The second one is that Boston Chicken put a strong emphasis on its customers; they offer a variety of quality food choices to their customers and their food is cheap, clean and fast. The company also used certain software to get the customers feedback immediately. And between the subsidiaries the software to make sure the internal information is exchange on time. There are two key risk factors for Boston Chicken. First, the competition in fast food industry is fierce. One example of Boston Chickens competitor is KFC, who has earned a lot of profit after introducing their new rotisserie chicken line up. The second key risk factor is its rapid growth in new stores. Boston Chicken has opened 500 new stores between the year 1992-1994.
The rapid growth also comes with a large cost and Boston Chicken might not be able to earn enough cash flows to maintain its daily operating activities. Also over 50% of the total revenue was the franchising related in 1994 fiscal year, the profitability and sustainability of the franchisee are a concern. According to the Boston Chickens Management Analysis and its Financial Statements, some of the assumptions the company made are: 1. Deferred financing costs are amortized over the period of the related financing. 2. Revenue from Company-operated stores is recognized in the period related food and beverages are sold. 3. Revenue derived from initial franchise fees and area development fees is recognized when the franchise store opens. 4.Pre-opning costs are amortized over one year. 5. Royalties are recognized in the same period related franchise store revenue is generated.
6. The notes are structured to give the parents 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. Boston Chickens accounting policy for revenue recognition is aggressive because it did not use consolidated financial statements to include the financed area developers operating results in the parent books even if it has control over the financed area developers. If consolidated financial statements were used, there will be a big effect on the Income Statement. The royalty & franchise fee and interest payment will be eliminated from revenue. Another accounting issue is that Boston Chicken agreed to loan the franchisees as much as 80% of their capital and reported loans at face value but did not have any allowance for bad debt.
Boston Chickens current accounting standard have kept franchise losses from the public and it also did not mention that the franchisees losses will hurt their ability to pay, this has also made Boston chickens accounting policy aggressive. Because of Boston Chickens business strategy, the companys success will depend on both its own store operations and the financed area developers; whether franchisees are profitable or not is a key factor for the companys long term success. However, Boston Chickens accounting policy did not allow its financial statements to measure the profitability of the franchisees and therefore will not be useful when measuring the effectiveness of its business strategy. One of the key risks Boston Chicken has is that whether the companys profit can be sustainable during rapid growth and expansion, since Boston Chicken did not include franchises operating result, the accounting policy failed to address the companys risk as well.