Boston Chicken Case
Boston Chicken’s business strategy comes from a different franchising structure in which BC, instead of selling store franchises to multiple franchisees, sells franchises to 22 regional area developers across the 60 largest U.S. metropolitan markets. This 22 are developers are committed to open 50 - 100 other stores. Therefore, its strategy is focused in rapid growth and reaching economies of scale.
The critical success factors come from how efficient Boston Chicken can be at finding key locations to expand and develop their brand name. In addition, their improvements in communication is a key factor for success since optimize their supply chains. Other operational changes like long-term agreements with suppliers, the structure of the flagship stores, the computerized customer feedback system, the implementation of drive-thru lines and adding menu items during holiday seasons are critical success factors.
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As a result, the company seems to be overstating revenues. For the year of 1994, if those fees are taken off from the Operating revenue of 17.4 million, and initial franchise fees for new stores were 13 million. Deferred financing costs are amortized over the period of the related financing. Revenue derived from initial franchise fees and area development fees is recognized when the franchise store opens. By changing the assumption for franchisee defaults, we can estimate the effect in the income statement.1% allowance 2% allowance. Net income before tax Bad debt expense on $202,500 notes receivable Adjusted net income before tax Percent change$20,450 $2,025 $18,425 10%. 20,450 6,075 14,375 30%
According to the accounting assumptions that the company follows, the company doesn’t look risky.
For some adjustment, I suggest to cut off the line of credit and make some details accounting policies about royalties and keep an eye on loans.
What you plan to do if your revenue cannot cover cost? Do you still overstate stock to raise fund?
What actions you would take if you cannot get back the loans?
How is Boston Chick performing?
From the table above, we can realize that:
1994 NOA = 36451
1993 NOA = 90369
The data above means net working operation assets from increased, which means that the company’s overall situation has improved a lot
1994 NOAT = 26.38
1993 NOAT = 47.06
NOAT has decreased means that the time spent on asset turnover has reduced and the internal efficiency has improved to some degree
1994 Liability to Equity ratio-solvency = 116.73
1993 Liability to Equity ratio-solvency = 64.17
Liability to equity ratio is increased, which is not a good sign to the company, because it holds a lot of debt that may be a loss to the company in 1994.
What assumptions is the market making about the company’s future performance and risks?
Assumption is that all of Boston Chicken’s income comes from fees, royalties, and interest payments from franchisees, most of which were financed by the franchiser. Risk is that the rapid growth of the company, also the source that the revenues are derived from. At last is the way Boston Chicken control its cash and debt.