Case study illustrative script 1 november 2012 ICAEW

FIRST ILLUSTRATIVE SCRIPT AND EXAMINERS’ COMMENTS In the commentary below extracts from the scripts are shown in quotation marks and italics; spelling, grammar, sentence construction and punctuation from the original script have been retained The commentary follows the order and numbering of the script with references to the topics in the marking key It should be read in conjunction with the review of the Second Illustrative Script and also the full Examiners’ Report for this session Examiners’ comments – overview This script achieved a pass in the 1st quartile It is around average length (but as always this depends on the actual handwriting), addresses all the key issues and contains some strong sections In terms of professional skills this candidate achieved competent grades across the script as follows – Clearly Competent (CC) and Sufficiently Competent (SC) – in out of grade boxes for Assimilating and Using Information; in out of 12 for Structuring Problems and Solutions; out of 12 for Applying Judgement and out of for Conclusions and Recommendations The original 27-page length of the manuscript version was broken down as follows  Cover and contents – page  Terms of reference and executive summary – pages  Report (main body) – 17 pages  Appendices/workings – pages The 17 pages of the main body of the report address the key issues and together with the appropriate appendices demonstrate sensible planning and a proper balance in answering the main requirements This candidate achieved a clear majority of the competent grades in the Executive Summary, a good majority of competent grades in both Requirement (financial analysis) and Requirement (assessment of Banbury rental proposal) and a majority of competent grades in Requirement (evaluation of new business opportunities) and for Appendices and Overall Terms of reference and executive summary This report starts with a terms of reference section, which acts as a contents summary The remainder of the executive summary (ES) is well structured with clear headings to sections and covers all three areas of the report adequately – there is evidence of some good planning in compiling this summary, and no suggestion of time pressure The three main pages of the ES are split fairly evenly between the three topics The summary of the financial analysis of the FS management accounts contains some of the appropriate numerical analysis covering most of the key areas which need to be considered, but concentrates mainly on percentages and percentage changes However, it was weaker on the analysis of Translation and Interpreting (T&I) and the review of the Myanmarpic2012 (MP) issue was not covered In the section dealing with the Banbury rental proposal the ES contains some appropriate figures from the calculations and identifies some recruitment issues as well as querying the assumptions and providing conclusions and recommendations on the way forward Similarly in the evaluation of new business opportunities the candidate presents a short summary of the benefits and risks of this opportunity and brings in some of the ethical issues – the weakness in the script was in looking at this issue from too broad a perspective The executive summary covered all areas and was sufficiently competent in the use of numbers and in the quality of discussion provided It was competent on judgement, conclusions and recommendations Copyright ©The ICAEW 2012 Page of 14 To score better grades on this section, the candidate could have (i) used absolute numbers and provided a more comprehensive coverage of the T&I and MP analysis; and (ii) adopted a more tightly focussed approach with better judgement and conclusions on the analysis of the new opportunities FS financial analysis / Myanmarpic2012 [Requirement 1] The financial statement analysis in this section is accompanied by Appendix (see detailed commentary below) This appendix supports the comparative analysis of revenues, gross profit and the revenue streams, in both percentage and absolute terms – it is a good piece of work from which the report can be written The appendix is less thorough on the details concerning the T&I analysis and the MP information The review starts with an appropriate analysis of overall revenue comparing 2012 against 2011 and discusses the strength of FS revenue diversification The analysis then moves on to discuss the three primary revenue streams, again in both absolute and percentage terms This analysis is set appropriately in the broader business context The candidate provides relevant commentary on the numerical work: “The worst performing revenue stream is English language, which had a substantial decline of 6.5% to £2,314 in 2012 compared to £2,475 in 2011 … The decline is as a result of the UKBA visa restrictions, deterring students from coming to the UK However FS has successfully maintained the accreditation status, and managed to benefit from increased foreign students from other colleges who had lost their status” An important missing detail is the scale of the numbers £2,314k The figures for the analysis of gross profit are only provided in percentage terms, which means that there is no yardstick to guide the reader However, the commentary is relevant and shows an awareness of comparative contributions within and between revenue streams: “The gross profit of English language has increased slightly to 48.7% in 2012 compared to 46.5% in 2011 This is because of the decreasing overseas students (semester long-lower margin courses) towards more corporate businesses (Intensive courses – higher margin)” The analysis of the impact of T&I services on movements in cash and accounts receivable, together with (MP) analysis, is adequate but not strong The candidate’s conclusions are consistent with the analysis but are not developed in sufficient depth The recommendation that “FS should consider withholding payments to MP suppliers until start receiving money for contract” implies somehow offloading the responsibility for poor credit control to the translators, which is neither commercial nor appropriate (especially in this instance as FS has already paid its translators in full) To score better grades on Requirement 1, the candidate could have:  Provided some clear absolute numbers for the changes in gross profit overall and by revenue stream  Considered the impact on ELT of the previous decision to terminate the Banbury rental  Discussed in more detail the cash analysis of T&I activity  Provided better conclusions and relevant recommendations in the report Assessment of Banbury rental proposal [Requirement 2] The financial data analysis in this section is accompanied by Appendix 2, which contains correct calculations, as far as they go, but it is a short and poorly labelled numerical starting point from which to comment on the proposal The candidate starts this topic by summarising the potential effect of the new proposal but refers to the contribution as being “profit” With that proviso the calculations for the two years are correct “For Copyright ©The ICAEW 2012 Page of 14 the new rental proposal, in the year ended 30 September 2013, this would produce a profit of £23,040 For the financial year to 30 September 2014 this would produce a profit of £49,560.” (Having correctly calculated the different “contributions” it is a pity that later in this section the candidate states that cash flows for the two years would be identical.) The script has comments on a number of the assumptions, with reasons: “The calculation assumes that monitoring costs are 10% of direct costs, however this may need to be increased to ensure FS maintain their UKBA accreditation status” but it is not a complete review of all the factors which are contained in the calculations and which might vary The consideration of other factors includes some pertinent points: “FS also need to consider the impact on secondary revenue streams The exam fees and sales of material are also likely to rise as a cotudent numbers maintain higher than anticipated, before entering into a contract FS could attempt to renegotiate contract terms with BBP, ie so that rent is paid quarterly rather than annually to release strain on cashflow FS could seek out alternative cheaper premises in other locations Rent is considerably higher £120k, compared to previously £90k FS could attempt to negotiate rentals again FS need to consider how they will finance the rent to be paid in January 2013 in advance Evaluation of potential new business opportunities Risks There are practical problems associated with the business opportunities in Brazil FS has no expertise in Brazilian – Portuguese speakers, FS has a lack of competent speakers in this language FS has recently faced reputational damage from the translation of the Arabic poster in the Olympic 2012, if this opportunity fails then FS could face further reputational damage Also the bad publicity could deter FS getting any work, due to the poor translation, companies may not want to use FS for their translation services Another practical problem is translators would be required in Brazil, does FS have the resources available for this kind of project? Any expenses incurred in Brazil will also have to be met by FS FS needs to investigate further the viability of any translation work in Brazil There are also increased forex risks, as FS will not be paid in sterling There may also be further cashflow implications and pressures which could cause a problem Copyright ©The ICAEW 2012 Page 11 of 14 Benefits Translation work in Brazil is a huge opportunity both with the 2016 Olympics and the FIFA world cup in 2014 There may be follow on options overseas in Brazil for English language and foreign language which would improve these revenue streams This would cause a significant increase in translation and interpreting revenue FS already has expertise and knowledge from the work on the 2012 Olympics which it could use for this translation work Brazil is a BRIC economy BRIC economies account for 20% of the world economic output and rising (source – Forbes) So there is increased opportunities in the BRIC economies The UK public investment in higher education is only 0.6% of GDP which is lower than Brazil and Russia, (source – Financial Times) So there are increased opportunities for foreign\English language revenue This will more than compensate for the falling English revenue streams caused by the Government policy on foreign students, and UKBA restrictions This opportunity is a good diversification, and it is an enormous market for opportunity The R-comp are also located near us at rental sites in Birmingham, and they already employ over 200 people Growth in the BRIC economies is seen as a key factor in generating world trade, this is an opportunity FS not want to miss Ethics FS have said they will utilise European-Portuguese initially, there is a risk of using inappropriate translators who are not correctly qualified There is also the ‘commissions’ payable in Brazil, these are dubious payments and are not the norm in the UK Translation in Brazil, there may be different employment laws, different work ethics There may be issues with fair wages, that working hours are reasonable, not subject to discrimination Need to ensure that translators working in Brazil have the right cultural fit Conclusions FS should go for the business opportunity of the Brazil translation work There are too many opportunities with the Olympics 2016 and FIFA 2014, and too many follow on options for FS not to take this opportunity The revenue will more than compensate for lost revenue from English language students Most pressing ethical issue is the use of inappropriate translators to this work in Brazil, errors may be made, this will ruin FS reputation Copyright ©The ICAEW 2012 Page 12 of 14 Recommendations FS should use the database of freelance translators to find translators best suited FS would need to carefully recruit freelancers, not use English-Portuguese speakers, use translators with correct qualifications, thorough checking of references, qualifications etc FS can use the UK trade and investment to offer support and can put FS in touch with local advisors in Brazil FS should work with the British trade of commerce to understand how to trade overseas, and seek advice from UK Department of British Innovation and skill regarding ‘commissions’ Appendix 2012 2011 Change % Change 2011 % Change Revenue overall 2,314 2,029 3,339 2,475 1,734 1,803 –161 295 1,536 –6.5% 17% 85% –15% 21% 66% Learning materials Exam fees Total 1,398 1,423 10,503 1,315 1,378 8,703 83 45 1,798 6% 3.3% 20.7% –7% –6% 4.7% Revenue mix English Foreign Translation Learning materials Exam fees 2012 22% 19% 32% 13% 14% 2011 28% 20% 21% 15% 16% English Foreign Translation Gross profit English Foreign Translation Learning materials Exam fees Total Copyright ©The ICAEW 2012 2012 2011 2012 Margin 1,128 1,006 791 644 272 3,841 1,152 847 771 620 369 3,759 48.7% 49.6% 23.7% 46% 19% 36.6% 2011 Margin Abs Movement % move 46.5% 48.8% 42.8% 47.1% 26.8% 43% –24 159 20 24 –97 82 –2% 18.8% 2.6% 3.9% –26% 2% Page 13 of 14 Appendix 2012 2011 2012 Cashflow Profit Depn Working capital Tax Purchase PPE Sale PPE Translation 1,295 51 –1,464 –225 –343 805 85 –377 –105 –76 +10 342 Cash inflow English Foreign Translation Sales material Exam fees Total 2012 142 231 2,314 154 118 2,959 2011 153 207 996 142 98 1,596 MP contract 2012 Translation receivables 2,314 Cashflow in 192 680 Cashflow out expenses (654) 30% Net cash outflow on MP contract (462) Cash outflow Net cash outflow Trade receivables MP receivables % Appendix Rent paid for premises £ (120,000) 1,957 2012 TR days 22 days 42 days 253 days 40 days 30 days 103 days (2,497) (540) 2011 TR days 23 days 44 days 202 days 39 days 26 days 67 days 2012 Financial Impact Sept 13 Sept 14 (90,000) (120,000) Contributions from Semester / long ELT programmes Revenue + costs per programme £180 x 12 x x 12 £ = 155,520 Direct costs 12 x £25 x 25 x 12 X 1.1 Contribution per programme Copyright ©The ICAEW 2012 =(99,000) 56,520 113,040 169,560 23,040 49,560 Page 14 of 14 ... Copyright ©The ICAEW 2 012 2 012 2 011 2 012 Margin 1, 128 1, 006 7 91 644 272 3,8 41 1 ,15 2 847 7 71 620 369 3,759 48.7% 49.6% 23.7% 46% 19 % 36.6% 2 011 Margin Abs Movement % move 46.5% 48.8% 42.8% 47 .1% 26.8%... Appendix 2 012 2 011 Change % Change 2 011 % Change Revenue overall 2, 314 2,029 3,339 2,475 1, 734 1, 803 16 1 295 1, 536 –6.5% 17 % 85% 15 % 21% 66% Learning materials Exam fees Total 1, 398 1, 423 10 ,503 1, 315 ... 805 85 –377 10 5 –76 +10 342 Cash inflow English Foreign Translation Sales material Exam fees Total 2 012 14 2 2 31 2, 314 15 4 11 8 2,959 2 011 15 3 207 996 14 2 98 1, 596 MP contract 2 012 Translation