BOSTON CHICKEN, INC. 1. Assess Boston Chickens business strategy.

What are its critical success factors and risks?

BASIC STRATEGY Boston chickens basic strategy was to provide customers with home made chicken at a reasonable price and environment Started with a new concept and field , so that existing firms like KFC had very less barrier to enter but they did not. Its strategy was to expand quickly and develop a brand name. It came out with a new segment in the fast food industry. He came out with a strategy to comprise a team consisting of both people from fast food industry and franchise industry.

SUCCESS FACTORS Entered a new field with different concept . It did not give each single store to different franchise, but gave a group of stores from same region to one franchise. Franchisee is given to people having 15-20 years of relevant management experience, strong financial resource, giving them a good earning. Came out with softwares to analyze day to day activities. Long term agreement with suppliers, neglecting the affect of price rise of commodity. Coming out with new items time to time, updating the menu regularly. On spot computer feedback.

RISKS INVILVED Concept too easy to be copied. Focusing on growth may reduce the quality of operations. Growth restricted the increment in funds resulting in less growth. Total control was given to the franchise which lead to the loss of food quality.

2. Howis thecompany reporting onits performance and risks? What are the key assumptions behind these policies? Do you think that its accounting policies reflect the risks 3. Revenues are recognized for franchise fees and development fees when the store 4. opens. Revenues from royalties are recognized when the store generates sales

Pre-opening costs are amortized over one year. Financing costs on notes receivable to franchisees are shown as earned.However, the 5. company makes no allowance for defaults on these notes. 6. The amount ofNotes receivable totaled more than $200m at the end of 1984, with a 7. further 131m of notes already committed 8. The notes are structured to give the parent the option to convert the loan into equity in the franchisee at a 12-15% premium over the equity price at formation of the franchise 9. We can estimate the income s 3. What adjustments , if any, would you make to the firms accounting policies? The company effectively has control over the financed area developers through its option to purchase. At this stage we recommend that Boston chicken should opt for the consolidation of the Financial Statements which would entail the following benefits: (1) The royalty, franchise fee and interest income would be eliminated. (2) The company would show its share of the sales revenue and cost from the stores. (3) The notes receivable would be eliminated and the company would report its share of the assets and liabilities of the franchisees

3. What questions would you ask management about the companys performance? The analyses done above are based on limited information and average data is incomplete, since it only takes one franchisee to fail, and Boston Chicken will incur a large loss in Notes receivable. Hence the pertinence of gathering more comprehensive information from the management. Some additional information required would be Same store sales Distribution of same store sales Late payments by franchisees. Security provided by developers such as any other assets outside the franchise corporation.

4. How is the Boston chicken performing? Looking at the financial ratios, we can predict the financial health of the company

Efficiency ratio

1993

1994

Average Collection period Turnover of cash ratio

Acc receivables *days/year/ net sales Net sales/Working capital

17.81660005

24.82657487

0.232

0.505

Efficiency ratios are used to predict how effectively company is utilizing its resources. They are typically used to analyze how well a company uses its assets and liabilities internally. Average collection period is increasing that is now company is taking more time to collect its credit sales which will ultimately increase short term borrowings but at thesame time higher turnover of cash means company is able to generate more cash overa period. So net effect will be minimum. Liquidity ratio current ratio current asset/ current liability cash flow from operation/current liability 1993 1.271 1994 2.175

operating cash flow ratio

0.781

1.290

Liquidity ratios are a measure of how company manage to fulfil its short term funding. Higher ratio indicates that company can easily manage its short term liability. Over the year we can see ratios are increasing which is a good sign for a company who is in expansion mode because such companies frequently needs cash. Profitability ratios are used to assess a business' ability to generate earnings as compared to expenses over a specified time period. Return on assets indicates revenue they are generating by utilizing each unit of asset. Higher ratio of ROA and ROE over the year means they are receiving more over the years with same amount of investment. Also increase in Gross profit and net profit means they are generating more with less cost involved. Profitability ratio Gross profit net profit marginnet (Sales-COGS)/Sales 1993 1994

0.734

0.834

Net profit sales

0.015

0.168

ROE

Net income/shareholder's equity Net income/Assets

0.007

0.062

ROA

0.006 0.038

Boston chicken is able to maintain high profitability, liquidity and efficiency ratio which reflect company have a potential to sustain over the period.Also since they are expanding, so they need funds which can be easily arranged but also we can see that over the year Revenue/ Store is also increasing. Therefore it can be concluded that market is still unsaturated and there is lot more to explore.