ADVANCED LEVEL CASE STUDY EXAMINATION

WEDNESDAY 26 AUGUST 2020

(4 HOURS)

CASE STUDY
1. Please read the instructions on this page carefully before you begin your exam. If you
have any questions, raise your hand and speak with the invigilator before you begin.

2. Please alert the invigilator immediately if you encounter any issues during the delivery
of the exam. The invigilator cannot advise you on how to use the software. If you
believe that your performance has been affected by any issues which occurred, you
must request and complete a candidate incident report form at the end of the exam; this
form must be submitted as part of any subsequent special consideration application.

3. Click on the Start Exam button to begin the exam. The exam timer will begin to count
down. A warning is given five minutes before the exam ends. When the exam timer
reaches zero, the exam will end. To end the exam early, press the Finish button.

4. You may use a pen and paper for draft workings. Any information you write on paper
will not be read or marked.

5. The examiner will take account of the way in which answers are structured. Respond
directly to the exam question requirements. Do not include any content or opinion of a
personal nature. A student survey is provided post-exam for feedback purposes.

6. Ensure that all of your responses are visible on screen and are not hidden within cells.
Your answers will be presented to the examiner exactly as they appear on screen.

ICAEW/CS/J20
 July 2020 Case Study: Scour Limited

List of exhibits

The following exhibits were included in the material provided as Advance Information:

1 About you (Hilary O’Keeffe), your employer (Young & Walsh) and your client
(Scour Limited)

2 The commercial cleaning industry

3 An introduction to franchising

4 Scour: An introduction

5 Scour: Review of the management accounts for the three years ended 31 May
2019

6 Scour: Management accounts for the three years ended 31 May 2019

7 Scour: Business model

8 Scour: Customer profiles

9 Scour: Franchising operations and franchisee profiles

10 Scour: Supply chain

11 Scour: Staffing (owned operations)

12 Scour: Strategic plan

13 Recent media coverage

These items are newly provided:

14 Email dated 22 July 2020 from Paul Croxley to you: Scour: Draft management
accounts and business developments

15 Scour: Draft management accounts for the year ended 31 May 2020

16 Note dated 22 July 2020 from Joy Lyons: Additional information relating to the
management accounts

17a Email dated 21 July 2020 from Adam Frith to Paul Croxley: Cleaning product
suppliers

17b Recent media coverage

18a Email dated 20 July 2020 from Maria Andreou to Paul Croxley: New franchisee

18b Recent media coverage

ICAEW/CS/J20 Page 1 of 14
Scour Limited: Case Study requirement
You are Hilary O’Keeffe, a final-year trainee ICAEW Chartered Accountant working in the
business advisory unit of Young & Walsh, a firm of ICAEW Chartered Accountants with
offices across the West of England. One of your clients is Scour Limited. Scour provides
commercial cleaning services for a wide range of customers across the West and South
West of England. Scour also has a network of franchisees which provide commercial
cleaning services to customers across the rest of the UK. You report to a partner, Paul
Croxley.

Requirement
You are required to prepare a draft report for the Scour board, as set out in the email dated
22 July 2020 from Paul Croxley to you (Exhibit 14). Your report should comprise the
following four elements:

• An executive summary
• Your responses to the three detailed requirements set out in Exhibit 14, including financial
appendices (as required).

State clearly any assumptions that you make. All workings should be attached to your answer.

Your report should be balanced across the three detailed requirements, and the following time
allocation is suggested:

Reading and planning 1 hour

Performing calculations and financial analysis 1 hour
Drafting report 2 hours
Marks allocation
All of the marks in the Case Study are awarded for the demonstration of professional skills,
allocated broadly as follows:

Applied to the four elements of your report (as described above)

• Assimilating and using information 22.5%
• Structuring problems and solutions 22.5%
• Applying judgement 22.5%
• Drawing conclusions and making recommendations 15.0%
• Demonstrating integrative and multidisciplinary skills 17.5%

Of the total marks available, 15% are awarded for the executive summary and approximately
10% for the relevant discussion of ethical issues within your answer to the requirements.
In planning your report, you should be aware that not attempting one of the requirements will
have a significantly detrimental effect on your chances of success, as will not submitting an
executive summary. In addition, as indicated above, all four skills areas will be assessed under
each of the four elements of your report. Accordingly, not demonstrating your judgement or
failing to include appropriate conclusions and/or recommendations in each element of your
report will affect your chances of success.

NOTE: The scenario in this exam is based around the original scheduled exam date,
22 July 2020. You should answer the requirements as if you were taking the exam on
that date.

ICAEW/CS/J20 Page 2 of 14
 EXHIBIT 14

EMAIL

From: Paul Croxley

To: Hilary O’Keeffe
Subject: Scour: Draft management accounts and business developments
Date: 22 July 2020

We need to review Scour’s latest draft management accounts, which we have just received.
We also need to advise Scour on two business decisions. I am attaching the following:

• Scour’s draft management accounts for the year ended 31 May 2020 (Exhibit 15)
• A note from Joy Lyons: Additional information relating to the management accounts
(Exhibit 16)
• An email from Adam Frith to me about cleaning product suppliers (Exhibit 17a), with
related media coverage (Exhibit 17b)
• An email from Maria Andreou to me about a prospective new franchisee (Exhibit 18a),
with related media coverage (Exhibit 18b).

Please draft for my review a report addressed to the Scour board. The report should comprise
the following.

1. 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.

2. An evaluation of the proposal for the supply of cleaning products, as set out in Exhibit 17a.

Using the information in Exhibit 17a and Exhibit 17b, you should evaluate the bids from
the existing supplier, Thom, and the potential new supplier, Violetta. For each supplier,
you should calculate the total expected cost of purchasing cleaning products (including
transport and distribution costs) for the two years ending 30 November 2022. You should
assess the adequacy of the assumptions; compare and contrast the key terms; and
recommend, with reasons, which bid Scour should accept. You should include in your
evaluation the ethical and business trust issues that Scour should consider when making
its decision.

3. An evaluation of the approach from the prospective franchisee, Edna Jones (Exhibit 18a).

You should evaluate the financial, operational, strategic, ethical and business trust
issues, including those arising from Exhibit 18b. You should advise, with reasons,
whether Scour should accept Edna as a franchisee.

ICAEW/CS/J20 Page 3 of 14
 EXHIBIT 15

Scour: Draft management accounts for the year ended 31 May 2020

Statement of profit or loss for the year ended 31 May 2020

£000
Revenue (Note 1) 14,771
Cost of sales (Note 1) (13,034)
Gross profit (Note 1) 1,737
Administrative expenses (Note 2) (1,094)
Operating profit 643
Net finance income 20
Profit before taxation 663
Income tax (126)
Profit for the year 537

Statement of financial position at 31 May 2020

£000
Non-current assets
Property, plant and equipment (PPE) (Note 3) 206
206
Current assets
Inventories 53
Trade and other receivables (Note 4) 1,651
Cash and cash equivalents 996
2,700

TOTAL ASSETS 2,906

Equity
Ordinary shares 150
Retained earnings 1,366
1,516

Current liabilities
Trade and other payables (Note 5) 1,264
Taxation 126
1,390

TOTAL EQUITY AND LIABILITIES 2,906

ICAEW/CS/J20 Page 4 of 14
Statement of cash flows for year ended 31 May 2020

£000
Cash flows from operating activities
Profit before tax for the period 663
Adjustments for:
Depreciation 93
Profit on disposal of PPE (6)
Finance income (20)
730
Change in inventories (9)
Change in trade and other receivables (254)
Change in trade and other payables 67
534
Income tax paid (74)
Net cash generated from operating activities 460

Cash flows from investing activities

Acquisition of PPE (132)
Proceeds from disposal of PPE 17
Interest received 20
Net cash generated from investing activities (95)

Net cash generated from financing activities -

Net change in cash and cash equivalents 365

Cash and cash equivalents at start of period 631
Cash and cash equivalents at end of period 996

ICAEW/CS/J20 Page 5 of 14
Notes to the draft management accounts

Note 1: Revenue, cost of sales and gross profit

£000
Owned operations
Revenue 13,451
Cost of sales
Personnel (10,471)
Purchases of cleaning products / other supplies (1,491)
Transport and distribution (85)
(12,047)
Gross profit 1,404

Franchised operations
Revenue
Initial fees 190
Ongoing fees 455
Sale of cleaning products 648
Recharge of transport and distribution costs 27
1,320
Cost of sales
Set-up costs (229)
Continuing obligation costs (196)
Purchases of cleaning products (535)
Transport and distribution costs (27)
(987)
Gross profit 333

Note 2: Administrative expenses

£000
Personnel 593
Premises and IT 308
Advertising and marketing 193
1,094

ICAEW/CS/J20 Page 6 of 14
Note 3: Property, plant and equipment

Cost £000
At 1 June 2019 604
Additions 132
Disposals (38)
At 31 May 2020 698

Depreciation
At 1 June 2019 426
Charge for the year 93
Disposals (27)
At 31 May 2020 492

Carrying amount
At 31 May 2020 206

Note 4: Trade and other receivables

£000
Amounts due from Scour customers 1,299
Amounts due from Scour franchisees 134
Trade receivables 1,433
Other receivables and prepayments 218
1,651

Note 5: Trade and other payables

£000
Trade payables 194
Other payables and accruals 1,070
1,264

ICAEW/CS/J20 Page 7 of 14
 EXHIBIT 16
Note from Joy Lyons, 22 July 2020

Additional information relating to the management accounts

In relation to the year-end review, please note the following matters, all of which are reflected
in the management accounts.

Owned operations

1. The average price charged to customers per cleaning hour was unchanged from the
average price charged in the year ended 31 May 2019.

2. On 1 March 2020, Scour’s rival, Y4, was taken over by an international facilities
management company. This enabled Y4 to undercut Scour when bidding for new
contracts or at renewals. I estimate that in the 3 months to 31 May 2020 this has caused
us to lose £150,000 of recurring revenue from existing contracts not being renewed.

3. Three college customers (Upson, Rolands and Manson) took the decision to stay open
for conferences and other events during the summer (July and August 2019) and
winter (Christmas and New Year 2019/2020) vacations. However, they were closed for
the whole of April and May 2020 and cleaning was reduced to a minimum for these two
months. The combined effect of these changes was an overall increase of 10% in the
number of cleaning hours for the three colleges in the year ended 31 May 2020.

4. On 1 December 2019, our customer Tonto opened three new supermarkets of similar
size to its existing ones and with the same cleaning requirements from Scour. In
addition, all Tonto’s stores have had higher than usual levels of cleaning in April and
May 2020. As a result, total revenue from Tonto in the year was £995,000.

5. The business measures for the year were:

o Customer satisfaction: 97%
o Customer retention: 66%
o Revenue per employee: £35,200.

Franchised operations

1. During the year ended 31 May 2020, 19 new franchisees joined the Scour network and no
franchisees left. Their joining dates were spread evenly over the year.

2. The combined revenue earned by the 19 new franchisees from their customers for the
period to 31 May 2020 was £2.3 million, compared with their forecast combined revenue
of £2.6 million. The combined revenue of the 11 franchisees who joined in 2019 was
£2.9 million for the year ended 31 May 2020.

3. Of Scour’s total continuing obligation costs during the year ended 31 May 2020, £93,000
were attributable to the 19 new franchisees.

4. On 1 June 2019, Scour streamlined its set-up processes by launching an online induction
programme for franchisees.

ICAEW/CS/J20 Page 8 of 14
 EXHIBIT 17a
EMAIL

From: Adam Frith

To: Paul Croxley
Subject: Cleaning product suppliers
Date: 21 July 2020

As part of our plan to create efficiencies in the business, we are seeking to reduce our costs
of purchasing cleaning products.

Our existing contract with Thom as the sole supplier of cleaning products (covering both our
owned and franchised operations) expires on 30 November 2020. Continuity of supply is
essential: any interruption would significantly impact our day-to-day activities, reputation and
results. In the event of a change in supplier, there would need to be a smooth transition. We
have therefore already begun the renewal process.

In accordance with our normal arrangements for selecting suppliers, we asked three
companies to bid for the work: Thom, UPP and Violetta. Following initial presentations, we
eliminated UPP on the grounds of price and strategic fit, and we must now choose between
Thom and Violetta as our exclusive supplier.

Key terms

The key terms proposed by each supplier are as follows. In both cases, the contract is for the
2 years starting 1 December 2020.

Thom Violetta
• Minimum annual £2.25 million per year £2.0 million per year
purchase (Note) (after any discounts) (after any discounts)
• Opening discount Equivalent of 1 Materials with total
month’s product value of £100k
supply included free of included free of
charge charge
• Transport and 6% of Scour’s cost of 4% of Scour’s cost of
distribution costs product purchases product purchases
(after any discounts) (after any discounts)
• Number of available 70 40
products
• Payment terms 30 days from delivery 45 days from
delivery
• Delivery time 36 hours 24 hours

Note: If this requirement is not met, Scour must pay the shortfall as part of the final invoice
for the year.

ICAEW/CS/J20 Page 9 of 14
Other information and assumptions

1. Costs of cleaning product purchases from Thom (excluding transport and distribution
costs) for the year ended 31 May 2020 were:

Owned operations: £1,173,000

Franchised operations: £535,000.

Our projected cleaning product purchases (excluding transport and distribution costs) for
the 6 months to the end of the current contract, then for the next two years, are as follows:
Owned Franchised
£000 £000
Current contract
6 months ending 30 Nov 2020 600 400
New contract
12 months ending 30 Nov 2021 1,400 1,000
12 months ending 30 Nov 2022 1,600 1,400
The figures reflect our current expectation of growth across both our owned and
especially our franchised operations. They are based on Thom’s existing prices.

2. Thom’s prices will remain unchanged from those in the existing contract. Violetta’s prices
are 5% higher on average than Thom’s for equivalent products of the same type, size
and/or volume.

3. Violetta’s products are more concentrated or more efficient than many equivalent products,
including Thom’s. According to Violetta’s own estimates, they are 15% more concentrated
or 15% more efficient than Thom’s equivalent products of the same type, size and/or
volume, so they can be replaced or replenished less frequently.

4. Violetta has developed a web portal through which customer orders can be made in
realtime using a mobile app. Labels on all bottles and containers change colour when
they reach a minimum level, which triggers the requirement to reorder. Violetta says that
this process is working effectively for its first two commercial cleaning customers.

5. Violetta will use its energy-efficient fleet of five vans, assisted by its own route planning
software, to transport the products to the specified locations within the stated delivery
time.

ICAEW/CS/J20 Page 10 of 14
 EXHIBIT 17b
RECENT MEDIA COVERAGE

A climate of uncertainty (Cleanse magazine, July 2020)

The battle between cleaning product suppliers making claims about the eco-friendliness of
their products shows no sign of abating.

Well-known supplier Thom has repeatedly said that its products are the most eco-friendly on
the market, and that this has been confirmed by external audits from specialist firms.

However, some manufacturers (such as Violetta) dispute this, on the basis that it is not
possible to guarantee eco-friendly status and that there are no industry standards to
benchmark against.

Other companies – typically those that have been in existence for a long time and/or which
have no desire (or funds) to invest heavily in R&D – believe that eco-friendliness is a
gimmick. In their view, the majority of people who buy and use cleaning products are not
interested in their eco-friendly credentials as long as the products can do a proper cleaning
job and are safe to use.

There is some evidence that eco-friendly products may cause health issues (ranging from
skin irritation to respiratory problems), but this has not been scientifically proven and we
remain cautiously sceptical.

False economies (Franchised Quarterly, June 2020)

Cleaning franchisor Crocus has uncovered a series of issues that are threatening to damage
its good name in the industry.

In one recent incident, a franchisee had decided that she no longer wanted to use the
branded bleach specified in her franchise agreement because she found it ineffective. She
replaced it with another brand, which ruined the washrooms at one customer’s offices,
resulting in the loss of that customer.

In another incident, a franchisee under financial pressure had been over-diluting a detergent.
This led to poor cleaning work and complaints from his customers – and the promise of a free
week of cleaning as a gesture of goodwill.

As part of its review of purchasing, Crocus had noticed that both franchisees had been
ordering fewer products and asked them for an explanation – which is when the incidents
came to light.

Crocus is now reinforcing to all of its franchisees the need to adhere to their agreements,
particularly in relation to products.

ICAEW/CS/J20 Page 11 of 14
 EXHIBIT 18a
EMAIL

From: Maria Andreou, Franchising Director

To: Paul Croxley
Subject: New franchisee
Date: 20 July 2020

Edna Jones, one of our longest-serving employees, has approached us with a view to
becoming a Scour franchisee. A former cleaner and then supervisor, Edna is currently part of
our head office team. From this role, she is very familiar with the activities of Scour’s existing
franchisees and the details of their financial and operational performance. She has also
maintained wide experience of the day-to-day aspects of cleaning. She therefore believes
that she is well placed to prosper as a franchisee herself – and at the same time to enhance
Scour’s profile.
Several cleaners have previously joined the network but Edna would be the first head office
employee to do so. She would also be the first franchisee to set up in more than one territory.
We need to evaluate Edna’s approach using the same financial and other criteria as for any
other prospective franchisee.

The proposal

Edna is proposing four separate operations. She wants to set up each of them as a separate
limited company under an initial two-year franchise agreement. She has prepared forecasts
for the two years, based on a start date of 1 September 2020:

Year 1 Year 2
£000 £000
Revenue
Leicester 2 200 300
Leicester 3 250 350
Leicester 4 250 400
Leicester 5 200 300
900 1,350

Total costs 750 1,050

Edna has made the following points (my comments are below each one):

1. All four franchises will be in Leicester, in the territories known as Leicester 2, 3, 4 and 5.
There is at present a large amount of new building construction in progress (especially
offices and shops) within Leicester 4.

My comment: Together with our existing Leicester 1 franchise run by Tracy Harris –
one of Scour’s founding franchisees – these would give us complete coverage of
Leicester.

2. Edna has oral agreements from prospective customers in all four territories. The revenue
and costs for these are reflected in the forecasts.

ICAEW/CS/J20 Page 12 of 14
 My comment: I understand that these include two existing customers of Tracy Harris’s
Leicester 1 franchise, each currently paying £40,000 per year for cleaning. Edna has
told them that she will be ready to take over their cleaning on 1 September 2020 and
she will charge them 10% less than Tracy for the same number of cleaning hours.
Total revenue for Leicester 1 in the year to 31 May 2020 was £240,000.

3. With her knowledge of Scour’s franchise operations, its systems and processes in IT, HR
and other areas, Edna believes that the support she requires from Scour, both at the outset
and after, will be much less than for other franchisees, and there will also be economies of
scale from having four territories. As a result, she feels that there should be a single initial
fee of £25,000 covering all four territories and ongoing fees should be at a rate of 5%.
There are no figures for fees included in her forecast costs.

My comments: I understand that Edna has applied to her bank for a loan of £25,000 to
cover the proposed initial fee. Also, I estimate Scour’s costs for each territory as follows:
set-up costs of £11,000; continuing obligation costs of £10,000 for Year 1 and £7,000
for Year 2.

4. Edna is in the process of recruiting eight cleaners (two for each territory) from Scour’s
competitor Goodglow.

My comment: These cleaners are known to be unhappy with their current jobs and in
particular with some of the business practices adopted by Goodglow. I understand that
Edna has offered them a higher salary than they are currently earning, together with the
chance to earn a bonus.

ICAEW/CS/J20 Page 13 of 14
 EXHIBIT 18b

RECENT MEDIA COVERAGE

A bright future for cleaning (Leicester Gazette, July 2020)

The recently-published results of a survey conducted in January and February 2020 reveal a
growing demand in Leicester for outsourced facilities management (FM). FM covers a wide
range of services, such as commercial cleaning, security and catering.

Many local businesses – in line with others across the UK – had been running these services
in-house – with a noticeable decline in reliability and quality. They are gradually going back to
using specialist, professional external providers.

One FM service is particularly prospering: commercial cleaning. Some respondents to the

survey predicted an increased demand in each of the next two years as Leicester businesses
recognise both the benefits of clean premises and the importance of complying with the
complex legislation on health and safety.

At the same time, value for money is a key objective. In the survey, some business owners
said that they prefer to use a company that offers a range of FM services rather than using
separate companies for commercial cleaning, security and catering as this enables them to
benefit from economies of scale.

However, others said that they receive a much better service (for which they are happy to pay
more) from dedicated commercial cleaning companies – especially those operating as
franchises – because of the commitment, friendliness and more specialised knowledge of their
staff.

ICAEW/CS/J20 Page 14 of 14