisees and area developers to the general public the stock prices would have declined significantly thus affecting the company finance.
Most of the accounting policies adopted by the company are meant to hide the tremendous risks of failing franchises since they do not reflect the risk. However, to some constrained degree the bookkeeping policies reflect the dangers. The 1994 balance sheet shows a convertible subordinated debt of $130,000 compared to null debts in 1993 and 1992. Such a large debt within a period of one could have raised alarms from different quarters of the firm as it shows a decline in business. Moreover, a cross-examination of the cash flow statement shows that the net income of a company with so many franchisees as well as company that provide finances regarding loans to area developers is only $ 16, 173 in 1994 while the from financing activities is $255,703. This revelation above is a clear indication that the company finances most of its activities from convertible subordinated notes.
Question 3: What adjustments, if any, would you make to the firm’s accounting policies?
Considering the primary purpose of having accounting policies in an organization is to enhance accountability and transparency, the first step would modify the reporting of revenues of the company. I would begin by separating franchise related fees as well as royalties should not be included in the revenue of the company when a store is opened but rather should be accounted for when the firm received them in cash. Considering that Boston Chicken paid up to 80 percent of all the cost incurred in opening these franchisees, learning to differentiate income from the repayment of the loan would have been a great move. Correspondingly, just money got from organization worked stores ought to be perceived as income. The bookkeeping approach ought to demonstrate extra paid in capital and its sources. The separate ought to be given to show its capitals separately and resources separately. Amid the year 1994, the money got from working exercises is $16,173 while the trade utilized out contributing exercises is $270,854. The accounting policy adopted by the organization should not have shown in the same place $ 163,622 paid for plant, property, and gear, and issuance of notes receivable. To enhance the accountability and transparency in the organization as well as to uphold the trust of all stakeholders, there should be a detailed explanation as to why the company was willing to take up the risk of an issue such a large number of notes to the area developers (Bivand, n.d.). Additionally, accountants should learn how to separate their work by calculating the cost and revenue of the company differently from those of the franchisees considering that franchisees are always regarded as independent entities.
Question 4: What questions would you ask management about the company’s performance?
After looking at the company’s bookkeeping policies and records, the management has a lot to answer concerning their practices and the company performances. The first question would focus on the quality and the integrity of the company earnings. From the books presented, it is easy to tell that there a lot of mistakes in the accounts provided. Fees, royalties and interest payment from payments from franchisees that are financed by the mother company that is Boston chicken are not performing as expected (Bostic, n.d.,). The next question would focus on the actual changes of the company sales and revenues and how well they can project next year’s sales and revenue. From the accounts provided it is evident that there is a significant increase in cost and expenses of running the business from $ 14,592 in 1992 to $71,540 in 1994 while there are no significant changes in revenue and sales. Any changes in the cost and expenses incurred should be clearly reflected in the sales and revenue of the company. Moreover, another performance that would require my attention and clarification would be the rise of interest cost from $ 440 in 1993 to $ 4,235 in 1994. This is a significant increase that should not be witnessed within a period of one year. The management should have a detailed explanation as to why the interest cost increased at that rate. Other question would focus on the marketing strategy of the company considering that most of the company customers were purchasing other company products in search of value-based products. Therefore, I would like to know what changes Boston Chicken has implemented to attract and retain a value-seeking customer. What changes would the company implement to ensure that the franchise agreements are not draining the company finances and resources? What can the company do to make their home-cooked food to make them value-based?
Question 5: How is Boston Chicken performing?
Looking at the accounts provided by the company to the public, the company is performing well since it is recording significant growth and increase in revenue. Moreover, the total numbers of shares of the company are steadily growing from 32,667 in 1993 to 42,861 in 1994. However, this is not the real story behind the scenes considering that it is evident that the company is making losses from their franchisees. For one to get the actual picture on the ground, he or she has to closely examine the cash flow statement which clearly indicates that the net operating cash in the year 1994 is $ 35, 198 while the net cash used to invest in different activities of the company is$ 270,854. Moreover, the amount of money invested as the issuance of notes receivable is $ 225,282 which raises the question whether Boston chicken is operating as a fast food company or a finance company (Bivand, n.d.). From the above analysis, it is quite clear that the company is not performing as expected the senior management is only making things work by trying to cover up what is actually going on. As a fast food company, a large portion of its revenue should actually come from selling the home-cooked nourishment at a lucrative price rather than from its financing activities since it is not a financial institution.
Question 6: What assumptions is the market making about the company’s future performance and risks? Do you agree with those assessments?
The market is assuming that the Boston Chicken franchises acquire more income than they currently realize per week and they expect this trend to be consistent from week to week. As the revenue and profits increases, the income of the franchise will increase which in turn will lead to an increase in income of the whole company as well as increase per share earnings. However, this is contrary to my expectation and assumption since the company books of accounts show that the primary income of the company comes from financing activities rather than sales of the home-cooked chicken (Bostic, n.d.,). Therefore, the basic income of the company widely depends on the fees, royalties, and interests collected from the appointed franchisees. Most of the market players and the management of the Boston chicken are yet to figure out that most of the company revenue does not come from their primary product. Despite the fact that it is standard to utilize the accumulation arrangement of bookkeeping if there should expect a rise an occurrence of Boston Chicken, just the expenses, eminence, and intrigue acknowledged ought to be perceived.
Boston Chicken shows a positive growth regarding income statement since the financial results of the company is pleasing in the eyes of the public, but a closer look at the financing activities of the company completely changes the scenario. Most of the finances of the company come from the issuance of stock as well as the issuance of debentures and lending money to their franchisees and area developers. Considering that each franchise operates independently, it becomes difficult to control the activities of these franchises which in turn increase the risk of these franchises not returning the money. As a result, the business is taking the wrong turn which is also enhanced by the fact that more and more customers are turning to other value products and as they feel home-cooked chickens are not fulfilling their needs effectively and effectively.
Statement of Issues Problems
- The interest for Boston Chicken items is decreasing as a stable rate as since clients are looking for an incentive for cash.
- The money that Boston Chicken has given its franchisees speaks to a generous hazard. The cash may not be returned, and therefore they should have an account for bad debts.
- Both the pay and budgetary position of Boston Chicken is confronting significant money related hazard (Bivand, n.d.).
Boston Chicken had a phenomenal plan of action when it initiated since it was focused on expanding their business as well as their customer base by appointing franchisees and area developers to open up shops all over the region. Be that as it may, changes in client preferences and tastes which forced them to seek other products from other companies led to a decline in the demand for the home-cooked chicken. The organization has financed a few franchisees, and this speaks to a significant hazard to the organization especially if these franchisees fail to live to their expectation or pay up their loans.
It is prudent for Boston Chicken should offer value for the customers’ money for them to win their hearts and encourage them to buy the organization products. It should alter its menu and present low-value high esteem items. Additionally, it ought to receive a more moderate franchise arrangement and ought to abstain from giving money to the franchise. Boston Chicken ought to enhance its plan of action. This will pull in monetarily solid franchises to it.
Bivand, R. (n.d.). Revisiting the Boston Data Set (Harrison and Rubinfeld, 1978): A Case Study in the Challenges of System Articulation. SSRN Electronic Journal. doi:10.2139/ssrn.2719454
Bostic, R. W. (n.d.). The Role of Race in Mortgage Lending: Revisiting the Boston Fed Study. SSRN Electronic Journal. doi:10.2139/ssrn.2135