Pass In Training

The Requirement

A review of Scour’s management accounts for the year ended 31 May 2020 in comparison with the year ended 31 May 2019.

Your review should be based on the management accounts as set out in Exhibit 15 and the additional information in Exhibit 16. It should cover, separately for (a) owned operations and (b) franchised operations: revenue, cost of sales and gross profit. Please also provide brief comments summarising the performance of the overall business.

Overview and comparison to our Mock examinations

This was very similar to our Mock 1 examination, with almost identical numbers for revenue. The real exam and our mock both had 19 new franchisees opening during the year and a very similar split for all four of the franchisee revenue lines. A large number of the points we developed in our answer were also relevant to the real examination.

Owned operations (Revenue and Gross Profit)

In the real exam, Students who are likely to have performed well would have used the information in Exhibit 16 to help develop their answers.

• Average price being unchanged should lead to students linking the growth to a change in the volume.
• Y4 being taken over helps to explain why customer satisfaction rates increased and yet retention rates fell. A reasonable recommendation would be to consider how to compete against Y4 for future bids as this is a risk into 2020, after all it is a considerable amount of revenue to lose in just a 5 month period.
• Colleges and Tonto explain a reasonable proportion of the net growth in revenue based on the 10% increase in college cleaning hours and the new Tonto stores. We believe the examiner could have changed the exam paper slightly as a consequence of the Coronavirus outbreak as he mentions the colleges were closed in April & May 2020 and the Tonto stores required higher cleaning in the same months. We certainly would not go into detail on these points in our analysis, but it should be sufficient to suggest a recommendation to “consider the impact of the COVID-19 on different types of customers in order to minimise idle time and maintain optimal headcount.”
• The Revenue per Employee £35,200 should also allow students to comment on the efficiency of the division (no price increase to customers suggests improved efficiency and lower idle time), but also to work out the FTE headcount and then consider how Personnel Costs have changed. There is a slight increase in average personnel costs, which has not been passed onto the end customer and helps to explain the small decrease in GP Margin.

Franchised Operations (Revenue and Gross Profit)

Students should have also used the extra information presented in Exhibit 16 to enhance their answers:

• 19 new franchisees – students should compare to target and also be able to consider how the loss per new franchisee has moved (reducing loss per new franchisee). This is explained by the online induction programme. However, it is still loss making and could be a recommendation.
•  The combined revenue earned by the new franchisees was lower than their budgets – a point which can be made easily by students. More interesting is the 11 franchisees figure, which should enable students to compare to the £220k annualised figure from the AI and therefore state about the improved performance of the existing franchisees.
• The ongoing costs relating to the new franchisees would allow students to comment on the disproportionate costs relating to the support needed for new franchisees over established franchisees – a point also repeated in the AI.
• Gross profit margin for the franchisee operation was expected to grow as the division matures and again students were able to comment on this point.

Overall performance

Students were also asked to comment on the overall performance of the business. We would expect students to automatically comment on Overall Revenue, Overall Gross Profit and Gross Profit Margin. The change in the sales mix from Owned to Franchise should help to explain the change in gross profit margin.

However, less obvious would be for students to comment on the Operating Profit for the business overall as the examiner has only asked for Revenue, COS and GP. However, we would expect students, if unsure and with sufficient time available, to cover the change in Operating Profit and OP% as this has increased considerably. As it is brief, we would not expect students to go into any real detail on the overhead costs, perhaps pulling out one of the costs.

There is the possibility that the examiner would also want students to comment on the net cash flow for the business too. However, we believe very few students would do this and if there is a point on the key it is likely to be one bullet point. We personally would not have covered net cash flow in our answer.