Analyzing Boston Chicken Inc

Boston Chicken, Inc.

Scott Beck founded Boston Chicken in the year 1989 with the business idea of operating and franchising food service stores with the company's conception to combine fresh, palatable, and alluring meals concomitant with customary home cooking with a high level of expediency and value. In essence, the company was attempting to generate the setting for a consumer of obtaining and accessing a home cooked meal at a price that is reasonable and economical and all in very minimal time (Grant, 1993). The case will be analyzed on the following aspects: the comprehensive assessment of the success factors and risk factors of the strategy employed by Boston Chicken and assessing the accounting policies used by Boston Chicken. The case analysis will also undertake a comprehensive financial evaluation to determine the performance of the company. There will also be an outline that will delineate the assumptions being made by the market regarding the future performances and risks of the company. Lastly, the analysis will point out the subsequent events of Boston Chicken that goes further than the financial years presented in the case study.

Boston Chicken's Business Strategy: Critical Success Factors

The business strategy employed by Boston Chicken during the time period displayed in the case study is that of home meal replacement. In particular, the home meal replacements were made up of an assortment of food, which included fresh vegetables, rotisserie-cooked chicken and salads. These are meals that are linked with traditional home cooking and come at a great value for the consumers. From a marketing business strategy perspective, this aspect was brilliant for the reason that people wanted to eat meals that were traditionally prepared or cooked in the home without the hassle of having to do it themselves. Strategies that resulted in the growth of Boston Chicken encompassed the opening of franchises of Boston Market. Towards the end of the 1994, five years after its establishment, the company had 1,100 stores open across the nation and had hired about 16,500 employees. In turn, the opened franchises expanded their menus by including new sides, entrees, and desserts in order to have a greater consumer base reach (Davis, 1994).

One of the company's success factors was the location and growth level in large metropolitan markets. In essence, Boston Chicken engaged in three distinct businesses that included the opening of restaurants or stores, selling of franchises and financing area developers. As a result, this enabled the company to have substantial diversification in its business. In particular, Boston Chicken leveraged the notion of franchising for its growth and development. In addition, Boston Chicken also had the strategy of retailing franchises to large regional developers rather than retailing them to a huge number of small franchises. The main purpose of this strategy was to utilize the financing, management as well as local information of the developers in order to grow and develop additional stores in that particular region (Healy, 1997).

One other key success factor of Boston Chicken's growth was developing the computer software that enables the company to link all of its business operations. In particular, this strategy was a great boost to Boston Chicken as it enhanced operating performance for all the company's store. This is for the reason that, for instance, there was less probability of overstocking on inventory and reordering for more items on the inventory list became much easier. More so, this new system was also able to help the employees of the company with their work schedules. The preceding success business strategies aforementioned ensured that the consumers were satisfied with the quality products retailed by the company. In turn, this made things much easier not only for the company, but for the employees as well and enabled Boston Chicken to expand its business operations with less risk levels. This computer software provided Boston Chicken with support for its business network and assisted in the management of its supply chains, study of the market, the collection of feedback from consumers and financial reporting. One other key success factor for the company was the execution of long-term agreements with key suppliers of the business to lock-in food prices, the growth and development of flagship stores and the construction of drive-through lanes to enhance sales in the off-peak hour periods (Healy, 1997).

Boston Chicken's Business Strategy: Critical Risk Factors

Boston Chicken's growth was one that was rapid. In three years' time between 1991 and 1994, the number of stores increased from 34 to 534. The company had an annual growth rate that surpassed the 500% mark with a new Boston Chicken store being opened in every two days. The revenue generated by the company in this time period increased from $5.2 million to $96.2 million. In turn, the resulting net income also increased from a loss of $2.6 million to $16.2 million (Healy, 1997). Nevertheless, it is imperative to note that this rapid growth rate does come at a cost. There are a number of risk factors that the company faces. For starters, Boston Chicken runs the risk of losing control of its business operations due to its concentration on fast and rapid growth. In particular, excessive focus and emphasis on rapid growth could result in reduced quality of operations, a rise in wastage of food and eventually, lower levels of profitability of the franchise operations. It is also imperative to note that with such immense growth, the additional costs of wages, cost of goods, administrative expenses and other costs increase manifold. Despite the fact that Boston Chicken has been able to continue generating profits, there is no assurance that if it goes on to grow at this rapid rate, it will have the capacity to generate profits in the long run. In addition, the company's fast growth will imply a shortage of experienced personnel and does not have an organizational culture either (Healy, 1997).

Another risk is that the growth strategy of Boston Chicken places a heavy pressure on the management of cash, taking into consideration that funds are necessitated for growth. The revenue generated by Boston Chicken emanates from franchising fees, royalties as well as through interest from the line of credit opened by the company for all of its franchises. In accordance to Lipton Financial Services, for Boston Chicken to be at a break even point, the company has to earn at least $23,000 every single week (Healy, 1997). However, the downside is that the actual average sales attained every week were less than this necessitated amount. Boston Chicken might not have been able to produce an adequate amount of cash flows to sustain and keep up its day-to-day operating activities, even though its revenues from new franchising may have been high.

Another risk factor that Boston Chicken faced was competition. One good example of a serious competitor is KFC. At the point when KFC expanded its menu and introduced the new rotisserie chicken line up, the profits of the company rocketed. In particular, its sales increased to about $160 million. In addition, there is still a great deal of opportunity and prospects for rival companies to take advantage of. One other risk factor arises from the notion that Boston Chicken is seeking to grow and advance into the bagel market and set itself up a retailer of breakfast meals. Boston Chicken placed an investment of $20 million in Progressive Bagels. This can be deemed as a major risk for the reason that the company is attempting to enter into a new market with a different and varied consumer base. More so, it is a risk as not every single consumer will be able to perceive Boston Chicken as a breakfast retailer. In addition, by late 1995, the investment was amplified to $80 million. However, no data was obtainable to assess the yield from this investment (Healy, 1997).

Company's Report on Performance and Risks

Boston Chicken is reporting its financial data within the financial statements centered on the performance and risk of the stores operated by the company and fees and royalties that are related to the franchise. The main assumption made in undertaking this reporting is the incessant success of the stores operated by the franchisees. In particular, these stores operated by the franchisees have to make available a profit or yield for the investors. Lack of doing so implies that investors will not be keen on purchasing an area in order to develop a franchise. This policy being used of not providing any financial data and information on the separate individual stores operated by the franchisee runs the risk of a deterioration of royalties as a result of net income losses at a franchisee-operated level (Healy, 1997).

In reporting its financial statements, the revenues of Boston Chicken are recognized for franchise fees and development fees once the store opens and is in operation. Secondly, revenues from royalties are recognized when the Boston Chicken store generates sales. The costs incurred prior to the opening of the store are amortized over a one year period. Third of all, the costs of financing on notes receivable to franchisees are indicated as earned. Nonetheless, Boston Chicken does not make any allowance for the default on these notes receivable. In addition, there are a number of accounting practices that can be perceived risky to the business. A particular one that stands out and seems to be contentious is that the financial statements of the company did not indicate an area for allowance of bad debt. In addition, the manner in which the company accounted for its loans can also be perceived as a risky and controversial aspect for the reason that they were converted into equity two years afterwards. In addition, the loans that were not recompensed or reimbursed by the franchises were not presented in the financial statements of the company. In addition, another element is that at no given point in the financial statements was it revealed the number of franchises that were included in the company. The implication of this is that the financial statements of the firm were not consolidated to indicate the true and correct operating profits or losses. The amount of Notes receivable came to an amount greater than $200m at the culmination of 1984, with an additional 131m of notes already committed. The notes are structured to hand the parent company the option to convert the loan into equity in the franchisee at a 12 to 15% premium rate over the equity price that was prevailing at creation of the franchise (Healy, 1997).

Adjustments to Firm's Accounting Policies

There are adjustments that ought to be made to the firm's accounting policies. For starters, in order for the financial information presented to indicate the correct financial condition of the company, all of the financial statements of Boston (Chicken's franchises ought to be combined). It is imperative to take note that financial statements do not offer a true representation of the company's financial status and health, if they do not take these numbers into consideration. For instance, by analyzing the financial information of the company's assets in the financial statements, a great deal of the financial data emanates from accounts receivable and notes receivable. An important element to take into account is that these two comes from the franchises and the financed area developers. Bearing this in mind, the investors are not able to be reliant on the presented financial statements and for that reason, not able to perceive the full financial depiction of the company. So, how exactly would financial statement consolidation change the financial statements of Boston Chicken? Well, for starters, there would be the elimination of royalty, franchise fees and also interest income. Secondly, the company would be able to indicate its share or proportion of the sales revenue generated and costs incurred from the stores. Third of all, there would be the elimination of notes receivable and Boston Chicken would report its share and proportion of the assets and liabilities of the franchisees (Healy, 1997).

Secondly, more often than not, Boston Chicken does not make estimations for allowance for bad debt. The implication of this is that it ends up having an over estimation on the net income of the company by not having the contra asset account, that is allowance for bad debt. In particular, the company does not take into consideration the capacity of the franchises to repay or reimburse the loans that are handed to them. In addition, it also does not take into consideration the royalties and payments from franchises centered on revenues that were deteriorating. Therefore, taking these elements into consideration, it can be deemed that the present financial statements presented in the case study do not in actual fact offer a true representation of the financial condition, health and status of the company (Healy, 1997).

Questions to Ask Management about Company's Performance

All of the analyses undertaken above have been done on the basis of restricted average data and information. A great deal of the information is incomplete. This is taking into account that it can take only one franchise to fail and for the company to do so as well and more so that the company will experience a huge loss in terms of notes receivable. Therefore, it is imperative to attain more wide-ranging and comprehensive data and information from the management. Some of the additional data and information that I would ask the management, regarding the performance of the company would include the following:

1. Same Store Sales

The financial information provided such as revenues and costs of products sold have all been generalized. Information that would be asked from the management is the sales made by each stores. Are all stores profitable? Are some of the stores making losses in terms of yield?

2. Distribution of Same Store Sales

As aforementioned, financial information provided such as revenues and costs of products sold have all been generalized. It is imperative to obtain information from the management to ascertain how sales from these stores are distributed.

3. Late Payments by Franchisees. Franchise business appears to be. However, this is the case as long as franchisees can maintain the payment of the bills. It is imperative to obtain additional data from the management to ascertain if any late payments are made by franchisees and how they are accounted for.

4. Security provided by Developers, for instance, any other assets external from the franchise corporation. The poor performance of the franchised stores is not mirrored in Boston Chicken's earnings. This is a significant aspect for the reason that Boston Chicken is bankrolling these stores. Therefore, it is important to ask the management whether they are obtaining financial security, perhaps is the form of assets from developers (Healy, 1997).

Boston Chicken's Performance

Financial Ratio Analysis

Financial ratio analysis makes it possible to examine the financial health of a company. The financial statements of a company provide limited understanding and knowledge into its performance. So as to attain a much stronger and richer insight of what takes place, there has to be a relevant basis of evaluation and appraisal. Not only are you able to analyze the financial performance of a company, but the ratios also make it possible to compare the performance of companies with their rival companies and also with benchmarks in the industry (Weygandt et al., 2008). The following section encompasses the financial ratio analysis of Boston Chicken in the three-year period between 1992 and 1994. These ratios offer a proper perspective of the financial performance of the company.

1. Liquidity Ratios

Liquidity ratios are not only a proper measure of financial health, but also financial performance. The ratios examine the capability of a corporation to settle its current liabilities as they come to be due. The current ratio is computed by dividing the current assets by current liabilities. The word current implies that the period in consideration is less than or equivalent to one financial year. This particular ratio assesses the current assets in relation to the current liabilities to ascertain and determine whether the company has sufficient assets that can be liquidated instantaneously in order to reimburse obligations and debt (Weygandt et al., 2008).

i. Current Ratio

Boston Chicken

1994

1993

1992

Total current assets

59,329

13,094

11,016

Total current liabilities

27,280

10,306

3,199

Current Ratio

2.174817

1.270522

3.443576

The current ratio of Boston Chicken largely declined from 3.44 in 1992 to 1.27 in 1993. This was owing to the increase in the liabilities of the company in 1993. However, in the following year, the financial ratio of the company rose to 2.17. This ideal current ratio is 2:1. Therefore, this implies that Boston Chicken is financially healthy in terms of liquidity. In particular, this means that the company is able to fully cater for its current liabilities, debt and obligations through its current assets.

ii. Operating Cash Flow Ratio

Boston Chicken

1994

1993

1992

Cash flow from operation

35,198

8,046

(3,612)

Current Liability

27,280

10,306

3,199

Operating Cash Flow Ratio

1.290249

0.78071

-1.1291

The operating cash flow ratio is a financial metric that indicates how well the current liabilities of a company are catered for by the cash flow that is generated from its business operations. In the three-year period, the operating cash flow ratio of Boston Chicken has steadily increased from -1.22 in 1992 to 0.78 in 1993 and further up to 1.29 in 1994. This implies that the company's liquidity in the short-term period has steadily improved. Therefore, this indicates that Boston Chicken is financially stable as its liquidity is satisfactory.

2. Profitability Ratios

Profitability ratios indicate how well the company is able to generate profits in a fiscal year through sales, use of assets and also forms of capital such as equity. Profitability ratios show whether or not a company is making as much profit as it should be.

i. Gross Profit

Gross profit margin is a profitability ratio that compares the amount of operating income with that of revenue. This ratio considers the expenses of production that are not related to the direct production of products or services and these expenses include administrative expenses. This ratio is calculated using the following formula:

Gross profit margin = Earnings before interest and tax / Sales Revenue (Weygandt et al., 2008).

Boston Chicken

1994

1993

1992

Gross Profit (loss)

24,611

1,927

(6,309)

Total revenues

96,151

42,530

8,283

Net Profit (loss) Margin

0.255962

0.045309

-- 0.76168

The operating profit margin of a company is indicative of the profitability of the financial institution with respect to the income generated by the company in relation to the operations. The gross profit margin of Boston Chicken Paribas steadily increased from -76.17% in 1992 to 4.53% in 1993 and went on to rise further up to 25.60% in 1994. This implies that the company in the past three years has become more and more profitable, owing to its increase in the revenues generated and the gross returns yielded from such revenues. For instance, in 1994, Boston Chicken made a return of 25.60 cents for every dollar of revenue compared to a loss of 76.17 cents for every dollar generated by revenue sales in 1992.

ii. Net Profit Margin

The net profit margin is a profitability ratio that indicates the profitability levels of the firm with respect to the net income generated against the revenues attained by the company for that particular accounting period. This is computed using the following formula:

Net profit margin = Net income / Revenue (Weygandt et al., 2008).

Boston Chicken

1994

1993

1992

Net income (loss)

16173

-5850

Total revenues

96,151

42,530

8,283

Net Profit (loss) Margin

0.168204

0.038726

-0.70627

The net profit margin of a company is indicative of the profitability of the financial institution with respect to the net income generated by the company in relation to the revenues. The net profit margin of Boston Chicken Paribas steadily increased from -70.63% in 1992 to 3.87% in 1993 and went on to rise further up to 16.82% in 1994. This implies that the company in the past three years has become more and more profitable owing to its increase in the revenues generated and the profit yielded from such revenues. For instance, in 1994, Boston Chicken made a return of 16.82 cents for every dollar of revenue compared to a loss of 70.63 cents for every dollar generated by revenue sales in 1992.

iii. Return on Equity

The return on equity can be described as the amount of profit return or the net income that a company generates from every dollar that emanates from its equity. This is usually of great value and benefit, to the users of financial statements and in particular the investors to perceive what kind of profit the shareholders are obtaining as returns of their investment. It reveals just how the company makes use of the funds that are invested by the shareholders in the company. A high rate implies that the company knows how to generate profit and maximizing the funds of the shareholders. In addition, it also indicates growth and makes more and more probable investors to invest in the company (Weygandt et al., 2008). This is computed as follows:

ROE = Net Income/Shareholders' Equity

Boston Chicken

1994

1993

1992

Net income (loss)

$16,173

$1,647

($5,850)

Shareholder's Equity

259,815

94,906

17,037

Return on Equity

0.062248

0.017354

-0.34337

The return on equity ratio of Boston Chicken in the past three years has constantly and steadily improved. The financial ratio between 1992 and 1994 steadily increased from -0.3434 to 0.0174, and then further rose to 0.06224. This is owing to the extreme increase in the income generated by the company from a loss to a steady return. The improved figures are indicative that Boston Chicken started to comprehensively invest on its shareholder's equity. This is because, for instance, in the past year, the company generated 0.062 cents from every dollar that is invested from the equity of the shareholders. This is a significant improvement compared to the 0.34 cents loss for every dollar invested from the shareholders' equity in 1992.

iv. Return on Assets

Return on assets (ROA) is a financial ratio that measures the profitability of a company, but also its financial health. This ratio, in particular, places emphasis on measuring the profitability of the assets that are only used to generate net income for the company. ROA is calculated through dividing net income generated by the total assets. This is as shown in the formula below:

ROA = Net Income/Total Assets

Boston Chicken

1994

1993

1992

Net income (loss)

$16,173

$1,647

($5,850)

Total assets

$426,982

$110,064

$22,670

Return on Assets

0.037877

0.014964

-0.25805

In the accounting period, being analyzed, the return on assets ratio of Boston Chicken had a steady and impressive improvement. The financial ratio increased from -0.25805 in 1992 to 0.014964 in 1993 and went on to increase much further up to 0.037877 in 1994. The inference of these figures is that as the assets of the company increased, so did Boston Chicken maximize on them. The increasing net income generated by the company is satisfactory enough to indicate that the company has in the past two years effectively invested and utilized its total assets. For instance, in the past year, the company generated 0.038 cents from every single dollar invested in the total assets. This figure is quite impressive, considering that two years before every dollar invested in the assets of the company had yielded a loss of 0.23 cents. These financial ratios indicate that Boston Chicken's performance has improved and the company's profitability is increasing, implying a proper financial position of the company.

3. Efficiency Ratios

i. Turnover of Cash Ratio

The cash turnover ratio is a financial metric that is employed to ascertain the proportion of cash necessitated to generate sales. Basically, the ratio indicates the efficiency with which a company utilizes its accessible cash to undertake operations and generate sales. The cash turnover ratio is obtained using the formula:

Cash Turnover Ratio = Annual Revenue / Average Cash Balance

Boston Chicken

1994

1993

1992

Total revenues

96,151

42,530

8,283

Cash

25304

Cash Turnover Ratio

3.799834

9.374036

0.853126

The turnover of cash ratio for the company significantly increased from 0.85 in 1992 to 9.37 in 1993. However, this figure went on to decline to 3.8 in 1994. The significant figures in 1993 and 1994 are due to the expansion being undertaken by the company through opening of stores. The company had an expansion rate of about 500%. This implies that for the company to increase the revenue generated it required 9 times the available cash balance in 1993 and almost 4 times the available cash balance in 1994. In addition, this means that if Boston Chicken is required to increase its revenue by $1,000,000, then it would require an additional $300,000 of available cash to undertake this.

ii. Average Collection Period

The average settlement period for accounts receivable indicates the time period that the company takes to collect its debts and money owed from its consumers and its debtors. As a result, having a lower average collection period is perceived as optimal, for the reason that this implies that it does not take a business a long time to transform its receivables into cash. At the end of the day, every corporation requires cash to settle its own costs such as operating and administrative costs. The financial ratio is calculated using the following formula:

Average settlement period for accounts receivable = Average accounts receivable / credit sales revenue x 365

Boston Chicken

1994

1993

1992

Accounts receivable, net

6,540

2,076

Credit Sales Revenue

96,151

42,530

8,283

Average settlement period for accounts receivable

24.82657

17.8166

24.85331

The collection period of the company in general has been quite effective and satisfactory. The settlement period has been low, which implies that the company is effective in its collection. According to the figures, it shows that Boston Chicken was most effective in its collection and settlement in the year 1993.

4. Other Ratios

i. Royalty and Franchise associated revenue store

This ratio is attained by dividing the fees associated with royalties and franchises by the number of stores.

ii. Company-Operated Revenue Per Store

This is attained by dividing the revenue generated by the company operating stores against the number of stores iii. Earnings per Share

The EPS financial ratio indicates the profitability level and performance of a company as it is the percentage of a company's profit that is apportioned for every outstanding share of common stock. The earnings per share ratio are calculated by dividing the net profit generated by a company against the number of ordinary shares.

Boston Chicken

1994

1993

1992

Net income (loss)

$16,173

($5,850)

Number of shares

42,861

32,667

28,495

Earnings per share

$0.38

$0.06

($0.21)

The earnings per share of the company increased from a loss of 21 cents per share in 1992 to a profit of 6 cents per share. In 1994, this figure increased much further to 38 cents per share. This indicates that in the three-year period, the profitability of Boston Chicken has immensely improved.

iv. Interest Expense Ratio

This financial ratio measures the efficiency of the company. This encompasses the manner in which the company is effective enough to generate income. It delves into the financial efficiency of the bank in determining the manner in which the different operations of the business have an impact on the gross income. The interest expense ratio of a company is calculated by dividing the interest expense by the gross income.

Interest expense ratio = Interest expense / Gross Income

Boston Chicken

1994

1993

Interest Expense

4,235

Gross Income

24,611

1,927

Interest Expense Ratio

0.17208

0.22833

The interest expense ratio of Boston Chicken in the past two years declined from 0.23 in 1993 to 0.17 in 1994. This indicates that Boston Chicken's level of effectiveness in generating its income slightly deteriorated in the past two years. More so, this implies that the company's business operations are effective enough in generating its income in 1993 compared to the past year.

v. Asset Utilization

The asset utilization ratio provides the financial statement users with a measure of the capability of the management of a company to make the most of and capitalize on its total assets in order to generate revenue. The asset utilization ratio is computed by dividing total revenues by the net book worth of the principal assets.

Boston Chicken

1994

1993

1992

Revenue

96,151

42,530

8,283

Total Assets

426982

110064

22670

Asset utilization

0.225187

0.386412

0.365373

Over the three-year period between 1992 and 1994, the asset utilization of Boston Chicken was inconsistent and varied. The ratio rose from 36.53% in 1992 to 38.64% in 1993. However, the ratio declined the subsequent year to 22.51%. The asset utilization ratio computes the total sales made for every dollar of assets a company possesses. For instance, with a utilization rate of 22.51% in 1994, Boston Chicken22.51 cents for every dollar of the assets held by the company. This indicates that Boston Chicken as a company has been efficient over time with each dollar of the assets that it has. This can be perceived in the steady increase of the revenues generated over time.