Pass In Training

The following covers a standard style question where the Examiner is asking for Revenue and then two out of either Gross Profit, Operating Profit or Net Cash.

There are various ways he can ask this question, including putting a greater emphasis on the two sales channel. Our proforma answer would need to be adapted to make sure you answer in the way the Examiner asks Requirement 1.

We have given a very full answer, to try and cover everything. You can tailor this down depending on the numbers on the day of the exam e.g. if Wages in COS has little movement, it is unlikely there will be much credit in the key for this.

YELLOW HIGHLIGHTED CELLS ARE OPTIONS DEPENDING ON THE MOVEMEN IN THE EXAM

BLUE HIGHLIGHTED CELLS ARE THE SECOND OPTION IN THE SAME SENTENCE DEPENDING ON THE MOVEMENT IN THE EXAM

GREEN HIGHLIGHTED – YOU NEED TO PICK THE BEST REASON. MAKE SURE YOU GO FOR SOMETHING NEW ON THE DAY OF THE EXAM IF SOMETHING IS GIVEN OR IF NOT THEN ENSURE YOU CHOOSE SOMETHING FROM THE AI THAT SUPPORTS THE MOVEMENT.

GREY HIGHLIGHT – OPTIONAL EXTRA SENTENCE – WITHOUT KNOWING THE CONTENT OF THE EXAM, THE GREY SENTENCES ARE SPECULATIVE AND NEED TO BE USED CAREFULLY.

REVIEW OF RESULTS FOR THE YEAR ENDED 30 JUNE 2021

Revenue

Total revenue [INCREASED / DECREASED] by £xxxk (x.x%) to £xxxxxk, [CONTINUING [AT A FASTER RATE / SLOWER RATE] / REVERSING] the growth trend experienced since 2017 [DESPITE / DUE TO] the recent economic downturn. The competitive nature of the industry means pricing and customer service are important in order to win new business. The NW region was expected to grow, which has benefited both divisions, and it is [PLEASING / DISAPPOINTING] the £30m target from 2020 has still not been achieved.

RH revenue [INCREASED / DECREASED] by £xxxk (x.x%) to £xxxxxk, [CONTINUING [AT A FASTER RATE / SLOWER RATE] / REVERSING] the growth trend experienced since 2017 and was the [BEST PERFORMING / WORST PERFORMING division]. The main reason for this variance was [REASON REQUIRED e.g. Wrights stopping construction which had generate £0.8m in 2020 / NEW CUSTOMER ETC.]. The variance is mainly volume driven as the competitive nature of the industry, especially RH, makes it difficult to influence prices.

BCT revenue [INCREASED / DECREASED] by £xxxk (x.x%) to £xxxxxk, [RETURNING THE DIVISION TO GROWTH AFTER 2020’S UNEXPECTED DECREASE / CONTINUING THE DECREASE WHICH FIRST OCCURRED IN 2020 AT AN [INCREASEING / DECREASING SPEED]]. It is the [BEST PERFORMING / WORST PERFORMING division], with the change due to [REASON REQUIRED e.g. there being no brief pause which occurred at the start of the economic downturn.].

Branch revenue [INCREASED / DECREASED] by £xxxk (x.x%) to £xxxxxk, which compared to 2020’s marginal decrease looks [GOOD / DISAPPOINTING]. This change is linked to the number of months of trading in the year which has [RISEN / FALLEN AS STORES WERE NOT / WERE FORCED TO CLOSE FOR MORE MONTHS AND THERE WAS MORE / LESS REFURBISHMENT CLOSURES] from 86 to xxx. However, average branch revenue p.m. [INCREASED / DECREASED] from £238.1k to £xxxx, [CONTINUING THE KPI GROWTH PATTERN SINCE 2017 / WHICH IS THE FIRST YEAR OF DECLINE]. [THIS IS DESPITE / THE REASON FOR THIS IS] the continued online growth in both RH and BCT divisions and the general social trend towards online purchasing.

Online revenue [INCREASED / DECREASED] by £xxxk (x.x%) to £xxxxxk as customers switched to online following the required branch closures in 2020 and the increasing number of click & collect branches where revenue is recorded online but the goods collected in branch. Click & collect may unfairly under-report the importance of the branch network to the business. Online sales could have been higher had IT outages not INCREASED / DECREASED the estimated lost revenue to £xxxx.

BCT now makes up xx.x% v 21.6% of the sales mix, with RH being the remainder [REVERSING / CONTINUING the movement from 2020. RH remains highly dominate. Online revenue is now xx.x% v 30.4% of the sales mix continuing the trend towards online. The reduction in the reliance of branches for generating revenue is a significant industry wide trend that is likely to continue.

TUTOR NOTE: PLEASE NOTE WE HAVE NOT ANALYSED ANY BRANCHES IN THIS PROFORMA. HOWEVER, IF THERE IS A PARTICULAR BRANCH THAT HAS CHANGED SIGNIFICANTLY IN TERMS OF ITS REVENUE / KPI, YOU WILL NEED TO DISCUSS IT. ADDITIONALLY, IF THE EXAMINER WRITES THE QUESTION IN A WAY HE WANTS YOU TO FOCUS ON THE SALES CHANNELS, THEN YOU WILL HAVE TO GO INTO SOME ADDITIONAL DETAILS ON THE BRANCHES. HE COULD WORD THE QUESTION “YOUR REVIEW SHOULD INCLUDE REVENUE, WITH A FOCUS ON THE PERFORMANCE OF THE BRANCH AND ONLINE SALES CHANNELS, GROSS PROFIT AND OPERATING PROFIT. IF HE DOES WORD THE QUESTION IN THIS MANNER, A LOT OF THE WORDING ABOVE IS STILL RELEVANT, BUT YOU HAVE TO ENSURE YOU ANSWER IS FOCUSING ON THE CHANNELS. FOR INSTANCE GROWTH IN RH WILL IMPACT BOTH BRANCH AND ONLINE CHANNELS. YOU NEED TO UNDERSTAND THE REASON BEHIND THIS GROWTH TO EXPLAIN WHY RH HAS INCREASED IN ORDER TO SUPPORT THE GROWTH OF BRANCH OR ONLINE. WE FEEL THIS APPROACH IS LESS LIKELY AS THERE IS INSUFFICIENT INFORMATION IN THE AI TO ALLOW YOU TO ANALYSE GP BY SALES CHANNEL.

Gross profit

TUTOR NOTE: THE DETAIL BELOW IS ASSUMING THE QUESTION ASKS FOR REVENUE, GROSS PROFIT, OPERATING PROFIT AND THE REQUIREMENT 1 TWIST. IF THE QUESTION ASKS FOR REVENUE, OPERATING PROFIT AND CASH FLOWS, YOU NEED TO REDUCE THE DETAIL ON GROSS PROFIT TO AVOID RUNNING OUT OF TIME E.G. YOU WOULD PROBABLY DROP A REVIEW ON WAGES WITHIN COS

Total GP [INCREASED / DECREASED] by £XXXk (y.y%) to £zzzzzk, [GREATER THAN / LESS THAN] than the growth in revenue, meaning GP margins [INCREASED / DECREASED] from 19.1% to xxx%, [REVERSING / CONTINUING] the margin decrease since the peak in 2019. The sales mix movement [TOWARDS / AWAY FROM] the higher BCT division helps [EXPLAIN / OFFSET] some of the margin movement.

The [INCREASE / DECREASE] in G&M of £xxxk (y.y%) to £zzzzzk, is due to an [INCREASE / DECREASE]in the volume of goods sold. G&M as a percentage of revenue has INCREASED due to an increase in CMPI index with prices being unable to be passed onto the end customer due to the competitive nature of the industry / due to a larger inventory write off during the year.  TUTOR NOTE: WE ARE ANTICIPATING CMPI TO INCREASE WHICH WILL BE A REASON WHY MARGINS HAVE DECREASED AS IT WILL BE HARD TO PASS THESE COSTS TO THE END CUSTOMER. THE PARAGRAPH IS WRITTEN HOW WE EXPECT IT TO BE, BUT YOU NEED TO TAILOR THE GREEN PARTS AS REQUIRED ON THE DAY OF THE EXAM.  PLEASE KEEP A CLOSE CHECK ON INVENTORY WRITE OFF AS THIS MAY ALSO EXPLAIN MOVEMENT IN G&M

Wages & salaries increased £80k (1.8%) which is [IN LINE / FASTER / SLOWER] than the revenue growth. More staff are required for branch sales than online, which could indicate a DECREASE / INCREASE in branch profitability. However insufficient information is available to confirm this. TUTOR NOTE: THIS SHOULD FORM A RECOMMENDATION – ANALYSE BRANCH PROFITABILITY

RH’s GP INCREASE / DECREASED by £xxxk (yy%) with margins INCREASEING / DECREASING from 15.9% to xxx% DUE TO REASON FROM THE EXAM PAPER IDEALLY OR TIE INTO CMPI. GP Margins were HIGHER / LOWER in BCT at xxx% v 31.1% DUE TO REASON FROM THE EXAM PAPER IDEALLY TUTOR NOTE: WITHOUT NEW INFO ON THE DAY OF THE EXAM, YOU MAY FEEL LIKE YOU ARE REPEATING YOURSELF HERE WITHER THE REASON FOR WHY OVERALL GROSS PROFIT HAS CHANGED. TRY AND FIND A REASON IN THE EXAM E.G. WRITE OF OFF STOCK LINKED TO A RH CUSTOMER, HIGHER DISCOUNTS BEING GIVEN TO RH CUSTOMER, SPECIAL PROMOTION TO BCT CUSTOMERS ETC. IF THERE IS NOTHING NEW IN THE EXAM, DON’T WORRY ABOUT SOUNDING REPETITIVE.

Operating profit

TUTOR NOTE: THE DETAIL BELOW IS ASSUMING THE QUESTION ASKS FOR REVENUE, GROSS PROFIT, OPERATING PROFIT AND THE REQUIREMENT 1 TWIST. IF THE QUESTION ASKS FOR REVENUE, OPERATING PROFIT AND CASH FLOWS, YOU NEED TO REDUCE THE DETAIL ON GROSS PROFIT TO AVOID RUNNING OUT OF TIME

WAGES WITHIN COS

Total OP [INCREASED / DECREASED] by £XXXk (y.y%) to £zzzzzk, and OP margins [INCREASED / DECREASED] from 0.9% to xxx%. This is due to the change in GP which has been PARTIALLY / MORE THAN offset by an INCREASE / DECREASE in DISTRIBUTION COSTS / ADMIN COSTS with costs increasing SLOWER / FASTER than revenue.

Distribution costs INCREASED / DECREASED by £xxxk (xxx%) to £xxxxk and is now xx% v 7.0% of revenue despite the stated target to reduce these costs compared to revenue. [REASON REQUIRED] e.g Delivery charges mean customers use click & collect for orders under £100k and the free delivery above this value, which may not be sufficiently covering costs. Click & collect being despatched from Warrington is unlikely to be efficient and excludes vehicle depreciation and refunds. On time deliveries INCREASED / DECREASED which could result in large refunds depending on the order size

Admin costs INCREASED / DECREASED by £xxxk (xxx%) to £xxxxk and is now xx% v 11.3% of revenue despite the stated target to reduce these costs compared to revenue. [REASON REQUIRED] e.g The reason for this is a large increase / decrease in [Director’s Salaries / Bad debt write off etc].

Net Cash

Net cash INCREASED /   REDUCED by £xxxk DESPITE / PARTIALLY DUE TO the DECLINE / INCREASE in profitability and the adding back of depreciation (non-cash item) of £xxxk. HP is again utilising its overdraft facility.

An increase / decrease of £xxxk in cash was tied up in inventories, partly due to the increase / decrease in trading (revenue), but also an improvement / worsening of days from 37.3 to xxx. The main reason for this was [REASON IF AVAILABLE FROM THE EXAM PAPER E.G. BULK ORDERING TO AVOID SHORTAGES IF INTRODUCED BY THE EXAMINER]

TUTOR NOTE: REMEMBER A WRITE OFF OF INVENTORY IS A NON-CASH ITEM. IT HAS REDUCED OP AND WILL REDUCE THE YEAR END STOCK HOLDING (SO EFFECTIVELY IS ADDED BACK IN WORKING CAPITAL)

An increase / decrease of £xxxk in cash was tied up in receivables, partly due to the increase / decrease in trading (revenue), but also an improvement / worsening of days from 37.2 to xxx. The main reason for this was [REASON IF AVAILABLE FROM THE EXAM PAPER E.G. A LARGE ORDER DELIVERED TO A CUSTOMER AT THE YEAR END / WORSENING OF CREDIT CONTROL]

An increase / decrease of £xxxk in cash was tied up in payables, partly due to the increase / decrease in trading (revenue), but also an improvement / worsening of days from 66.2 to xxx. The main reason for this was [REASON IF AVAILABLE FROM THE EXAM PAPER]

A further £xxxk was spent on investment in PPE, with long term assets being paid for out of working capital. REASON DEVELOPED e,g The investment in vehicles was needed to help with the growth in online sales.

Conclusions and recommendations

Total revenue increased £xxxk (xx%) as RH’s INCREASE / DECREASE was OFFSET by BCT’s growth OR DUE TO AN INCREASE / DECREASE IN BOTH DIVISIONS. RH INCREASED /DECREASED by £xxxk (xx%) due to MAIN REASON.

Overall GP INCREASED / DECREASED by £xxx (yy%) with GP margins INCREASING / DECREASING from 19.1% to xxx%, REASON. RH GP% INCREASED / DECREASED from 15.9% to xxx due to REASON and BCT INCREASED / DECREASED FROM 31.1% to xxx% due to REASON

OP INCREASED / DECREASED by £xxk (xxx%) with OP margins INCREASEING / DECREASING from 0.9% to xx%  as REASON e.g. distribution costs increased as a percentage of revenue from 7.0% to 7.5%.

Net cash outflow of £xxxk was high as investment in assets increased to £xxxk, inventory was higher and INVENTORY / RECEIVABLE / PAYABLE days decreased from xx days to xxx days.

TWIST – MAKE SURE YOU BRING IN A FIGURE AND CONCLUDE

The board should (PICK 5 DIFFERENT ONES RELEVANT TO THE SCENARIO ASKED FOR E.G. DON’T PICK A WORKING CAPITAL CASH FLOW REC IF HE HAS NOT ASKED FOR ANY ANALYSIS ON CASH FLOWS)

• Develop reporting to be able to branch profitability to ensure all branches are sustainable
• Review reason for the fall in BRANCH average revenue per month
• Split costs to be able to fully understand online profits and overall branch profits
• Review reason for the fall in on time deliveries and increase in delivery costs as percentage of revenue  OR   Continue to monitor on time deliveries and improve due to the 5% refund policy having a potential large impact on profit
• Consider expected future supplier price increases / mitigation e.g. Buying Group
• Carefully review cash flow over the next 12 months (especially if cash has decreased)
• Review deliver routes to minimise delivery costs and improve efficiencies
• Review future financing options for large capital investments
• Review / improve working capital and credit control processes to minimise overall WC

Extra Info - If the examiner wants a more detailed review of the performance of the Branches (either within Revenue or as part of the Twist in Requirement 1), we believe you need to consider the following:

Branch review – REVENUE

TUTOR NOTE: IF YOU ARE ASKED TO REVIEW BRANCH REVENUE IN DETAIL YOU WILL NEED TO UNDERSTAND HOW THE BRANCHES HAVE MOVED IN ££ AND IN TERMS OF THEIR AVE. REV. PER MONTH. THE POINTS YOU WOULD COVER – BELOW IS AN EXTRACT FROM MOCK 2 – PLEASE DO NOT VIEW THIS IF YOU ARE STILL TO SIT MOCK 2

START WITH THE OVERALL POSITION  Branch revenue [INCREASED / DECREASED] by £xxxk (x.x%) to £xxxxxk, which compared to 2020’s marginal decrease looks [GOOD / DISAPPOINTING]. This change is linked to the number of months of trading in the year which has [RISEN / FALLEN AS STORES WERE NOT / WERE FORCED TO CLOSE FOR MORE MONTHS AND THERE WAS MORE / LESS REFURBISHMENT CLOSURES] from 86 to xxx. However, average branch revenue p.m. [INCREASED / DECREASED] from £238.1k to £xxxx, [CONTINUING THE KPI GROWTH PATTERN SINCE 2017 / WHICH IS THE FIRST YEAR OF DECLINE]. [THIS IS DESPITE / THE REASON FOR THIS IS] the continued online growth in both RH and BCT divisions and the general social trend towards online purchasing.

DISCUSS REFURBISHED BRANCHES IF ANY HAVE BEEN REFURBISHED Wigan’s total revenue fell £XXk and Bolton’s by £XXk, however average revenues p.m. increased by £XX and £XX respectively REASON E.G. THIS WAS DUE TO THE BRANCHES BEING CLOSED FOR MORE MONTHS THAN IN 2020, OFFSET BY AN IMPROVEMENT IN AVE. REVENUE ONCE REFURBISHED BRANCHES REOPEN. In all refurbished branches there has been an increase in average revenue in the months following refurbishment.

DISCUSS WORST PERFORMING BRANCH Manchester is the worst performing branch, but it is also the only branch that has not been refurbished. Average revenue fell from £228.5k to £204.8k, suggesting the importance of refurbishment to a branch’s success.

DISCUSS THE BEST PERFORMING BRANCH

COMMENT ON CLICK & COLLECT Click & collect has grown online and for 2 months were important for branch customers. Refurbished branches have C&C facilities, which are reliant on the branch network for online growth.