CASE STUDY – JULY 2013 EXAMINERS’ COMMENTS AND MARK PLAN Contents Page Part 1: Executive summary Introduction Overview of performance Part 2: The Case Study examination Scenario for the paper (Advance Information) Analysis of Advance Information (AI) Information provided in the Exam Paper (EP) Exam requirements Analysis of Exam Paper information Summary of grades available 10 Part 3: Commentary on candidates’ performance Overview of professional skills 11 Executive summary 12 Requirement 1: Review of TN business unit 13 Requirement 2: Evaluation of tender for Vynes Independent School (VIS) contract 13 Requirement 3: Discussion of response to Humbells Hardware (HH) issues 14 Overall paper: Appendices 15 Overall paper: Report 15 Part 4: Appendices Appendix 1a: Financial statement analysis: Review of TN business unit 16 Appendix 1b: Financial statement analysis: Review of HLSF 17 Appendix 2: Financial data analysis: Calculation of revenue / gross profit from VIS contract 17 Part 5: Marking key © The Institute of Chartered Accountants in England and Wales 2013 Page of 17 CASE STUDY – JULY 2013 PART 1: EXECUTIVE SUMMARY Introduction This report covers the July 2013 Case Study (CS) exam It is issued in conjunction with two illustrative scripts and related Examiners’ commentaries The first script was well within the top 25% of all assessed scripts; the second failed the exam In reviewing these documents, it is important to be aware that it is rare for a script to be uniformly ‘bad’ or uniformly ‘good’: a successful script will often present detailed coverage of all requirements but include errors of calculation, spelling or logic; an unsuccessful script may contain one or two strong sections or several excellent points but be let down by poor or incomplete text elsewhere Attached to this report are two appendices with examples of the sort of work that candidates did, or might have done, under ‘financial analysis’ The two illustrative scripts offer further insights into this area Overview of performance 75.4% of all candidates sitting the paper passed, compared with 74.1% in both July and November 2012 As always, successful candidates demonstrated their higher skills and used their four hours effectively so as to be able to cover all key aspects of the exam They approached the tasks methodically and produced wellbalanced, relevant answers addressing the principal components of each requirement; clear appendices; and succinct, focused executive summaries They followed a clear progression from Assimilating and Using Information to the other three skills areas Many had an even spread of passing grades, revealing an ability to assimilate the case material into a report together with commercial knowhow and appropriate professional scepticism They had clearly prepared well for the exam, making the necessary effort to master the Advance Information and to refine their exam technique The subject of the case is Palate Ltd (LL), a privately-owned, top-end contract catering company based just outside London, with annual revenue of around £21 million, spread fairly evenly across its three divisions: XX (Business & Industry), TN (Events) and LA (Schools) The candidate is in the role of Ashley Franklin, a final-year trainee ICAEW Chartered Accountant working for Palate and reporting to the Director of Finance and Business Development, Samantha James The exam requirements followed on from the Advance Information (AI) They comprised: A review of the results of TopNotch (TN) business unit, and the results of one client, Hertfordshire Late Spring Fair (HLSF), for the year ended 31 May 2013 An evaluation as to whether Palate should tender for the catering contract of a new school, Vynes Independent School (VIS) A discussion of the steps to be taken to address the issues raised by a firm of external catering consultants (Ogilvie) in relation to Palate’s client, Humbells Hardware (HH) In the rubric, candidates were specifically told to provide an executive summary and that the report should be balanced between the three elements There was in effect one requirement per business unit As always, each contained several parts: candidates had to identify these and then tackle them in an orderly manner: At Requirement 1, the tasks to be performed by candidates (including adjustment of numbers to create a comparable set of figures and the need to review HLSF on a stand-alone basis) were clearly set out At Requirement 2, they had to perform calculations, assess assumptions and advise on practicalities At Requirement 3, they had to address Ogilvie’s issues, deal with ethical aspects and wider implications As always, the three main elements of the report were equal in importance: a candidate spending too much time on any one section was likely to have missed the opportunity to gain passing grades in others Candidates who failed did so for various reasons, including (as often) poor time management, which led to unbalanced answers (incomplete Requirement 3; rushed executive summary) They would have benefited from planning at the outset how best to structure each section (including all the components of Appendix 1), rather than diving headlong into their report However, the key reasons for failure at this sitting were twofold: a continuing inability to apply professional scepticism (and perhaps to recognise where to apply it), leading to poor grades at the related Applying Judgement (AJ) boxes in Requirements and 3; weak recommendations in all three requirements © The Institute of Chartered Accountants in England and Wales 2013 Page of 17 CASE STUDY – JULY 2013 Requirement was “conventional” (as one tutor put it) in testing financial statement analysis skills Where it differed from some recent exams (“innovative” – same tutor) was that it focused on a single business unit rather than on the company as a whole, as well as requiring students to extract the results of one contract which seemed to be distorting the figures and then to review separately the performance on this contract Most candidates performed the requisite adjustments correctly, analysed the revised figures under the headings given (revenue, cost of sales and gross profit) to ensure coverage of all the main elements, developed this analysis with additional calculations (making use of visitor numbers) and evaluated their findings appropriately For HLSF (mentioned only briefly in the AI), the initial analysis was good but only the best students evaluated it well The art here was to replicate the principles used for the main TN work Requirement once again involved financial data analysis and the ability to challenge estimates and assumptions Although candidates had not seen a calculation of the required type, it should have been straightforward as it simply involved multiplying a set of data together In the event, most did follow the expected methodology and produced revenue and gross profit figures for each of the three years in question Many were therefore able to achieve passing grades for the basic number-work However, the approach towards the underlying estimates and assumptions was variable Many simply accepted figures such as pupil numbers Weaker candidates often discussed only one or two assumptions, resulting in incomplete answers While not specifically asked for, sensitivity analysis on the numbers should have been an obvious next step when there were so many variables involved and the predicted margins were relatively low In the event, hardly any candidates did any sensitivity analysis Quite a few said that some should be done (this was not deemed worthy of reward under ‘Makes recommendations’) Coverage of the practical considerations was mostly poor, even though most of these were a natural extension from the analysis of the contract and the facts presented at Exhibits 16 and 17 Requirement assessed wider business skills in relation to apparent problems with the contract for what was by far Palate’s largest client, Humbells Hardware (HH) Candidates had seen from the AI: (i) a summary of the HH contract; (ii) notes on the client as a whole and in particular on the resolution of previous issues that had arisen on the same contract; (iii) a letter referring to operational problems at another large client (AGBS); and (iv) a press article on “keeping your clients (happy)” They were also expected to discuss the ethical aspects of the scenario presented – both the general point about apparently undue pressure being placed on Ogilvie by HH and the specifics of some of the issues raised Those who had familiarised themselves with the AI in overall terms, who dealt in an orderly fashion with all the main aspects – and who had allocated themselves sufficient time – managed a good spread of passing grades Weaker candidates tended to offer a ‘scattergun’ approach and so produced unstructured answers They even failed to offer a basic analysis of the specific Ogilvie issues – presented in a numbered list to give a framework for students’ answers – which would have earned them good credit in the marking key Thus Requirement was far from being “open-ended”, as one tutor described it Indeed, as another noted, it “built on information provided in the AI There was ample scope for candidates to apply their own analysis It should have been manageable for a well-prepared candidate.” In summary, in the words of one tutor: “The exam requirements were clear and unambiguous, and there was plenty of information in the Exam Paper to use in your discussions [Candidates] were not asked to anything unusual, unfair or outside [their] capabilities, but they will need to have been well organised to complete it in the time allocated.” As another commented, “well-prepared students should have read the AI a number of times and there was enough detail provided for them to have performed extensive financial and strategic analysis before the exam Therefore they should have been able to explain the historic performance of each division in their own words and been aware of the factors most likely [to] influence 2013 performance.” © The Institute of Chartered Accountants in England and Wales 2013 Page of 17 CASE STUDY – JULY 2013 PART 2: THE CASE STUDY EXAMINATION Scenario for the paper (Advance Information) The case relates to Palate Ltd, a contract catering company based in St Albans, just outside London Palate has three business units, each operated as a separate division, though they form a single statutory entity You, the candidate, are Phil Roberts, a final-year trainee ICAEW Chartered Accountant working for Palate You report to the Director of Finance and Business Development, Samantha James Four weeks prior to the examination, candidates were provided with a package of information, containing a series of exhibits relating to Palate and the industry in which it operates, comprising: 10 11 About you (Phil Roberts) and your employer (Palate Ltd) The UK contract catering industry: Background Contract catering: The business model Palate Ltd: Overview of the business Email dated 19 July 2012 from Samantha James to all Palate directors Palate Ltd: Management accounts for the year ended 31 May 2012 Palate Ltd: Overview of business units (July 2012) Palate Ltd: Example client contracts (summary of key terms) The food service supply chain Palate Ltd: The way forward (the board’s strategic overview, May 2013) Letter dated June 2013 from Morgan Catering Advisors to Palate Ltd and to Arno Girls’ Boarding School, together with a note from Oswald King to Samantha James Analysis of Advance Information (AI) By carefully studying and analysing the AI, candidates should have formed a comprehensive picture of Palate and the industry, using facts and figures from across the material The AI was, as always, intended to be largely self-contained: the 38 pages contained a myriad of information with which candidates had to be familiar Key points are summarised below: additional Examiner commentary is in bracketed italics, with emphasis on connections between exhibits After Exhibit (candidate’s role), Exhibits 2-3 present an overview of the UK catering industry and business model (Industry exhibits are intended to ‘set the scene’, to provide an important context for the case and exam requirements and to create a ‘level playing-field’ so that candidates not have to carry out extensive research of their own One key to a full appreciation of the AI is an ability to relate these general industry issues (for example, in the Palate case: impact of Olympics, trends in schools catering, contract types) to the company’s circumstances and to other material in the AI While candidates are not expected to commit every sentence of these exhibits to memory, they should aim to be aware of the main contents so that they can easily locate key topics in the exam hall Thus mention of food price inflation would have enhanced candidates’ answers to both Requirements and 2; the horsemeat scandal – which conveniently “broke” during the early development of the case – and the related issue of traceability represented key knowledge for Requirement 3.) Exhibit documents Palate’s history and current position, describing how it won its first clients (through personal connections of the three founding directors (Samantha James, George Watson, and Oswald King)); its expansion from the education sector into B&I clients and then catering at public events; the resulting formation of three business units, each with its own management team, led by one of the main board directors (George, Oswald and Nasir Khan), joined by Samantha as Director of Finance and Business Development The exhibit goes on to discuss Palate’s subsequent tender success rate; its main business issues; performance measurement, including wastage; contracts, pricing, payment; staffing, training; demand, seasonality; menu development; and working capital, procurement, supply chain management and sustainability (including its industry accreditations); quality assurance and inventory control (including the use of “mystery diners”); and the importance of technology throughout Palate’s operations (including the use of cashless catering) (Some of these points link back to the earlier industry information – see notes to Exhibits 2-3 They also provide an obvious connection to the next two exhibits – 2012 business review and management accounts.) Analysis of Exhibit (the May 2012 management accounts) would reveal that: © The Institute of Chartered Accountants in England and Wales 2013 Page of 17 CASE STUDY – JULY 2013 Revenue was up overall, from £19,027k to £20,658k (8.6%), with rises in all three business units: XX, £9,007k to £9,594k (6.5%); TN, £5,881k to £6,337k (7.8%); and LA, £4,139k to £4,727k (14.2%) Cost of sales grew from £16,705k to £18,109k (8.4%), with rises of 8.0% and 8.3% respectively in the two main captions, food & consumables and wages, between them accounting for about 98% of cost of sales In both cases, the extent of the increases varied between the business units Gross profit rose from £2,322k to £2,549k (9.8%), up in LA and XX business units but slightly down in TN Gross profit margin was fractionally up (12.2% to 12.3%), but with variations across the business units: XX, from 11.0% to 11.9%; TN, from 18.5% to 17.0%; LA, from 5.8% to 6.9% Operating profit was up from £748k to £779k (4.1%), reflecting a 12.5% rise (£1,574k to £1,770k) in administrative expenses Most of this relates to head office payroll costs, up from £1,009k to £1,171k Allowing for other items, after-tax profit was up from £577k to £602k Average catering staff salary cost was down from £16.5k to £16.3k, with numbers up from 466 to 501 There were additions of £40k (2011: £37k) to property, plant and equipment (PPE) Overall, PPE remained low, down to £98k from £131k There were small – mostly offsetting – movements in inventories, receivables and other current liabilities Within receivables, prepayments were up from £156k to £259k, suggesting higher “location fees” (see below) for some TN clients in the following year Trade debtor days were down, 31.7 to 25.6; inventory days, 24.2 to 21.7; trade creditor days, 54.2 to 51.8 Cash rose from £1,504k to £1,863k, mostly via operating profit generated, offset by dividend payments of £300k (2011: £250k) These management accounts should be read in close conjunction with Exhibit 5, in which Samantha James briefs the directors on some of the key developments: Revenue is up on many flagship clients Despite margin pressure (notably at smaller TN clients), cost-cutting has ensured an overall healthy gross profit trend Wastage is up from 4% to 5% (industry average = 8%) Kitchen equipment at some clients is not being properly maintained, and is being replaced or upgraded XX remains the largest business unit, with growth coming partly from small, one-off contracts TN has shown good revenue growth At V Park, now TN’s largest client, inefficient staffing needs to be resolved as the contract is due for renewal in 2013 Hall Golf Club has benefited from a charity tournament Some smaller contracts that have become unprofitable are not being renewed LA revenue growth on some 2011 contract wins has been accompanied by increased gross margins Lunches served at the three largest clients are up 10% In summary, Palate is performing well in the recession, increasing both revenue and margins in 2012 TN has the highest margin but it is the riskiest business unit, as it has more one-off contracts (As always, time spent on the financial information would have been invaluable The management accounts and board briefing gave students plenty of information on which to carry out in-depth analysis on Palate prior to the exam The industry background should have helped develop their wider sector knowledge, enabling them to produce value-added analysis of the company’s performance They should have realised the need to digest the summaries of individual clients at Exhibit (see below) and their link to the financial data They may have identified that the Olympics and Jubilee would have an impact on the 2013 results, particularly for TN, though this could be positive or negative.) Exhibit provides an overview of the three business units, with a summary of the three key clients in each and then further information on two of the three Key points emerging from an analysis of this are as follows: XX Some clients require only executive dining, others, a full daily canteen service Contracts range from two to five years Some are fixed price; others, cost-plus HH is the largest, with revenue £4,059k (2011: £3,631k) and gross profit £411k (2011: £374k) The contract was renewed for years from September 2011 and covers HH’s 1,200 head office staff and 1,000 superstore employees In September 2011, the parties engaged Ogilvie (independent catering consultants) to identify any issues; these were resolved in time for the renewal The next biggest contract, Ross Laboratories (5 years from June 2009) is around half the size Its single site near St Albans employs around 2,500 staff Palate won the tender against three other bidders, undertaking to refurbish the facilities before the contract began A cashless payment system is in place © The Institute of Chartered Accountants in England and Wales 2013 Page of 17 CASE STUDY – JULY 2013 TN TN revenue comprises both one-off work and significant regular and/or recurring annual business The client base covers a range of organisations (eg, country parks) and public events (eg, concerts), with contracts generally being of the “concession-based” type Palate pays the event organiser a non-refundable “location fee” to gain entitlement to provide catering The three largest contracts (V Park, TGMF and Hall Golf Club) are similar in size: £1.2m to £1.5m in revenue and around £0.2m in gross profit The V Park contract (4 years from December 2009) covers the restaurant / bar, plus meeting rooms Total visitors to V Park rose from 176k to 209k in the year to 31 May 2012 but numbers (and Palate’s revenue) will be impacted by the local authority’s decision to charge admission from December In 2008, Palate won a 6-year contract for the annual August three-day TGMF Visitor numbers were: 296k (2010); 349k (2011) For the August 2012 event (“Nostalgia Weekend”), which will be reflected in the May 2013 accounts, some items are being sold at 2002 prices LA Palate’s education clients comprise independent (day and boarding) schools and colleges At some day schools, Palate caters for other meals in addition to lunches (eg, breakfast for some pupils) Palate has three main rivals: Jordi (specialist schools caterer); Ravenous (established national firm now breaking into Hertfordshire having recruited a Palate manager); Trenchard (facilities management group) The largest client is AGBS: revenue, £1,147k (£1,112k); gross profit, £90k (£83k) The contract (5 years from June 2009) covers 60 staff and 500 pupils Palate is also exclusive caterer for on-site conferences The next largest is Clarkstone (4 years from September 2009), a specialist sports school with 1,700 pupils and 170 staff Revenue is £1,019k (£1,003k); gross profit, £86k (£80k) By revitalising the service, Palate increased take-up, revenue and profit in the first year and achieved the 95% target take-up (It should be readily apparent that this is a critical exhibit, linking back to earlier information in the accounts and forward to the contract extracts that follow and to the AGBS letter at Exhibit 11 – see below.) Exhibit presents extracts from the contracts for two of the clients discussed in Exhibit – HH and AGBS The contracts are both of the cost-plus type and are similar in many respects, with some small variations They contain clauses relating to: period of contract; responsibilities of Palate; responsibilities of HH; pricing, payment and financial arrangements: and (HH only) sustainability (Extracts from legal documents provide another dimension to information provided in the case, as well as a reference-point for the discussion of ethical issues.) Exhibit describes the supply chain and the respective roles of operators, distributors and wholesalers: With consumers increasingly questioning the origins of their food, caterers are experiencing a surge in demand for food sourced locally, especially with appropriate “assurance”, eg, Red Tractor quality mark Caterers are adopting corporate social responsibility (CSR), including sustainable measures (eg, using only British meat to avoid exposure to overseas malpractice) and initiatives to reduce waste and energy To combat health issues, the Food Standards Agency (FSA) is encouraging caterers to include calorific values of meals on menus (This provides context in particular for Palate’s own procurement procedures (Exhibit 4; see above) and its ‘Project Greenbuy’ strategic initiative – next exhibit – plus the sustainability clauses in the HH contract.) Exhibit 10 (the board’s strategic overview) sets out possible 2013 commercial opportunities for Palate, in both new (notably ancillary services) and existing markets (expanding catchment area for XX; tendering for TN events reinstated after being cancelled in 2012; new schools (LA)) It also identifies threats to the business, major ones including supply chain problems and breakdowns in client relationships Finally, it describes Palate’s “key 2013 initiative – Project Greenbuy”, to be launched on June 2013 with seven objectives, including: reducing purchase quantities to cut wastage to 3%; reducing distances travelled by delivery lorries; centralising all future buying The expected annual cost saving would be £300,000, with revenue potentially increasing by 10% All purchases will continue to be made in the UK (This exhibit also has links with other AI material, including: additional services (p9); health & hygiene (p32); food price inflation (various); Olympics / Jubilee (various).) © The Institute of Chartered Accountants in England and Wales 2013 Page of 17 CASE STUDY – JULY 2013 Exhibit 11 is a letter from Morgan Catering Advisors highlighting some issues on the AGBS contract, with a comment from Oswald King to Samantha James that these need to be addressed urgently The issues relate to record-keeping, staffing, refrigeration, lunchtime queuing and conference catering (This exhibit comprises the mid-contract review foreshadowed at Exhibit and linking back to some of the features of the AGBS relationship set out in Exhibit Candidates should have spent time thinking through the implications of the issues raised as it was likely that they might have to address these in the exam or, alternatively, respond to a similar independent review on one of Palate’s other major clients.) Exhibits 12(i)-(v) are a series of press cuttings: In Exhibit 12(i), we learn that food price inflation will continue, possibly returning to the 2008 levels (8%) Exhibit 12(ii) offers some tips for “keeping your clients (happy)”, with “10 simple, commonsense steps”, to retain strong relationships (eg, meeting the client regularly, conducting regular surveys) Exhibit 12(iii) announces that Palate’s rival Ravenous has won a contract at a new local school, potentially worth £600,000 if the pupil roll reaches its projected 1,000 maximum (notwithstanding increased local competition) Ravenous had defeated Palate in a recent bid for a nearby college Exhibit 12(iv) notes that, following an investigation, local schools are “clear” of horsemeat The FSA has urged those responsible for schools catering to have “rigorous procurement procedures” in place and to deal only with “reputable suppliers” In Exhibit 12(v), reports that five men have been jailed over a scam in which a major supermarket chain was overcharged by nearly £3 million in relation to fruit purchasing (As always with press articles provided in the AI, these exhibits shed further light – and a different perspective – on issues mentioned elsewhere, such as LA’s competition, client relationships and supply chain management, as well as introducing new topics for debate, such as fraud.) Overall, as one tutor remarked, “the AI provided students with a good understanding of the company and industry The information was presented in such a way (eg, volume data but not for all contracts and relatively brief descriptions of the different types of contract) as to encourage students to perform further analysis and research Another commented that it “gave lots of information about the major clients” Information provided in the Exam Paper (EP) The Exam Paper contained seven new exhibits, comprising nine pages of new information: 13 14 15 16 17 18 19 Email dated 24 July 2013 from Samantha James to you Palate Ltd: Draft management accounts for the year ended 31 May 2013 Email dated 11 July 2013 from Nasir Khan to Samantha James Email dated 23 July 2013 from Oswald King to Samantha James Article dated 23 July 2013 from Catering Now Email dated 22 July 2013 from George Watson to Samantha James Letter dated 17 July 2013 from Ogilvie Catering Consultants to Palate Ltd and to Humbells Hardware Exam requirements I would like you to prepare a draft report to the board, in which you should: Review the results of TopNotch (TN) business unit, and the results of our client Hertfordshire Late Spring Fair (HLSF), for the year ended 31 May 2013 You should compare TN’s revenue, cost of sales and gross profit (Exhibit 14) with those for the year ended 31 May 2012, having first adjusted the draft 2013 management accounts to exclude the results of both HLSF 2012, held in June 2012, and HLSF 2013, held in May 2013 (see Exhibit 15) You should refer as necessary to the analysis in Note of the accounts You should then review the results of the HLSF 2013 event by comparison with both the HLSF 2012 and HLSF 2011 events Evaluate whether Palate should tender for the Vynes Independent School (VIS) contract, as requested in Oswald King’s email dated 23 July 2013 (Exhibit 16) Your evaluation should comprise a calculation of Palate’s minimum revenue and gross profit to be earned in each of the first three years of the VIS contract, based on the assumptions and estimates set out in Exhibit 16, together with an assessment of these assumptions and estimates and of the practical considerations associated with the contract © The Institute of Chartered Accountants in England and Wales 2013 Page of 17 CASE STUDY – JULY 2013 Discuss the steps that we need to take to address the issues raised in the letter from Ogilvie Catering Consultants (Exhibit 19), as referred to in George Watson’s email (Exhibit 18) Your discussion should be set in the context of both our desire to maintain a strong and profitable relationship with HH and our recent strategic review (Exhibit 10) Where appropriate, please also identify any wider implications for Palate as a whole and any ethical concerns that arise for Palate Candidates were also told to include an executive summary and to balance their report across the three detailed requirements They were given a suggested time allocation, unchanged from recent Case Study exams, as well as other guidance that should now be familiar in relation to executive summaries, the discussion of ethical issues within their answer to the requirements, the need to attempt all requirements and, for each of these, to address all four skills areas: Assimilating and Using Information (A&UI), Structuring Problems and Solutions (SP&S), Applying Judgement (AJ) and Conclusions & Recommendations (C&R) The time allocation suggested to candidates was: Reading and planning Performing calculations and financial analysis Drafting the report hour hour hours Candidates should have spent time studying Exhibit 13 carefully so as to understand the requirements and key elements of each; digest the other new exhibits (management accounts and email about HLSF; email and press article about VIS; email and letter about HH); and identify the related AI exhibits to integrate into their answers For Requirement 1, candidates should then have begun a more detailed review of Exhibits 14 and 15, enabling them to adjust and then assess the 2013 TN accounts in the light of their analysis of past results (including visitor numbers) carried out in preparation for the exam, together with a commentary on HLSF – for which all relevant figures were newly presented but which had to be analysed in the same way For Requirement 2, it was essential to read Exhibits 16 and 17 carefully so as to understand the format of the contract being proposed and to identify all the critical estimates and assumptions Finally, for Requirement 3, candidates had to digest Exhibits 18 and 19 and relate them to relevant material within the AI referring both specifically to HH (Exhibits and 8) and generally to the issues raised With proper time allocation, candidates should have been able to complete these tasks within the four hours available to write a well-balanced report A danger may have been to spend too long on Requirement so that Requirement was rushed and thus unstructured or short of content Analysis of Exam Paper information From an initial reading of the new exhibits, candidates should have established that: TN’s 2013 results are distorted by the inclusion of an event that was held twice in the same financial year Palate has an opportunity to tender for the catering contract at a brand-new school The catering at Palate’s largest client has been the subject of a negative report by external consultants A more detailed review of the EP should then have elicited the key facts to be addressed in the exam Candidates should recognise that they are to concentrate on the results of TN and are not expected to discuss the statement of financial position or cash flow Their analysis must also make relevant reference to ‘Note 1’ – the table of revenue and gross profit by client, together with its footnote on visitor numbers To their analysis, they first had to adjust the management accounts (Exhibit 14) to remove the results of the two most recent HLSF events (using the figures provided at Exhibit 15), which had both occurred in the year as a result of Jubilee-related schedule changes To answer the requirement fully, their adjustment schedules had to incorporate cost of sales figures that excluded HLSF They should have realised that HLSF was part of the ‘Other’ caption in Note and so the results of the three named TI large clients were unaffected by the adjustments However, while it would be possible to perform some analysis on these three clients without making the adjustments, a more logical technique was to make all the adjustments first so as to give the correct like-for-like position for TN as a whole Comparing the adjusted 2013 management accounts against the original 2012 management accounts (Exhibit 6) and client breakdown (Exhibit 7) in the AI would then reveal that: © The Institute of Chartered Accountants in England and Wales 2013 Page of 17 CASE STUDY – JULY 2013 TN’s overall revenue for 2013 is £5,819k (down £518k or 8.2% on 2012); cost of sales, £4,879k (down £380k / 7.2%); gross profit, £940k (down £138k / 12.8%); gross margin was down from 17.0% to 16.2% V Park revenue is down 16.5% to £1,202k (visitor numbers down 24.4% to 158k); gross margin to 13.1% TGMF revenue is up 19.1% to £1,583k (visitor numbers up 25.2% to 437k); it is now TN’s biggest client “Other” revenue is down by 17.0% to £1,893k; gross profit up to £312k; and gross margin is 16.5% In cost of sales, food and consumables are down 11.2% to £2,304k; and wages by 5.7% to £2,330k Exhibit 15 explains the impact of the Hertfordshire Late Spring Fair (HLSF): All revenue and costs from both “HLSF 2012” and “HLSF 2013” are recognised in the 2013 accounts, as the 2012 event was held (over four days) in early June 2012 to coincide with the Queen’s Diamond Jubilee celebrations while the 2013 event took place (over three days) in its traditional late-May slot The results from HLSF 2012 were therefore abnormal but a series of issues has also meant that the 2013 event earned less revenue and profit than in 2011 and earlier years (Candidates will have expected to be presented with 2013 management accounts and to analyse them The requirement – described by one tutor as “innovative” – to cover only one business unit, to gross profit level only, rather than the whole company and the other primary statements, should have been welcome, even if some additional work was needed to get to the starting-point (Figures for the other business units would be useful, on a smaller scale, for Requirements and – see below.) Similarly, while they had not previously seen any detail on HLSF, the inclusion on a single page of all relevant information should have enabled them to focus on the key points arising for the second part of the requirement.) Exhibit 16 is an email from Oswald King to Samantha James, referring to Exhibit 17, a Catering Now article: Vynes Independent School (VIS), due to open in September 2013, is seeking a replacement caterer as the original choice, Jordi, has gone into administration The caterer will have to be financially stable, offer a menu matching VIS’s vision and give value for money Palate’s rival, Ravenous, has already announced its intention to tender VIS will begin with 400 pupils, rising to 800 in 2014 and 1,200 in 2015 Staff numbers, starting at 50, will grow in proportion The dining area can hold 600 There are two kitchens Some of the site could be hired out for conferences Under its “liberal” ethos, VIS will allow pupils to leave the premises at lunchtime A nearby fast food outlet and sandwich shop – which might be an attraction to VIS’s pupils – are both busy Experts say that the contract could eventually generate annual revenue of £650k The tender would reflect a guaranteed minimum number of meals for three years, using agreed estimates for average take-up (60% in Year 1, 75% in Year 2, 90% in Year 3) and revenue per meal (£2.50 in Year 1, £2.75 in Years and 3) payable by VIS to Palate VIS would pay Palate one-third of the total annual minimum guaranteed revenue at the start of each term Oswald King anticipates gross margins of 5% in Year 1, 10% in Year and 15% in Year 3, reflecting likely economies of scale, plus stable food costs, menus and staffing ratios (These two exhibits taken together gave candidates a clear set of steps to follow: calculation; assessment of estimates and assumptions; and discussion of practical considerations An initial read should have revealed that: the basic calculation was not complex; there were a number of variables whose questionability was well signposted; and there were plenty of issues to address for a new business with little more than a month to settle its catering arrangements Many of the points raised across Exhibits 16 and 17 should have rung bells from the AI – eg, contract types (Exhibit 3), Ravenous (Exhibits 7), take-up rates at other schools (Exhibit 7), previous new schools (Exhibit 12(ii)), lunchtime competition and conference catering (Exhibits and 11).) From Exhibits 18 (internal email) and 19 (letter from Ogilvie), we learn that: Ogilvie has identified a number of issues during a 5-day review at HH’s head office catering operations These cover: wastage; unclear food labelling and menus potentially endangering diners with allergies; use of lower-grade imported meat from a local wholesaler with apparently poor tracing procedures; the projected failure to achieve contractual sustainability targets; a proposal by Palate’s new chef at HH’s head office to source fruit from a Spanish agricultural producer where his cousin is managing director Ogilvie may have been put under pressure by HH’s directors to write a negative report as HH is cutting costs across the business and wants to renegotiate the contract on more favourable terms HH may convert part of one superstore into a customer restaurant, a potential extension to the contract Feedback from Palate’s “mystery diners” has contradicted Ogilvie’s comments on wastage © The Institute of Chartered Accountants in England and Wales 2013 Page of 17 CASE STUDY – JULY 2013 (With proper preparatory work on the AI, candidates should have been ready for a requirement of this nature HH features in Exhibits and 8, and there is also an equivalent report on another large client – AGBS – at Exhibit 11 Additionally, awareness of Palate’s strategic thinking (Exhibit 10), sustainability issues generally and the horsemeat scandal in particular should have stood them in good stead to address the specific issues raised by Ogilvie.) The EP develops a number of features of Palate’s business from the AI, each needing a different technique for advising the board Exhibit 13 sets out the route to be followed in writing the report: Requirement entails a clear focus on financial statement analysis, covering all the items specified Requirement involves financial data analysis together with a broader business perspective and a strong element of professional scepticism Requirement 3, although mainly covering one client, also gives rise to “wider implications for Palate as a whole” To justice to these, familiarity with its strategic objectives and the wider scenario is needed In all cases, a logical approach with careful planning would have reaped dividends Summary of grades available The Examiners identified five topics for which grades would be awarded, corresponding to the requirements: Executive summary; Review of TN business unit; Evaluation of VIS tender; Response to HH issues; Overall paper Candidates were rewarded according to how well they demonstrated, under each of these topics, their application of the four Professional Skills For each topic, there were a number of ‘boxes’ under each of the four skills, representing specific areas in which the skill was to be demonstrated Within each, candidates were awarded one of five available grades: CC SC IC ID NA Clearly Competent Sufficiently Competent Insufficiently Competent Insufficiently Demonstrated Not Addressed The total number of boxes per topic and skill was as below This reflects (i) an even balance between the three main requirements and (ii) higher weighting towards SP&S and AJ, as indicated in the Exam Paper rubric It is consistent with recent sittings Executive summary Review of TN business unit Evaluation of VIS tender Response to HH issues Overall paper – Report: structure, style and language Overall paper – Appendices: content and style © The Institute of Chartered Accountants in England and Wales 2013 A&UI 2 SP&S 3 11 AJ 3 10 C&R 2 2 Total 10 10 10 36 2 40 Page 10 of 17 CASE STUDY – JULY 2013 Requirement 1: Review of TN performance This should have been a straightforward section – and for most candidates it proved to be They focused appropriately on the set tasks They should have expected the 2013 management accounts and so been well prepared to review them – though perhaps not the required focus on a single business unit Those who had anticipated an analysis of the business as a whole should have been relieved at the scope of the requirement, even if they had to some preliminary work to derive the relevant figures Less adaptable candidates floundered in a sea of numbers and so produced irrelevant commentary The challenge was to carry out the adjustments efficiently and to ensure sufficiently detailed analysis The reference to note of the accounts – results (including, where applicable, visitor numbers) for individual clients – was crucial here Most tackled the core financial statement analysis methodically, using the headings given (revenue, cost of sales and gross profit) to ensure coverage of all the main elements, with the gratifying result that a strong majority achieved passing grades throughout A&UI and at SP&S box However, the developed skills of AJ and C&R proved the undoing of weaker students A small number adjusted the TN revenue incorrectly, or did not adjust it at all – or, in a tiny majority of cases (see the Second Illustrative Script), adjusted the results of Palate overall They thus missed the first two points under A&UI However, the majority did manage a passing grade in this first box For “identifies business issues and wider context”, most candidates discussed the Olympics/Jubilee and inflation When performing the financial analysis, candidates rarely covered TN’s client mix Many discussed in detail V Park and TGMF (which were showcased at Exhibit and thus perhaps viewed as being the important clients) but not HGC (which had been only briefly mentioned, in Exhibit 10) Similarly, as HLSF had been removed for separate analysis, candidates assumed that there was nothing else worthy to say about “Other” clients – even though this category was where the main downward movement had occurred In explaining revenue, most candidates observed that visitor numbers had been impacted by admission fees / Nostalgia Weekend These were basic facts from the case: it proved a good differentiator to calculate and comment on revenue per visitor, an extra piece of analysis which candidates had to think of It was surprising that more did not this as the equivalent data was available in the AI and they should have used it as part of their preparatory review of the prior year accounts Coverage of cost of sales (COS) and gross profit (GP) was quite poor Many candidates just quoted GP for TN, VP and TGMF (sufficient for an IC grade) but did not give any reason for reductions other than that they were revenue-driven For COS, scripts were often characterised by general or bland statements (eg, “Cost control within cost of sales appears to be good, which is promising as margins are expected to be squeezed even tighter going forward.”) Such candidates did not cover any individual costs – except perhaps location fees as these showed the biggest percentage movement despite being small in value Wages and food & consumables – by far the most significant captions, between them accounting for 97% of COS – were not addressed in detail by many candidates The least predictable part of the requirement (HLSF) was, perhaps inevitably, the least well done Candidates generally earned credit under SP&S but struggled with the evaluation points under AJ Though the information was new, the general approach was no different from that already adopted for the rest of the TN business and, with a modicum of common sense, candidates could have explained the key movements appropriately In summary, a well-prepared candidate was able to demonstrate full familiarity with the broad sweep of the case material in a succinct way The very weakest candidates wrote only two pages and so did not provide enough detail to achieve passing grades Requirement 2: Evaluation of tender for Vynes Independent School (VIS) contract There were in effect three elements: Revenue and profit calculation Discussion of assumptions (professional scepticism) Practical considerations Revenue and profit calculation Candidates had to perform a relatively simple calculation, and the vast majority got it wholly correct, thus gaining passing grades at the relevant places (AU&I box 1, SP&S box 1) The figure of £650k (mentioned in Exhibit 17 as an experts’ estimate) should have provided reassurance to candidates that their revenue of £635k for year was in the right range The commonest error was in not multiplying by 190 days but this © The Institute of Chartered Accountants in England and Wales 2013 Page 13 of 17 CASE STUDY – JULY 2013 was still fairly rare Others applied their own assumptions (eg, for staff:student ratios), rather than first using the figures provided and only then going on to question them Traditional Requirement mistakes, such as transposition errors or being out by a factor of 10, were also in evidence once again “Describes business issues and wider context” (frequently a stumbling-block) was well done, with many gaining passing grades Discussion of assumptions (professional scepticism) Having done their initial calculation, candidates were expected to go on and look at the component figures and comment on each A major weakness in this requirement was a failure to challenge sufficiently the estimates and assumptions (primarily SP&S box and AJ box 2) Exhibit 13 specifically reiterated the instruction to candidates to this, but many simply accepted figures such as pupil numbers They may have wrongly assumed that Palate would get the pupil numbers, take-up and revenue per meal as the guaranteed minimum, and so may have believed that these were set in stone and could only actually end up higher Weaker candidates often discussed only one or two assumptions, resulting in incomplete answers These were typically the assumptions provided at the foot of Exhibit 16, even though there were a number of other variables mentioned elsewhere in the exhibit, in some cases also referred to in Exhibit 17 (notably pupil numbers) The item mentioned most was stability of food costs, which candidates correctly discussed in relation to current inflation, but many answers touched only briefly on the implications for GP (which would be lower as price rises would reduce margins) While not specifically asked for, sensitivity analysis on the numbers should have been an obvious next step when there were so many variables involved and the predicted margins were relatively low In the event, hardly any candidates did any sensitivity analysis, although quite a few said that some should be done (this was not deemed worthy of reward under ‘Makes recommendations’) Some knew that they should something and tried looking at the expected COS/revenue and what would happen if the food prices went up but could not then explain what the figures were telling them The best scripts calculated the cost of the meals and adjusted it for inflationary estimates to show that, far from earning rising margins, Palate could easily make a loss on the VIS contract Evaluation of the contract tended to be pretty poor, but there were some good scripts Candidates stated that Ravenous would be bidding but then did not say what impact this might have – the classic case of doing no more than quote back the EP – but some were better: “It is a very competitive market and we know we have direct competition from Ravenous who will try to undercut Palate Palate needs to pitch competitively but at the same time must not compromise on price at the cost of quality.” Many compared the GP%, meal prices and staff ratios with LA overall and/or with Clarkstone/AGBS, thereby making effective use of their preparatory work on this business unit Practical considerations Coverage of the practical considerations (AJ box 3) was mostly poor, even though most of these were a natural extension from the analysis of the contract and the facts presented at Exhibits 16 and 17 The Case Study frequently contains a business opportunity for which the timetable may be critical Here, there was a very definite start date, with many tasks to be accomplished beforehand, yet many candidates overlooked the urgency It did not occur to them, for example, that there was only a small window in which to carry out market research, and in any case the target audience (children on summer holiday before the school’s opening) would not be accessible Better candidates exercised the right caution: “The timeframe imposed and lack of information present too great a danger.” Requirement 3: Discussion of response to HH issues As is often the case, this was the least well done requirement Less organised candidates had overrun on the rest of the exam, resulting in sparse answers here – a common problem at Requirement for those unable to plan their four hours effectively Poorer scripts tended to offer a ‘scattergun’ approach; stronger ones kept focused on the wider context As for the other requirements, Requirement had a number of components Candidates needed to cover, within a cohesive narrative, each of the issues raised in Ogilvie’s letter together with their wider implications for Palate as a whole – all in the context of the apparent pressure under which Ogilvie had written the letter The core analysis should have been straightforward as the issues to discuss were clearly set out in the EP (instead of having to be extracted), providing a framework for candidates to structure their answers So it is surprising that some did not discuss all the issues This was quite a big differentiator as it affected three boxes directly (SP&S boxes and 2, AJ box 2) The actions were well answered by most candidates Some weaker candidates who did analyse the issues did not so properly, tending instead to go straight to the © The Institute of Chartered Accountants in England and Wales 2013 Page 14 of 17 CASE STUDY – JULY 2013 recommendations The worst discussions were on (i) the meat, with overemphasis on the late delivery / reliance on a single supplier rather than the poor quality; and (ii) the Spanish fruit, which many candidates thought would be a good idea if it was cheaper, regardless of Palate’s current strategy Better scripts ran sensibly through Ogilvie points, drawing out implications by reference to other, relevant case material: “The equipment issue should be looked into to determine if it is in poor condition because Palate did not notify HH or because HH did not act The responsibilities within the contract need to be brought to the attention of HH … Sourcing of fruit from abroad, whilst against Palate policy, is not in breach of any aspect of HH contract.” Wider implications Candidates discussed the issues affecting Palate’s reputation or litigation, but only the better ones gave wider business implications such as issues affecting other HH sites (including the proposed new customer restaurants) or other clients Ethics and professional scepticism While some candidates had no discussion of ethics or bias at all, most did observe that Ogilvie might have been under pressure to produce a negative report However, they did not then did not go on to say that it was unsubstantiated or that Palate could try to disprove, defend or counter the issues (or indeed that the catering staff who had made the claim might themselves have a vested interest – their own job security) Very few were able to articulate all sides of the matter: “If true, this puts the integrity of the entire report at stake along with doubts over the directors of HH Equally it is plausible that this is a notion put forward by our team in order to cover up for their performance ” For most, it was just accepted that the letter was true: “… and erring staff will be punished.” Others hedged their bets (“Some of the points raised by Ogilvie may be true or some may not be untrue”) or went to the other extreme (“There are significant issues raised from the review mostly relating to Palate’s fault”) Weak candidates who were aware that ethics needed to be discussed said that each of the issues was unethical – but did not say why: there was no credit just for making such a statement, eg: “Importing foods may lead to fraud” Overall paper: Appendices The first appendix, relating to Requirement 1, was mostly well done and at a sufficient level of detail, showing movements in key areas Candidates will have needed time to think about how to present their adjustment schedules efficiently The majority gave both absolute and percentage movements The second appendix tended to be weaker, but more than half of the cohort still gained a passing grade Candidates often did not label their numbers sufficiently There were some very neat calculations but others were just workings offering little clue to an uninformed reader as to what they were trying to show Overall paper: Report The vast majority of candidates achieved passing grades for the two boxes here Where ID or IC was awarded, the reasons varied Under ‘Structure’, a significant number did not provide section headings, just starting with a subheading, eg, “R2 C&R” on one page followed by the next page headed “10% Wastage” Once more, many failed to number their pages Legibility also remains a concern Under ‘Style and language’ the most common shortcoming was tactlessness: “The management goof-up resulted in ”; “… if someone gets ill or dies from our meals …” As often, this manifested itself in rudeness about the directors – the very people who will be reading the report: “Some of these roles given to Nasir are outside his sphere of expertise” (student’s underlining) For once, there was little evidence of candidates needlessly challenging the rigour of the management accounts – a long-standing message from the Examiners that usually falls on deaf ears Most had no disclaimer – correctly, as this was an internal report © The Institute of Chartered Accountants in England and Wales 2013 Page 15 of 17 CASE STUDY – JULY 2013 PART 4: APPENDICES APPENDIX (A): FINANCIAL STATEMENT ANALYSIS: Review of TN business unit TN (adjusted) V Park TG Music Hall Golf Club Other - as above Less: HLSF 2012 Less: HLSF 2013 Other – adjusted Change Revenue £000 1,202 1,583 1,141 3,926 2,707 (530) (284) 1,893 5,819 -8.2% 2013 GP £000 157 249 222 628 490 (153) (25) 312 940 -12.8% GP% % 13.1% 15.7% 19.5% 16.0% 18.1% 28.9% 8.8% 16.5% 16.2% Revenue change £000 (238) 254 (146) (130) Revenue change £000 -16.5% 19.1% -11.3% -3.2% (388) (518) -17.0% -8.2% Revenue £000 1,440 1,329 1,287 4,056 2,281 2012 GP £000 224 237 246 707 371 2,281 6,337 13.8% 371 1,078 6.4% GP% % 15.6% 17.8% 19.1% 17.4% 16.3% 16.3% 17.0% Working 1(i): Revenue mix V Park TG Music Hall Golf Club Other – adjusted 2013 % 20.7 27.2 19.6 67.5 32.5 100.0 2012 % 22.7 21.0 20.3 64.0 36.0 100.0 Working 1(ii): Revenue per visitor V Park Revenue (as above) Visitors Average TG Music Revenue (as above) Visitors Average 2013 2012 Change Change % £1,202k 158k £7.61 £1,440k 209k £6.89 (51k) £0.72 (24.4%) £1,583k 437k £3.62 £1,329k 349k £3.81 88k (£0.19) 25.2% TN analysis by caption Revenue Food and consumables Wage costs Location fees Transport costs Cost of sales (total) Gross profit GP% 2013 HLSF 13 HLSF 12 £000 £000 £000 6,633 (284) (530) (2,691) 153 234 (2,508) 81 97 (210) 15 30 (106) 10 16 (5,515) 259 377 1,118 (25) (153) 16.9% 8.8% 28.9% © The Institute of Chartered Accountants in England and Wales 2013 2013 adj Change £000 % 5,819 -8.2% (2,304) -11.2% (2,330) -5.7% (165) 43.5% (80) 3.9% (4,879) -7.2% 940 -12.8% 16.2% Change £000 (518) 292 141 (50) (3) 380 (138) 2012 £000 6,337 (2,596) (2,471) (115) (77) (5,259) 1,078 17.0% Page 16 of 17 CASE STUDY – JULY 2013 APPENDIX (B): FINANCIAL STATEMENT ANALYSIS: Review of HLSF Revenue Food and consumables Wage costs Location fees Distribution costs Gross profit GP% Visitors to HLSF Revenue per visitor F&C as % of revenue Wages as % of revenue HLSF 13 HLSF 12 HLSF 11 £000 £000 £000 284 530 312 (153) (234) (149) (81) (97) (65) (15) (30) (15) (10) (16) (7) 25 153 76 8.8% 28.9% 24.4% 58k 4.90 54% 29% 115k 4.61 44% 18% 13 vs 12 13 vs 12 £000 % (246) -46.4% 81 -34.6% 16 -16.5% 15 -50.0% -37.5% (128) -83.7% 74k 4.22 48% 21% (57k) 0.29 -49.6% 6.2% 13 vs 11 13 vs 11 £000 % (28) -9.0% (4) 2.7% (16) 24.6% 0.0% (3) 42.9% (51) -67.1% (16k) 0.68 -21.6% 16.1% APPENDIX 2: FINANCIAL DATA ANALYSIS: Calculation of revenue / gross profit from VIS contract Days in school year (A) Numbers – pupils Numbers – staff Numbers – total (B) Average take-up of meals (C) Number of meals (D) = (A) x (B) x (C) Average price per meal (£) (E) Total revenue (£000) (F) = (D) x (E) Year 190 400 50 450 60% 51,300 2.50 128,250 Year 190 800 100 900 75% 128,250 2.75 352,688 Year 190 1,200 150 1,350 90% 230,850 2.75 634,838 Gross margin % Gross margin £ Implied costs Average cost per meal 5% 6,413 121,838 2.38 10% 35,269 317,419 2.48 15% 95,226 539,612 2.34 VIS Year £635k 1,350 90% £2.75 Clarkstone 2012 £1,019k 1,870 95% £3.02 TOTAL 410,400 2.72 1,115,776 136,908 Working 2(i): Average revenue per meal Revenue Number of diners Take-up Average meal price (given / calculated) Working 2(ii): Revenue and gross profit in LA business unit LA revenue LA gross profit LA GP% Clarkstone GP% 2013 £4,984k £422k 8.5% 10.7% © The Institute of Chartered Accountants in England and Wales 2013 2012 £4,727k £327k 6.9% 8.4% Page 17 of 17 JULY 2013 - PALATE LIMITED First Marking DATE CANDIDATE NO TIME MARKER NUMBER ES Req Req Req Overall TOTAL 10 10 10 40 CC SC IC ID NA Total SUPERVISOR SIGNATURE CHECKER SIGNATURE Changes made? ID = Insufficiently Demonstrated IC = Insufficiently Competent SC = Sufficiently Competent CC = Clearly Competent Executive summary Review of TN business unit Evaluation of VIS tender Adjusted TN revenue and GP (numerical analysis) Revenue for years (number) Individual client revenue and GP (numerical analysis) GP for years (number) HLSF revenue and GP (numerical analysis) Questions validity of assumptions (pupil numbers/staff ratio/take up/meal price/GP%) Comment on key cost changes (food, wages) Consideration of sensitivity Comment on wider context (recession/Olympics/Jubilee/inflation/weather/ industry trends) Comment on wider context (experience/inflation/competition/public awareness) NA ID IC SC CC NA ID IC SC Evaluates change in TN revenue Evaluates contract risk/benefit Evaluates change in TN GP/COS Evaluates assumptions against existing experience Evaluates / concludes on HLSF Evaluates practical considerations Concludes on TN: poor results Concludes on whether to proceed Makes commercial recommendations Makes commercial recommendations NA ID IC SC CC NA ID IC SC CC CC Response to HH issues HH is a significant client First Ogilvie issue identified with implication Second Ogilvie issue identified with implication Ethical issues / independence issues Comment on wider context (Horsemeat/litigation/allergies/inflation/FSA) NA ID IC SC CC Recognises possible bias in Ogilvie report Considers wider implications (eg reputation) Urgent need to address issues / could trigger termination of contract Proposes specific actions to address Ogilvie issues Makes wider commercial recommendations NA ID IC SC CC CC SC IC ID NA Total REQUIREMENT - Review of TN business unit ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses relevant AI & EP information Financial analysis on adjusted TN revenue (in report) Adjusted TN revenue: £5,819k Significance of TN to Palate overall (£ or %) Adjusted TN COS / GP / GP%: £4,879k / £940k / 16.2% Revenue down £518k (8.2%) HLSF revenue: down 46% on 2012 / down 9% on 2011 V Park down £238k (16.5%) or TGMF up £254k (19.1%) or HGC down £146k (11.3%) HLSF GP%: 8.8% / 28.9% / 24.4% Other down £388k (17.0%) Uses visitor numbers / individual COS costs Considers client mix NA ID IC SC CC NA ID IC SC CC Identifies business issues and wider context Financial analysis on adjusted TN COS and GP (in report) Recession: less disposable income GP down £138k (12.8%) / GP% down to 16.2% (from 17.0%) Industry trends: growing popularity of festivals / 4.5% decline V Park GP down £67k (30%) / change in GP% or TGMF GP up £12k (5%) / change in GP% or HGC GP down £24k (10%) / change in GP% Impact of Olympics/Jubilee eg postponed events Other GP down £59k (16%) / change in GP% Food/wages inflation Food down £292k (11.2%) Planning requires accurate weather forecasts Wages down £141k (5.7%) Own research - NA ID IC SC CC Review of HLSF figures 2012 revenue distorted (eg days / Jubilee) NA ID IC SC CC 2013 increased entry prices affected visitor numbers (down 22%) 2013 GP/GP% low compared to TN / 2012 2013 food/wages costs are higher % of revenue than 2012 2013 hot food / staffing organised for forecast bad weather NA ID IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Evaluation of financial analysis on adjusted TN revenue Draws conclusions (under a heading) V Park: new admission charge impacted visitor numbers Overall: poor results V Park: comment on increase in revenue per visitor Overall: revenue and GP/GP% down (with numbers) TGMF: Nostalgia Weekend increased visitor numbers Concludes on specific client (V Park / TGMF / HGC / Other) TGMF: comment on decrease in revenue per visitor Concludes on specific cost (food / wages) HGC: lack of charity event in 2012 caused reduction in activity Concludes on HLSF HGC: 2014 will include charity event / compare 2013 to 2011 NA ID IC SC CC NA ID IC SC CC Evaluation of financial analysis on adjusted TN COS & GP Makes recommendations V Park: comment on GP eg staffing inefficiencies Monitor all clients / costs / improve controls TGMF: comment on GP% eg 'nostalgia' prices Ensure cost reductions not impact quality / reputation TGMF: but one-off price reduction / food not at 2002 cost Monitor staff usage to minimise idle time Other: non-profitable clients not renewed Consider which clients to re-tender / decline to renew Food: efficient purchasing / good waste control / > fall in rev Consider future of HLSF (eg viability/planning) Wages: poor control / now largest cost / < fall in rev Negotiate contract terms for changes in assumptions NA ID IC SC CC Other recommendations Evaluation of financial analysis on HLSF 2011 better yardstick for 2013 (rather than 2012) 2013 revenue/GP lower than historical norm NA ID IC SC 2013 revenue/GP/visitors down on 3/4 prorated 2012 figures CC SC IC Identifies increased revenue per visitor ID Comments on revenue per visitor eg expensive hot food NA Total Difficult to change plans at short notice NA ID IC SC CC 10 CC REQUIREMENT - Evaluation of VIS tender ASSIMILATING AND USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses relevant AI / EP information correctly Calculation of revenue and GP over three years Pupil (400 / 800 / 1,200) and staff (50 / 100 / 150) numbers Does calculation based on given methodology School days (190) and take-up (60% / 75% / 90%) Calculates expected revenue (eg per year £128k / £353k / £635k) Average meal price (£2.50 / £2.75 / £2.75) Calculates expected GP (eg per year £6k / £35k / £95k) GP% (5% / 10% / 15%) Correct calculation of expected GP per year (£6k / £35k / £95k) NA ID IC SC CC NA ID IC SC Describes business issues and wider context Comments on assumptions Recession: less disposable income / private school take-up Pupil numbers may not materialise Palate existing experience in schools / AGBS issues Teaching staff numbers/ratios may be incorrect Food price inflation Take-up % may be incorrect Competitors: Ravenous moving into area/education sector Meal price may be incorrect Competition: nearby popular fast food outlet GP% may not be achievable CC Public awareness: school food / healthy eating for children NA Own research - ID IC SC CC Consideration and calculation of sensitivity Year low GP GP will be impacted by changes in assumptions (no figures needed) NA ID IC SC CC Flexes calculation for take-up % / total meals Flexes calculation for meal price / GP% Justifies change in assumption used in calculation Specific comment on revised GP NA ID IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Evaluates contract risk/benefit Draws conclusions (under a heading) Bid price must recognise competition from Ravenous Concludes on financial impact Economies of scale may not materialise Concludes on assumptions Considers risk profile of contract / cash upfront Concludes on sensitivity Would be a significant addition to Palate's income Concludes on practical considerations Could be more if extras/conferences etc happen Concludes on whether to proceed Could further enhance profile in sector NA ID IC SC CC NA ID IC SC CC Uses professional scepticism Makes recommendations No evidence provided to underpin assumptions Clarify bases of assumptions Staff ratios/pupils not consistent with Clarkstone/HHS Due diligence on VIS VIS liberal approach to pupils leaving premises Clarify / negotiate contract terms Clarkstone meal price is £3.02 Discuss policy of allowing pupils to leave at lunchtime Compares GP%: LA (8.5%) / other schools (6.7 - 10.7%) Research ICT system / train staff No cost inflation / may be other costs Other recommendations NA ID IC SC CC Evaluation of practical considerations Imminent opening means urgent action needed Need to address kitchen / menu / staff / suppliers etc NA ID IC SC Need to assess new ICT system/hand-held devices CC SC IC ID NA Management time needed Dining room capacity will become an issue Total Palate can demonstrate financial stability / strong BS/cash NA ID IC SC CC 10 CC REQUIREMENT - Response to HH issues ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses AI & EP effectively Issues raised by Ogilvie HH: largest/significant client 10% wastage / lots of menu choices / poor quality equipment Contract: months termination / cost-plus / targets Unclear labelling Project Greenbuy Use of substitute lower grade meat Other reviews: HH 2011 / AGBS 2013 2% energy reduction / delivery food miles HH: cost-cutting / new customer restaurants Sourcing fruit from Spain NA ID IC SC CC NA ID IC SC CC Describes business issues and wider context Issues raised by Ogilvie - implications UK beef/horsemeat scandal / food traceability 10% wastage: > industry average (8%) / > Palate average (5%) Under-heating: H&S risk / HH own equipment Increasing culture of litigation Labelling: H&S risk / FSA fines Increasing awareness of allergies / labelling Substitute meat: poor quality for diners / circumventing controls Energy target not met: