Case Study July 20X2

CASE STUDY
JULY 20X2
ADVANCE INFORMATION
This material is issued prior to the examination session on 25 July 20X2.

Candidates MUST bring this material with them to the Examination Hall.
Copyright © ICAEW 20X2. All rights reserved. 159473

LUVLOX LTD: ADVANCE INFORMATION
ICAEW/CS/J12 Page 1 of 37
This material is issued prior to the examination session so as to allow you to familiarise
yourself with the information provided and undertake any research and analysis you think fit.
This information is also published on the website: www.icaew.com/students.
You MUST bring this material with you to the Examination Hall, annotated if you wish,
together with your preparatory work. Once you have read the material, you are not expected
to spend more than two days working on it: this would include familiarisation with the
information provided, additional research and analysis, developing an awareness of the
industry, discussion and assembling your preparatory work for use in the examination. The
use of pre-prepared study material will not significantly help you in your preparation for this
examination. It is essential that you carry out sufficient analysis work of your own in order to
have a good understanding of the Advance Information. You will not benefit from taking large
quantities of additional material with you into the Examination Hall.
At the start of the examination you will receive some additional material which will complete the
description of the case scenario and state the Case Study requirements. Your answer must be
submitted on the paper provided by the ICAEW in the Examination Hall. Any preprepared
papers, or papers comprising annotated exhibits from the case material, included in your answer
WILL NOT be marked.
Assessment of the Case Study
The marks in the Case Study are awarded for professional skills, allocated broadly as follows:
• Assimilating and using information 20%

• Structuring problems and solutions 25%
• Applying judgement 25%
• Drawing conclusions and making recommendations 20%
• Demonstrating integrative and multidisciplinary skills 5%
• Presenting appropriate appendices 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. Ethical
issues do not form a specific requirement but, within a requirement, may cover such topics as:
• Lack of professional independence or objectivity

• Conflicts of interest among stakeholders
• Doubtful accounting or commercial practice
• Inappropriate pressure to achieve a reported result.
You should be clear that marks are awarded for demonstrating your professional skills, not for
reproducing facts from the case. In order to be successful, you will need to:
• Demonstrate your knowledge of the case material and make use of your research
• Carry out relevant analysis of the problems and structure your proposed solutions
• Apply your judgement on the basis of the analysis that you have carried out
• Draw conclusions from your analysis and judgement, and develop them into practical commercial
recommendations.
Omitting any one of these elements will have a significantly detrimental effect on your
chances of success.
July 20X2 Case Study: Luvlox Ltd
List of exhibits
1 About you (Ashley Franklin), your employer (Baron Young) and your client (Luvlox Ltd)
2 The UK hairdressing industry: Background
3 Hairdressing: The business model
4 Luvlox Ltd: History and overview
5 Luvlox Ltd: The business
6 Email dated 19 July 20X1 from Liz Newby (Accountant) to all Luvlox Ltd directors
7 Luvlox Ltd: Management accounts for the year ended 30 June 20X1
8 Luvlox Ltd: Price list
9 Luvlox Ltd: Extracts from insurance policies
10 Luvlox Ltd: New incentive scheme (July 20X1)
11 Press articles
EXHIBIT 1
About you (Ashley Franklin), your employer (Baron Young) and your client (Luvlox
Ltd)
You are Ashley Franklin, a final-year trainee Chartered Accountant working for Baron Young, a firm
of Chartered Accountants and Business Advisors with its headquarters in Newcastle-uponTyne in
the north-east of England. You report to one of the partners, Sarah Chandler, among whose clients
is Luvlox Ltd (LL), which operates a chain of three hairdressing salons – in Newcastle itself and in
the nearby towns of Wallsend and Gateshead. Sarah has been involved with LL since its early days.
Baron Young provides independent business advisory services to LL; audit and assurance work is
carried out by another firm.
You have been assigned to LL since your first year at the firm and are therefore familiar with its history,
business methods and finances. The tasks with which you have been involved include:
• Analysing financial performance to identify areas for improvement

• Drafting reports on the company’s proposals for strategic development
• Reviewing business plans for new salons
• Providing ad hoc advice in response to queries from the LL senior management team
As with your work on other clients, you are expected to keep yourself up to date with market, economic
and technical issues, enabling you to contribute as fully as possible to all of the above tasks.
The UK hairdressing industry: Background EXHIBIT 2
Hairdressing is part of a wider industry covering not only hairdressing but also beauty services,
whether provided by salons or by self-employed stylists. Hairdressing includes cutting and styling,
conditioning, perming, colouring and other treatments. Some businesses also offer specialist
services, such as straightening, hair extensions, wig creation and maintenance, weaving, braiding
and head massage. Beauty services comprise, among other things, skincare, facials/massage,
eyelash/brow tinting, manicure and pedicure.
Market size, key statistics and trends
According to the latest available detailed data from the Hair and Beauty Industry Association
(Habia), hairdressing and beauty services earned revenue of £5.25 billion in 20VIII and employed
nearly 0.25 million people (around 1% of the total UK workforce).
Hairdressing is a vast and competitive industry, with over 40,000 businesses currently in the UK,
of which around 5% are based in the north-east of England. It is also highly fragmented,
characterised by a large number of small, independent salons: only a few belong to chains. No
single operator dominates the market: the biggest, Regis, generates less than 2% of total
revenue. There are various reasons for this, notably low barriers to entry, which enable people to
set up their own salons and run them as owner-operated businesses. Self-employed stylists may
also work from their own home, operate a mobile service or even rent space in a salon. As a
result, a significant proportion of hair and beauty professionals are not employed by salons.
The recession has not affected the influence of fashion or the need to look and feel good (and
younger), but there is evidence that people are cutting back on discretionary spending on hair and
beauty treatments and switching to home alternatives where possible. Mintel's 20x0 British
Lifestyles report found that 12% of consumers were spending nothing on non-essentials, while 30%
described themselves as ‘quite cautious’ and 35% as ‘very cautious’ with their personal spending.
As a result, after several years of solid expansion, the industry experienced a decline, with revenue
falling by 6.3% in 20IX. It has yet to recover to former levels, but in 20X2 it is forecast to rise by
2.2%, taking five-year growth to a weak 0.1% per annum.
Although an estimated 100 salons close each month, the average newly-opened salon now
remains in business for around ten years. However, demand – from both men and women – for
good, imaginative hairdressing is always high, so a fashion-conscious hairdresser should have little
difficulty in running a successful business. This is why new salons keep springing up, and the vast
majority survive and go on to earn respectable profits.
Recent research indicates that the average woman between the ages of 13 and 65 changes her
hairstyle twice a year. According to shopping channel QVC in 20X1, she spends £405 a year on her
hair. A survey by Habia noted that women were attending salons less often in 20x0, down from
eight or more visits per year to six – though some still go as often as once a week – and using ‘do-it-
yourself’ products at home between appointments. Meanwhile, QVC says that men spend £179
annually at the barber. The men's market grew by 50% in the decade to 20IX, with 20% of men
aged between 16 and 24 regularly updating their look and 18% spending ‘a lot of time’ on their
image.
Another survey found that over-50s now spend more on their appearance than in previous generations,
with two-thirds of women in this age-group colouring their hair to disguise grey.
Wedding hair is a potentially profitable area, with many brides opting to have their hair styled
professionally. Falling marriage rates are likely to have a marginal impact on this market.
Employment, training, qualifications and skills
Habia notes that changes in the UK’s population will increase the need for hairdressers to cater
for a wider range of clients, and could present recruitment challenges. At present, the industry is
female-dominated: the proportion of male employees is increasing but remains at around 10%.
Entrants are often poorly qualified and lack basic skills. Qualifications – while not mandatory – are
available at a range of levels. Some colleges offer programmes for hairdressers who want to
extend their training. Many salons take on junior employees under apprenticeship schemes,
which allow them to learn ‘on the job’. Anyone starting up a salon will also benefit from training in
general business and enterprise skills, as well as client service and IT.
There has been a rise in the number of commercial teaching establishments and ‘academies’.
Some hairdressers have created their own facilities, which are usually made available in the
evenings. Many hairdressers use ‘in-salon’ training schemes, with experienced tutors, as an
alternative to providing staff with day-release facilities. For the established hairdresser wishing to
keep up to date and learn new techniques, there are a number of craft schools and specialised
seminars.
Trade associations and industry resources
Membership of professional trade associations can provide a wide range of benefits for a
hairdressing salon proprietor. In addition to Habia, which gives guidance on best practice and offers
opportunities to become involved in consultations on the industry’s future:
• The National Hairdressers' Federation (NHF) provides a Code of Conduct for hairdressers
• The Hairdressing Council (HC) allows hairdressers to register as State Registered Hairdressers (see
Exhibit 3) and apply for the Master Craftsman Diploma
• The Hair and Beauty Supplier Association (HBSA) is ‘the voice’ of suppliers to the industry.
Salon proprietors and their staff can also keep up with industry developments from events and
resources such as Hairdressers Journal International (www.hji.co.uk), which carries dedicated material
for salon managers on matters such as marketing, law and training.
Did you know?
The raw material: The average scalp has between 90,000-140,000 hairs, each made up of 70-80% protein,
0.1-0.5% minerals, 3-6% lipids or fats, 0.1% colour pigments, 10-15% water and 0.1-0.5% carbohydrates.
What hair looks like close-up: Each hair has an outer cuticle section, an inner cortex and a core ‘medulla’.
The cuticle’s surface is not completely smooth but consists of tiny overlapping scales, like a fish's. When the
hair is healthy, the scales lie flat, reflecting light, so that the hair appears to shine and feels silky.
When hair is out of condition: The scales are vulnerable to rough treatment. When subject to artificial heat
from rollers, tongs or driers, to chemical processes like perming, bleaching and tinting or to the assaults of
sun, sea and sand, they break away unevenly, refuse to lie flat and smooth and so lose their ability to reflect
light, making the hair look dull and lifeless. Additionally, broken scales tend to lock together and tangle the
hair badly when it is wet. When any of these things happen, hair needs ‘conditioning’.
Hairdressing around the world
By its nature, hairdressing is a localised activity. Other than the large international chains, most
businesses operate within their own country and are governed by the legal and regulatory
systems – and culture – in that country. They generally have minimal dealings with overseas
companies, except if buying products from overseas suppliers. Internationalisation for most such
businesses is restricted to global trends in image and fashion, such as hairstyles of sports
personalities. However, rates of innovation are actually low: while there is some research and
development, most products and treatments remain essentially the same.
Hairdressing Around The World: Some Facts
Hairdressers share many similarities worldwide, but there are also plenty of differences. Here are some
miscellaneous facts from ten countries around the globe.
• Salons in Russia often now have security guards on the door after a number of lavish salons opened there
a few years ago attracting rich clients.
• There are more hairdressers in Belgium per square kilometre than anywhere else in the world.
• In Singapore, some 'convenience' salons operate like supermarket deli counters: clients take a ticket and
wait their turn. To speed things up, they are given a disposable apron and comb, which they can keep if
they like. They pay a small amount for this service, which is designed to be efficient and cheap. The salon
often has a specially-designed vacuum cleaner to dispose of cut hair from a client’s head and shoulders.
• There are 15,000 salons in Australia, which has a population of 20 million. The largest franchise group has
170 salons across the country, and the average apprenticeship lasts four years.
• In Buddhist Thailand, Wednesday is the ceremonial 'head shaving' day for monks. As a result, some deeply
religious people and those who are superstitious believe that one must not cut one’s hair on this day. This
means that business is quiet on Wednesdays, so some salons will close.
• In China, clients buying a product always ensure first that it is not fake, and are very particular about
checking the expiry date.
• Japan is renowned for its dedicated 'workaholic' culture. As offices do not close until 20:00 or 21:00, it's
not unusual for salons to stay open till 23:00 to serve people who work late. It is common for a client to
arrive at 21:00 for a hair appointment.
• Mobile hairdressers are not uncommon in Malaysia, but they differ from those in the UK. Rather than
visiting the home, they travel by bicycle to residential areas and set up under a tree. They are usually quite
successful, as they appeal to children and old people who cannot travel to city salons.
• In Brazil, the more affluent women often visit the hairdresser once a week. Each appointment takes
between 90 and 120 minutes. The most requested services are colouring and brushing.
• In Italy, some stylists manage to take 20 appointments in a working day. On average, seven out of ten
women will have colour, while manicures and pedicures are also very popular.
EXHIBIT 3
Hairdressing: The business model
To be successful, a hairdresser must combine professional expertise with flair. Allied to this is the
need to create an attractive and comfortable setting, whether it is a small ‘corner-shop’ salon or
modern high-street unit, especially to attract (ever more image-aware) younger clients.
Nowadays, in order to survive, salons have to adapt and to appeal to such clientele. Although a
substantial number of ‘utility’ hairdressers still make a steady living from attending to the basic
needs of clients requiring a shampoo and trim or occasional perm or colour rinse, it is now these
who are most at risk from modern trends, and they are gradually finding themselves edged out of
the trade. Some try to respond to the demands of today's fashion-conscious population; others
feel that their only way ahead is to keep prices at competitive levels and thereby hold or attract
new custom. This is a short-term solution at best: holding prices means holding wages, which in
turn leads to poor service and staff resignations. Cheaper and under-qualified staff are employed
and, inevitably, the salon is on the road to unprofitability and eventual closure.
Licensing and registration
In Britain, anyone is free to practise as a hairdresser without registration, without qualification, even
without proper training. As a result, choosing a stylist can be a lottery. Reputation and recommendation are
a good start – but not foolproof. While 'big name' hairdressers are unlikely to have gained fame without
expertise, many fine stylists practise in average salons in average high streets or may be freelance (mobile)
hairdressers. While many consumers no doubt chance upon good stylists, others stray into the hands of
incompetent operators, experiencing poor service or even injury.
The Hairdressers (Registration) Act 1964 (the Act) established the Hairdressing Council (HC), which
maintains a voluntary register. About 10% of hairdressers are registered and entitled to call themselves
State Registered Hairdresser (SRH). Some local authorities require mobile hairdressers to register their
business and apply for a licence to trade. (Note: It is individual hairdressers – not salons – who are
registered.) Registration fees are set by each local authority. Local byelaws set standards for cleanliness,
sterilisation of equipment and inspection. All SRHs have a document, possibly displayed on the salon wall,
certifying them as qualified to practise under the Act. Freelance mobile SRHs will carry official ID (identity
papers) from the HC.
If registration were mandatory, the HC would regulate hairdressers much as eg the Medical Council
regulates doctors. However, as long as registration remains voluntary, the HC has jurisdiction over the SRHs
only – complaints against whom are very rare. Complaints about unregistered hairdressers are more
common and include alleged overcharging, bad haircuts, extensions falling out – even damage to hair, scalp
or ears. If these cannot be resolved in discussion with salon staff, the client may choose to go to law. If
medical treatment is needed, the chances of success in court are far better than where simply a poor
haircut is involved.
The Good Salon Guide (GSG)
The GSG is the only independent, nationwide scheme for assessing professional hairdressing standards and
services. Launched in 1993 in response to consumer demand, and listing around 2,000 salons, it has
become the standard of quality for the public and the industry.
Each salon is visited and objectively assessed by professionally trained inspectors against a set of strict
objective criteria and rated accordingly (just like the well-known hotel guides), giving consumers confidence
in their choice. If it meets a set of minimum standards, it is given Registered status. Thereafter salons are
rated as 3-, 4- or 5-star. A GSG rating shows that the salon has suitably trained and qualified staff, top-
quality products and aims to achieve and maintain the highest standards. Listings are published in trade
magazines and on the GSG website. All salons are reassessed annually.
British hairdressing is sometimes seen as the best in the world – with people from overseas coming to the
UK to learn from the ‘masters’ – but standards vary. Since it began, the GSG has gathered the support of all
major hairdressing bodies and is committed to working with the industry to ensure the highest standards.
Reputation is critical. During the early part of a hairdresser’s career and even during the latter part
of a training period, (s) he will want to win as many awards as possible in the numerous
commercially-sponsored competitions. Having a ‘big-name’ stylist working in the salon – and being
able to retain him or her – will often be the difference between success and failure. Clients can
become attached to a particular stylist; if the stylist moves, they often follow. In this regard, there
are legal limits on the ability of employers to place restrictions on stylists leaving to set up on their
own nearby: a reasonable restriction is normally deemed not to exceed a one-kilometre radius of
the employee's previous workplace or a period of more than six months after leaving.
The objective of many stylists is to have their own salon. How quickly they can achieve this after
initial training depends on many factors, such as financial resources, ability to run a business and
overall experience. Some prefer not to have the responsibility of a shop and instead manage to
run a profitable home-based salon which clients visit. In a profession dominated by females, this
‘family-friendly’ working model appeals to many. Others operate on a mobile basis, carrying their
tools and equipment with them to visit clients in their own homes.
Services and products
Salons will usually advertise the basic range of treatments – cutting, styling and so on. Within the
set tariff, prices can vary with the range of services required, type / length of hair and age / gender
of client. Experienced stylists know the basic prices and cost out the client requirements
accordingly, taking into account the many variables, such as style and degree of difficulty. Many
salons have colourists, who focus on hair colouring and do not carry out any styling.
Some salons promote themselves as specialist, for example in one age group, perhaps offering
lower prices to students or to the elderly. (Hairdressers can often gain contracts with old people’s
homes, perhaps attending on one or two days a week and thereby ensuring a series of
appointments one after another.) Others may have carved out a niche for themselves as stylists to
eg actors and actresses or athletes. In general, a salon should be able to achieve a gross profit
margin of 50-60% for its core services.
As well as stylists, salons may employ assistants (often hairdressing students), who are paid an
hourly wage. They wash clients' hair while stylists are busy with other clients, and they also perform
cleaning tasks, such as wiping mirrors and sweeping floors. This enables more efficient working so
that experienced stylists are not spending time carrying out lower-skilled jobs.
Salons also often provide a wide range of other services. These can include wig creation and
maintenance (for appearance or medical reasons), plus beauty treatments eg ear piercing,
eyelash/brow tinting, skincare, manicure/pedicure and tanning. Tanning in particular can be an
excellent way to boost profits – but it also comes with health risks and, if not managed properly, can
result in adverse publicity. A growing area is beauty parties, in which a salon is booked for a birthday
celebration or ‘girls’ night out’ and all those attending receive hair or beauty treatments.
The sale of hair products is a fast-growing area and can be highly lucrative. More and more people
go to a hairdresser for advice on and/or to purchase compatible products – sometimes without
even having a cut or other treatment while they are there. The hairdresser can offer a more
personal service with guidance on suitability, resulting in greater reassurance for the client than
through buying ‘off-the-shelf’ products in a large shop (some salons sell items that are not even
available in mainstream supermarkets and department stores). As well as hair products, the salon
may sell skin treatments, tanning and manicure items. Gross margins can be high: it should be
possible to achieve at least 50% over the range of products sold.
Many salons focus on one or two brands likely to appeal to their clients. They can become
recognised stockists of the brands they use, and will often receive merchandising material and
information about upcoming promotions from sales representatives. Larger companies may be able
to increase sales via own-label products. Arrangements with suppliers will often include a clause
detailing commissions to the salon and/or its staff as incentives to order more products.
Some chains are funded by (or ‘tied’ to) hair product companies. These companies finance salon
refurbishments in return for exclusivity of products being used in and sold to/from the salon. Gross
profit margins of a salon locked into such a supply agreement are significantly lower than those of
salons that are not ‘tied’ in this way.
Many salons operate under a franchise. The well-known chain Toni & Guy is a good example.
Such salons pay an upfront fee and then a regular amount to the ‘franchisor’ company, usually a
percentage of revenue earned, for the right to use the company’s name and to cover ongoing
support. This support normally includes advice on finance; systems; site selection, properties
and leases; shopfitting and design; training; marketing; and client care.
Location, tools and equipment
Location is a key issue for companies or individuals looking to open a new salon. It is important
that, when choosing a site, they carry out good research to make sure that there is sufficient
demand that is not already being fulfilled by other salons in the area. This process will typically
involve detailed scenario planning with calculations. Similarly, if offering specialised services such
as beauty treatments, they must be confident that they will attract enough clients and that they
can do so at a price that will earn a sufficient profit. They will also want to set their business hours
to fit demand. This may entail staying open late one or more evenings in the week or closing on
one day each week that is traditionally quiet. Some stylists reduce risk by setting up jointly with a
beautician or other professional on the same premises, thereby sharing many of the running
costs. Some larger chains have salons inside supermarkets or department stores.
A salon is more than merely a workshop: it is an extension of the proprietor's personality. Its style
will set the tone for the sort of service (s)he wishes to offer and the price likely to be charged. Most
people are broadly familiar with the external and internal appearance of a typical salon and its
components: a reception and waiting section, working area, drying and finishing facility, staff room
and store rooms. Modern refitting styles now place greater accent on space efficiency, providing
compact ‘units’ with all equipment in easy reach, releasing additional space for, say, beauty
treatments or retail sales.
Salons need a wide range of equipment and tools, according to the services being offered. Some
are capital in nature, depreciated over their useful lives; others are revenue expenditure, written off
as incurred. They usually source such items from specialist wholesalers or at trade shows, which
provide opportunities to meet suppliers and look at new products and techniques. There are several
key ‘tools of the trade’. The most important aspect of hairdressing is the haircut: a pair of scissors in
trained hands – together with razors and clippers (manual or electric) – can produce outstanding
results. Scissors come in many shapes and sizes, each for a specific task. Brushes and combs too
have adapted to changing styles, as have dryers: modern haircuts require modern techniques to
achieve the desired results. Hi-tech machines are generally thought to produce better results and
can save time.
Other common requirements are chairs (often with swivel facility or height adjusters), styling units,
wash points, reception counters, trolleys, curling and straightening irons and sterilisers. A constant
supply of clean gowns and towels is also essential. (A small in-house laundry is a good option; it can
be installed in a convenient space at the back of the salon.) Salons often also provide entertainment
for clients while they wait to be attended, ranging from newspapers and magazines to coffee
machines and toys.
Funding
A salon proprietor needs to budget carefully for the costs associated with a salon. Different levels
of funding will be needed at different stages in its development. At the outset, funds will be
required to lease or buy premises, to fit out and to procure the relevant tools and applications.
(Even if the site is already used as a salon, the new owner will generally want to imbue it with a
specific décor.) This process will then be repeated for any additional salons.
Subsequent refurbishment will also require a large outlay. In addition, other staff may need to be
recruited and their salaries paid, while there will be several other regular payments to make, such
as utility bills (heating, lighting, water), rent and rates.
In recent years, banks have been reluctant to lend to small businesses, even at high interest rates.
To help manage cashflow, salon owners have had to rely on alternative forms of finance, such as
leasing or government grants. Others have used their own money or that of friends and associates.
In the absence of funding, the less successful businesses or those with less financially astute
owners have been forced to close.
Pricing and payment
Appointments may be booked in advance, or clients may be able to ‘walk in’ without making a
prior appointment. Clients are charged for the service immediately after its completion. The salon
will usually try to book a future appointment for clients before they leave; this practice helps the
salon build a large clientele (repeat business is a key success factor in the industry).
Habia gives £32 as the average salon price for a woman’s cut and blow dry. Men's haircuts are
considerably cheaper, averaging between £8 and £12 at a traditional barber’s shop but between
£15 and £20 at a more modern-style salon. Prices need to be set at a level appropriate for the
quality and complexity of service provided (and hence the length of the appointment), the type of
client being sought and location. Discounts may be offered to corporate clients (ie where a
company has an arrangement for its employees to have haircuts at a local salon), or perhaps
family members, the elderly, students – or to regular clients, of whatever age. Lower prices may
also be charged at times of the day or on days of the week where trade is quiet so as to stimulate
demand and cover fixed costs.
By their nature, salons are cash businesses. This means that they need strong controls and
systems to ensure that all transactions are properly recorded and that cash is kept securely. A safe
can hold small amounts of cash up to specified limits, but cash should be banked regularly to keep
the amount on site to a minimum. Salons now have the facility for clients to pay by debit or credit
card: a ‘Chip and PIN’ machine will be required to process such payments.
Wages
Hairdressing is, of necessity, labour-intensive. Wages can account for up to 40% of revenue
(excluding product sales). Hairdressing is also affected by seasonal trends and, to cope with peaks
in demand, casual staff may have to be employed. At other times there may be not enough work to
keep permanent staff fully employed. ‘Seasonality’ in hairdressing applies not just to the time of
year, but also the day of the month or week and even the time of day: for example, salons will
usually be busier in the days after clients have been paid their weekly or monthly salaries and also
more generally on weekday evenings and on Saturdays.
To combat the labour cost inefficiencies caused by such seasonality, the practice has emerged for
self-employed hairdressers to be contracted. This is known as ‘chair rental’. Chairs are rented out
to the contracted hairdresser, who gets sole rights to the chair and in return pays the proprietor an
agreed proportion of takings to cover rent and overheads and a service charge to cover materials
and labour assistance. Salons renting chairs in this way will need to ensure that the contractors do
not undercut the salon's prices.
Wages are sometimes quite low but can be made up to some extent by gratuities (‘tips’). These
may be given either directly to a stylist or to the salon owner, who will then either pass them on to
the stylist or distribute them among all staff.
Promotion, marketing and advertising
Apart from large establishments, hairdressers tend to spend little on direct advertising and normally
feel that reputation spread by ‘word of mouth’ recommendations is sufficient to build up a good
business. Salons can promote themselves in a number of ways, including the following:
• Advertising in local newspapers and magazines, on local radio or at cinemas.

• Window displays, from a few inexpensive posters to TV screens or other electronic devices.
• Listing in the online and printed versions of general business directories.
• Offering gift vouchers, or special discounts to clients booking more than one service.
• Forming arrangements with external voucher companies such as Groupon.
• Creating a short video tutorial on hairstyling techniques and uploading it onto video-sharing websites
such as YouTube with a link back to their own website.
• Using social networking websites such as Facebook.
• Paying a celebrity to endorse the services and/or product being offered.
• Sponsorship of fashion shows and other industry events.
Health and safety
The Management of Health and Safety at Work Regulations 1999 require all businesses,
including the self-employed, to carry out health and safety risk assessments and to monitor
employee health in accordance with any risks identified. A comprehensive understanding of, and
compliance with, health and safety legislation is essential. Proprietors are responsible for the
testing and safety of electrical equipment (eg hairdryers, straightening irons). They must ensure
the safe handling of hazardous substances (eg hair dye, bleach), and control exposure of
employees, clients or others to these substances, by providing good ventilation and (where
necessary) protective gloves and sterilisers. Care must also be shown in the use of sharp tools.
Insurance and security
A hairdressing salon may have a number of insurance policies, including:
• Public liability insurance, covering it against claims from employees and clients harmed or adversely
affected as a result of its activities (eg injury from styling equipment).
• Cover for business interruption caused by events such as fires and floods.
• Income protection and critical illness cover, useful for a salon proprietor unable to trade as a result of
injury or illness.
• Key person insurance, to compensate for financial losses that would arise from the death or extended
incapacity of one or more specified employees.
Depending on location, it may be necessary to fit an alarm system and features such as grilles or
shutters to protect the premises.
Record-keeping
A typical salon’s records are often a combination of manual and electronic. Depending on the size,
sophistication and client base, they may include:
• an appointment book (showing date and time of appointment and service(s) provided);
• work slips (prepared by each stylist and recording work done and customer charges);
• cash receipts book, petty cash books, wages book and purchases / sales ledgers.
Work slips are used to reconcile takings and are usually kept for only a few weeks. Salon
proprietors often use dedicated software to track bookings, arrange follow-up appointments, issue
reminders, make payments and retain records of each client’s regular service(s). This software will
often be used to create valuable management information from point-of-sale data.
Luvlox Ltd: History and overview EXHIBIT 4
Early origins
Luvlox Ltd (LL) was formed by Amanda Richards, an actress known for her regular image changes, which
had enabled her to play a wide variety of characters on the stage and in her acclaimed television comedy
series I Am Amanda. One day in the spring of 20VII, Amanda was preparing at a well-known London
theatre for a new comedy in which she was the female lead. The play had received very poor reviews and
had so far attracted tiny audiences, leaving her disillusioned and contemplating a change of career.
Before becoming an actress 20 years earlier, Amanda had started a course in hairdressing and she had
always nurtured a longing to return to it later in life. It seemed to her that the opportunity was now ripe.
While in her dressing-room, she began asking her stylist, Marie Duval, about her work – how she had
started, what training she had been given, how she had come to be mixing with the stars of stage and screen
and what she most enjoyed about the job. From Marie’s answers and her enthusiasm and encouragement,
Amanda decided that a glamorous future in hairdressing awaited her – one with more certainty and less
stress than her current position.
However, she knew that – even with her celebrity background – the transformation could not happen
overnight. Fortunately for her plans, the comedy was withdrawn after only three of its scheduled twelve
weeks, and she was not due to start recording the next series of I Am Amanda for several months. She took
advantage of the lull in her professional life to seek some private ‘refresher’ lessons from Marie at her
salon in York in the north of England – styles and techniques had changed considerably since Amanda’s
earlier course – using local university students as models. (It was Marie’s policy not to let such relative
newcomers cut the hair of the rich and famous among her clientele – or ‘RAFF’, as they were
affectionately known by her.) Marie quickly realised that Amanda had an aptitude for styling and a good
eye for detail, coupled with plenty of creative flair, and invited her to join her existing seven staff.
Amanda very soon felt part of the team and – with continuing on-the-job tuition and observation – she
developed the skills, and gave Marie the confidence, to entrust her with some of the RAFF. They in turn
responded by praising her work and specifically asking for ‘Mandy’ when booking their next appointment.
Although she knew some of these clients from her previous career, many of them were new to her, and a
number of strong friendships were formed as a result of their salon visits.
Marie had accepted from the outset that Amanda’s presence in her salon might be only a temporary one.
Amanda had made it clear when she started that it was meant as a springboard to setting up on her own,
once she had learnt the techniques, as well as the responsibilities associated with running one’s own
business. It was therefore no surprise when Amanda announced in early 20VIII that she was planning to
open her own salon. Their relationship remained cordial, to the extent that Marie agreed to act as Amanda’s
mentor during the early days and to help with shortlisting and interviewing staff.
The first salon: Newcastle-upon-Tyne
Amanda’s first venture was to be a large, state-of-the-art salon in Newcastle-upon-Tyne in the northeast of
England, around 140 kilometres from Marie’s salon in York. Amanda had a strong affection for, and deep
knowledge of, the area as she was born and raised there, so it was natural for her to choose Newcastle for
her first salon. However, she knew that she had to do more than simply place a pin on a map to find
exactly the right premises. She commissioned a survey from a local market research company to advise
her on the locations of existing salons in Newcastle; which ones were successful; whether they appealed to
any specific demographic group (gender, age, culture, affluence); how far their clients were prepared to
travel, and by what mode of transport; what services were especially popular; what prices they charged;
which styling products sold well; and whether they were based in streets with busy shopping areas or
office buildings. The survey also identified districts where there was an unfulfilled demand for salons,
especially those geared towards wealthier sectors of the population.
The site that Amanda chose was a former bank branch that had been closed down during the financial
crisis and which fortunately happened to be of just the right size and available at the right time. Amanda
was able to obtain planning permission to convert it to a salon, but the process of fitting it out and
obtaining equipment was a long and expensive one, as she was very specific in the décor and ambience
that she wanted to create. She needed a building that could eventually accommodate 15 ‘chairs’, although
at first there would be only 10, with space to expand as and when appropriate. It was less difficult to
choose a name: one of Marie’s regular clients always greeted Amanda with the request
“Time to do my locks, love!” This became something of a catchphrase, leading naturally to ‘Luvlox’.
Luvlox Ltd was incorporated on 1 March 20VIII, making up its first accounts for 16 months to 30 June
20IX (and thereafter for years to 30 June). Along with a number of friends and contacts who were willing
to support her in her venture, Amanda raised £180,000 in initial share capital. In order to fund LL’s capital
expenditure and working capital requirements, a number of these individuals also made short-term loans to
the company, and LL additionally took out a bank overdraft. There has been no increase in the size or
ownership of the original share capital since incorporation. The loans were repaid in June 20IX.
Amanda was aware that it would not be appropriate to ‘poach’ any of Marie’s employees, and she
therefore advertised in trade journals for stylists to join her new venture. As a familiar figure across the
country, she had no difficulty in attracting replies: over 300 people came forward to fill the 12 advertised
vacancies. Many of these could be dismissed on grounds of unsuitability or inexperience before being
interviewed. Amanda was soon able to report that she had a team of 12 stylists (two male, the rest female)
to work alongside her. She also took on an experienced bookkeeper (Liz Newby) as
Accountant/Administrator and sourced external business advice from Sarah Chandler, a partner in the
local Chartered Accountants and Business Advisory firm, Baron Young. Sarah had been at school with
Amanda, and they had remained in close contact over the years, so Sarah was a natural choice when
Amanda was looking for an advisor to help her to set up her own business.
The salon was opened on 1 July 20VIII with an evening drinks reception and an impressive guest-list that
included a range of local sports and media celebrities – as well as a large contingent from the local and
national media. There were speeches by the mayor and by Amanda herself, followed by a styling
demonstration by two of Amanda’s team, with a footballer and an actress as their inaugural clients. Amanda
was delighted by the publicity that this generated, and Luvlox went on to enjoy considerable popularity and
financial rewards in its early months, quickly recouping much of the initial cash outlay.
As its first anniversary approached, the salon employed 15 stylists and it had 12 chairs. Revenue for the first
accounting period was set to reach almost £1 million, exceeding even the most optimistic initial forecasts. At
this stage, the salon provided mainly cutting and styling services, with no formal arrangements to sell hair
products and no plans to offer beauty treatments.
The next stage: Gateshead and Wallsend salons
Amanda realised that she needed to capitalise on this early success and her fame. On Marie’s advice, she
began to look for locations in two other north-east towns, Gateshead and Wallsend. She undertook
another market research exercise – comprising a questionnaire to existing clients and to local residents
who were not (yet) clients plus an external survey – which reassured her that, despite the ongoing UK
recession, there was a large market for the services that she was looking to provide at both salons. As with
Newcastle, the two new salons were to be ‘unisex’ (ie serving both male and female clients), and again
aimed at clients with higher disposable income.
Following this research, together with some careful financial modelling by Liz Newby – and input from
Sarah Chandler – Amanda chose two sets of premises, again on the sites of banks that had closed, and –
again with Marie’s help – she recruited further stylists. The new salons were opened on 1 July 20IX, both
with greater capacity and more chairs than the Newcastle one. Both are a few kilometres from Newcastle
and both cover wider areas: between them, the three salons serve a region with a population in excess of
one million, and one with excellent public transport links.
Continuing development
Newcastle continued to prosper, Gateshead just met its ambitious revenue and profit targets for the first
six months, but Wallsend did less well. This was due partly to the sudden closure of a well-established
department store on the same street, which inevitably reduced pedestrian ‘footfall’ and caused the loss of
the corporate contract with that store; and partly to the opening of a new salon by a leading chain nearby,
which had not been identified during LL’s market research.
Amanda viewed these developments as giving her the impetus she needed to expand her range of services
across the three salons. She recruited two new tinting experts in Gateshead to provide specialist colouring
services; in Wallsend she began to offer a wedding package to brides, their families and bridesmaids; and
one of the Newcastle stylists was contracted to a nearby old people’s home every Monday and Wednesday
– days of the week that were traditionally quiet within the salon. If successful, these initiatives would be
‘rolled out’ across the company. Amanda resisted the temptation to offer beauty treatments, believing that
this would compromise LL’s strong reputation for hairdressing.
Meanwhile, for all three salons she felt the time was now right to start selling hair products in a more
organised way and to seek formal supply contracts with some famous brands. With this in mind she
employed Ricardo Rossi, who had recently resigned from a large Italian salon chain and moved to the UK,
as Purchasing Director. She also took over the empty unit next to the Newcastle salon and converted it
into an office.
Personnel
Forming the senior management team with Amanda and Ricardo are: Erica Langley, Creative Director;
Laszlo Korn, Director of Sales and Client Relations; and Oriol Zucchi, Director of Training. Lazslo’s
responsibilities include winning corporate contracts with local companies (minimum 100 employees), and
Oriol ensures that staff receive ongoing training at a nearby academy. Each salon has a manager
(Newcastle: Irina Yu; Gateshead: Renata Taylor; Wallsend: Alexandra Lewis), who leads the team of
stylists but is also expected to spend 10% of her time dealing with the day-to-day running of the salon.
LL is a member of the National Hairdressers Federation and Habia (see Exhibit 2). The business has
established an excellent reputation, making it easy to attract new clients, many through referrals, and more
importantly to attract ambitious and highly-motivated staff. LL now has over 80 stylists in its three salons.
Average numbers for the year to 30 June 20X1 were as follows:
Chairs
Staff: Newcastle Gateshead Wallsend
Salon manager 15 27 25
Senior stylists 1 1 1
7 10 10
12 22 23
ICAEW/CS/J12 20 Page 1533
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Stylists
There are two grades, senior stylist and stylist, though there are some in both categories that do mainly colouring
work. All senior stylists and stylists are required to be SRHs, and they possess between them many years of
experience and a wealth of knowledge. They have benefited – like many successful hairdressers – from external
training given by leading figures in the profession. They typically work a 40hour week, sometimes in shift patterns
to meet fluctuations in demand. However, even at peak times, not all staff will be working simultaneously, and so
the number of chairs will be lower than the total number of employees. Amanda monitors activity closely, by
reference to ‘occupancy’ – the extent to which chairs are used for appointments. This can vary considerably, but on
average for each salon it is at least 50%.
There are also some part-time assistants responsible for carrying out ancillary duties such as hair washing and salon
cleaning, as well as answering phones and taking bookings. These are typically local students or school leavers who
want to earn spending money or perhaps to explore a longer-term future in hairdressing.
All staff are employees of LL rather than self-employed, as Amanda believes this is essential if they are to ‘buy in’
to the unique LL culture. There is a low staff turnover, which has helped to provide continuity and raise levels of
client service. An incentive scheme was introduced on 1 July 20X1 (see Exhibit 10), and there are plans to
implement a pension scheme in late 20X2. There is an ‘open’ staff culture, whereby everyone knows what everyone
else earns. Regular appraisals are another feature that helps to maintain high standards, with staff measured
according to criteria both qualitative (eg client and colleague feedback) and quantitative (eg number of
appointments, number of products sold). There is also a staff suggestion scheme (‘Heads Up’), to which all
employees are encouraged to contribute ideas. Cash prizes are awarded each month for those voted best by Amanda.
LL has collected numerous accolades in its brief existence. All three salons carry 5-star status in the Good
Salon Guide (see Exhibit 3), and they have featured in a number of lifestyle magazines as examples of
superb interiors. Erica was travelling stylist with the British Winter Olympics Squad at Vancouver 20x0
and has twice been a finalist in the prestigious British Hairdresser of the Year contest, while Amanda was
highly commended in the 20x0 North-East Entrepreneur of the Decade competition.
During this time, Amanda has cut back her day-to-day styling work so as to oversee the running of the
business and also to exploit her profile in the media. She frequently appears on regional television, usually
in chat-shows. She has a popular blog that attracts thousands of hits each week and is a frequent user of
Twitter; among familiar controversial topics, she often writes about the dangers of sunbeds and about the
amount spent by haircare companies advertising in the media. She is known to be a fitness fanatic and a
generous donor to medical charities, combining these roles by raising over £25,000 for good causes from
taking part each year in the Great North Run. She can often be seen in the Gateshead salon outside regular
working hours, making wigs to give to local hospitals for patients suffering from medical hair-loss, and
training her stylists in this skill. Some of her high-profile clients allow their hair to be sold at charity
auctions. Amanda also occasionally lapses back into her past career by agreeing to appear in regional
comedy fundraising events.
The future
LL is looking to refurbish and re-brand its salons. The re-branding is required to ensure that they are kept
looking fresh and that décor is maintained at a consistent and high standard. To achieve this, the salons will
shut for one month each in succession during the three months to 31 March 20X3. The total capital cost of
the refurbishment and re-branding programme is estimated at £500,000.
LL also hopes to open two new salons in 20X4; research will start in late 20X3. There are no specific ideas
at present: they may be in high streets, shopping malls or office complexes, in the north-east or further
afield. The optimal model for a new salon would be for one in a different style from the existing salons,
ideally appealing to younger clients (aged 18-35) and with a steadier stream of business during the day and
across the week. It would probably be around the same size as the Newcastle salon.
LL also intends to rationalise its product supplier portfolio to ensure it is receiving the best possible terms
and earning optimal margins. It is considering a number of other ideas too, such as setting up and running
its own training school; sponsoring a national hairdressing awards ceremony; and launching its own line of
branded scissors, brushes and combs, which would be endorsed by a well-known female athlete.
Testimonials
“I have been going to Wallsend salon once a month since it opened. The quality of service is excellent. There is
always a buzz when Amanda comes in to greet her clients and does a bit of styling.”
“I love my regular visits to Newcastle salon and always come away feeling like a new woman. One small
complaint – they should provide a coffee-machine as there is often a wait before appointments!”
Luvlox Ltd: The business EXHIBIT 5
Mirroring the country as a whole, hairdressing in the north-east of England is highly fragmented: no
company has more than a 4% market share, though the competitive landscape varies across the three
locations in which LL is represented. The three salons are operated as branches of LL and are open six
days a week, Monday to Saturday, from 09:00 to 18:00 (except Thursday, when they generally close at
20:00). They are shut on public holidays such as Christmas, New Year and Easter. Some local variation is
allowed to match competition or to respond to demand. LL has an established pattern of seasonality: the
profile of revenue across each salon for the four quarters of the year to 30 June 20X1 was as follows:
Q1 (to 30 Sept) Q2 (to 31 Dec) Q3 (to 31 March) Q4 (to 30 June)

20% 35% 25% 20%
The higher level of activity in Q2 – 35% of annual revenue – relates to increased demand for both products
and services in the run-up to Christmas.
The profile of clients and frequency of their visits vary between the salons. In general, they are from the more
affluent sections of the population. At 30 June 20X1, LL estimated the number of recurring clients (including
individual employees of corporate clients) as follows: 4,400 at Newcastle, 5,900 at Gateshead (both up about
10% in the year) and 6,300 at Wallsend (down 5%). Adult females (including over-65s) represent the majority
of both appointment numbers and revenue at all three salons.
The nature of the business is such that products and services provided to clients are generally paid by cash,
debit card or credit card at the end of the visit or appointment and hence the trade receivables balance in the
accounts is relatively low. Some regular clients have ‘accounts’ which they are allowed to settle on a
monthly or quarterly basis. Similarly, a few corporate clients have arrangements whereby they pay on behalf
of their employees and are invoiced monthly in arrears.
Prices for hairdressing are set according to complexity of the service, duration of appointment and seniority
of the staff member. There is a standard tariff across all three salons for the main services supplied (see
Exhibit 8), but for a specialist service or combination of services (such as the most common combination,
cut and blow dry plus colouring) a price will be agreed at the outset with the salon manager. Prices have
been maintained at the same levels since 20IX. There is also a set price list for products sold, normally
based on prices set by the relevant manufacturer or brand owner. Most products are priced in the £10-15
range (before discounts) but some are more expensive and some are cheaper. Discounts can be awarded at
the discretion of the salon manager if the client buys more than a certain amount, if (s)he is a frequent
visitor and/or if (s)he typically spends a lot on LL services.
Product costs in the accounts comprise both products bought for use by stylists (around 20% of the total)
and those sold to clients (the other 80%). They comprise mainly treatments such as shampoos, gels and
conditioners but also accessories, such as combs, scissors and straighteners; the mix of items varies between
the salons. Staff are motivated via a commission scheme to sell to clients. Products are bought centrally
according to monthly requests submitted to Amanda by each salon manager. LL uses five main suppliers,
with whom it has developed strong business relationships. The terms of trade vary between suppliers, with
some offering early settlement discounts, retrospective rebates or volume discounts. LL is considering a
change to its current purchasing policy: this would mean paying a little more for products on a ‘just-in-time’
basis, rather than buying large amounts in advance. Some have a short shelf-life and can spoil if they are
stored incorrectly or for too long; others can quickly go out of fashion. In addition, storage space is
increasingly limited.
Advertising and marketing
LL’s marketing strategy is based on word-of-mouth referrals, supplemented by advertising through local radio
and newspapers. The ‘recommend a friend’ promotion is particularly successful. In addition, LL has its own
Facebook page and arrangements with a major voucher company. Amanda’s own blog, feeds on Twitter and
media appearances are also important for maintaining the company’s profile. LL has the facility to generate
automated emails and texts to clients about offers on their birthdays, anniversaries and other special occasions
(it has a database of around 5,000 email addresses and 10,000 mobile phone numbers), as well as vouchers to
be sent to them in the post. Questionnaires are used to seek feedback and to monitor client satisfaction levels.
There is a website showcasing the services on offer, and LL is considering investing a larger sum for online
marketing, to attract an even wider audience.
IT and financial reporting systems
Although hairdressing is primarily a manual activity, IT pervades the full range of LL’s work. As well as
being used as a marketing tool and for the accounting records (including payroll and supplier ledger), the
central computer system has a bookings module where clients can make appointments online; they can also
select their favourite stylist, but this will often limit the number of available slots. No more than two
reservations can be made at any one time. All three salons have electronic displays in their windows,
highlighting current company news and showing high-definition pictures of celebrity clients ‘after’ a styling
appointment at LL. There is at present no facility to buy products online direct from LL.
Key risks and threats to the business
In mid-20x0, Amanda believed LL to be at the right size to carry out formal risk management. She took the
directors and salon managers on a residential weekend away – a series of off-site workshops led by Marie
Duval and Sarah Chandler (Baron Young continue to act as Business Advisors) as facilitators. The key risks
and uncertainties faced by LL, and factors that could affect its results, were identified as:
• competition and price sensitivity;

• changes in economic conditions, consumer tastes and fashion trends;
• client dissatisfaction, adverse publicity and legal claims (eg in event of personal injury);
• employee disaffection;
• obtaining suitable sites and financing for the development of new salons;
• maintaining good relationships with suppliers.
Health and safety, security and environmental issues
LL asks all employees to sign a code of conduct on joining, which among other things requires them to undertake
twice-yearly computer-based training in health and safety, security and environmental issues:
• Any health and safety ‘event’ (eg spillage of hazardous dye) must be logged in an incident book and cleared
up immediately, with the salon being closed if necessary until danger has been averted.
• Suspected security breaches are taken equally seriously, with a similar requirement for internal notification.
• LL is committed to playing its part in sustaining the local environment, both in the design, layout and
operation of the salons and in its choice of ‘green’ products, such as organic bleaches and low-energy light
bulbs. In addition, Amanda’s charitable work enhances LL’s image across the region.
Properties
Every salon enjoys a prime high street location in an area populated by big-spending clients. The properties
are well maintained with a modern façade, all designed to a similar style of top-quality interior, and all are
held under leasehold. The empty unit next to the Newcastle salon and office will shortly become available,
which could allow LL to expand and avoid the site being secured by a competitor.
Capital expenditure (capex) is significant and has to be budgeted carefully. LL produces a ‘rolling’ capex
plan, updated annually. Whether for the initial opening of a salon or later refurbishment, this includes the
fit-out, plus furniture, equipment, display units and IT. It also covers regular repairs and maintenance. LL
currently intends to introduce improved display screens and security systems in 20X3, as well as an
integrated management information system.
EXHIBIT 6
EMAIL
From: Liz Newby (Accountant)
To: All Luvlox Ltd directors
Date: 19 July 20X1
Subject: Management accounts for the year ended 30 June 20X1
I attach the management accounts for the year ended 30 June 20X1 (‘20X1’), in the usual format.
As had happened with Newcastle in 20IX, Gateshead and Wallsend took time to build up a stable core
business during 20x0. It was also only in that year that we began selling products in a more organised way,
and therefore 20X1 is the first year in which all three salons have been running at full capacity.
Overview of results
Overall, the results are very pleasing. We are continuing to obtain client feedback and we have again
achieved high levels of satisfaction. Almost 95% (20x0: 89%) say that they are ‘delighted’ with the service
they receive from LL, 93% (20x0: 87%) would recommend LL and 82% (20x0: 74%) rate LL ‘excellent’ or
‘very good’ value for money. However, figures vary between salons, with Gateshead consistently achieving
the highest scores and Newcastle the lowest.
I draw attention to the following highlights and issues in each salon and some of the ideas that we have recently
been putting in place.
Newcastle
Newcastle achieved good growth in services revenue, with a healthy number of new clients being attracted
by the upgraded signage in the front window. However, there has been a fall in product sales.
Questionnaires from clients suggest that this was mainly due to cutbacks in their spending on ‘luxuries’,
though we are also aware that products have not been attractively displayed and that some of the younger
stylists have not been actively promoting them. This has led to a build-up of inventory, much of which is
being stored in the office as there is not enough space in the salon. The younger staff also require further
training in client care and especially to improve their cross-selling skills: based on the average services
revenue per appointment, it appears that fewer clients at Newcastle than at Gateshead are encouraged,
when making an appointment for a wash and blow dry, to request colouring as well.
Trade has continued to be slow on Mondays and as a result we have taken the decision that from October
the salon will be closed on Monday mornings until further notice.
Costs were impacted by an increase in wages, following the recruitment of three new well-known stylists
from a rival. We will continue to look for the very best people to showcase the LL brand – and will if
necessary pay at higher levels to retain them.
Gateshead
Gateshead has benefited significantly from its specialisation in colouring. Feedback indicates that clients
have been transferring from competitors, where they were not satisfied with the quality of service that they
were receiving, and they have also been enticed by the lower prices charged by LL for colouring. The
introduction of well-known brands to the range of products sold (with generous incentives available from
the suppliers) has also helped to increase revenue, but there has been an impact on costs too as staff have
been using higher volumes of colouring than is specified by company policy. On 1 July 20X1, at the
initiative of the branch manager, Gateshead launched a ‘shade of the season’ promotion, with a different
colour every three months, and this is already proving very popular.
From August, following a winning idea in June’s ‘Heads Up’ competition, two chairs will be removed and
replaced by a toy area. Gateshead has a growing number of children among its clients and this is seen as a
way of increasing still further the number of children – and attracting their parents.
Other administrative expenses include a one-off amount of £25,000 to settle a legal action brought by a
celebrity client, who suffered emotional trauma and narrowly escaped a serious injury when a faulty hairdryer
‘exploded’ at a routine appointment in May 20X1. We have also now resolved a long-standing dispute with the
landlord, which will result in a higher rent charge in next year’s accounts.
Wallsend
Wallsend has had a good year, recovering particularly well from the adverse circumstances it faced in the
previous year – especially the opening of a rival new salon nearby. In fact, the success of LL and the rival
salon between them has led several established local salons to close. We were also faced with the sudden
resignation of the salon manager during the year, but her replacement, Alexandra Lewis (an existing senior
stylist at the salon who had always shown strong management potential), has worked successfully to
minimise the disruption to the business.
Clients come to us from across the region because of the size and reputation of the Wallsend salon. The
wedding package has been especially popular: Saturday mornings are now often busy with parties of brides,
bridesmaids and family members, with very early openings if required. There is, however, scope for greater
efficiency, with the 20X1 ratio of gross profit to salon staff numbers lower than in the other salons. We are
looking into the possible reasons for this: eg poor equipment, under-trained staff (in both cases possibly
resulting in longer average appointment duration); higher proportion of male clients; bigger discounts.
Product sales have been impressive, with wedding groups responsible for some of the growth here too, but
the average price per product may suggest that staff have been giving excessive discounts.
The wedding package initiative means that Wallsend is very busy on Saturdays but can be quiet at other times.
We are now offering a reduced-price wedding service during the week for the growing number of couples
choosing to get married midweek.
Finally …
It is hoped that the incentive scheme introduced for 20X2 will spur all of our people to achieve even better
results. One pleasing feature of 20X1 (as well as 20x0) was the level of cash generated, recouping much of
the large outlay incurred previously to equip each salon. If this continues, there should be funds available
for the planned 20X3 refurbishment programme and for potential new salon openings.
EXHIBIT 7
Luvlox Ltd: Management accounts for the year ended 30 June 20X1
INCOME STATEMENT
20X1 20x0
Notes £000 £000
Revenue 1 5,481 4,427
Cost of Sales 2 (2,403) (1,915)
Gross profit 3,078 2,512
Administrative expenses 3 (2,527) (2,105)
Operating profit 551 407
Net interest (22) (47)
Profit before taxation 529 360
Corporation tax OF FINANCIAL POSITION
STATEMENT (148) (101)
Profit for the year 381 259
CASH FLOW STATEMENT 20X1 20X0
ASSETS Notes £000 20X1 20X0
£000
Non-current assets £000 £000
CASH FLOWS FROM OPERATING ACTIVITIES
Property, plant and equipment 4 1,045 1,149
Operatingassets
Current profit 551 407
Depreciation
Inventories 5 82 197 142
67
Loss on sales of property, plant and equipment
Receivables 6 267 3 2301
Change in inventories
Cash 201 (15) (51
73
Change in receivables 550 (37) (126)
370
Change
Total in other current liabilities
assets 1,595 26 299
1,519
Cash generated from operations 725 672
EQUITY & tax
Corporation LIABILITIES
paid (101) (2)
Equity
Net interest (22) (47)
Ordinary share capital: 180,000 shares of £1 each 180 180
Retained earnings 645 264
Net cash from operating activities 602 623
Total equity 825 444
Current liabilities 7 770 1,075
CASH FLOWS FROM INVESTING ACTIVITIES
Total equity & liabilities 1,595 1,519
Payments to acquire property, plant and equipment (97) (192)
Receipts from sales of property, plant and equipment 1 21
Net cash used in investing activities (96) (171)
CASH FLOWS FROM FINANCING ACTIVITIES

Net change in cash and cash equivalents 506 452
Cash and cash equivalents at beginning of year (445) (897)
Cash and cash equivalents at end of year 61 (445)
NOTES TO THE MANAGEMENT ACCOUNTS
The salon names are abbreviated as follows: N = Newcastle, G = Gateshead, W = Wallsend.
1a Revenue
All revenue is derived from hair cutting and styling services and the sale of products, as follows:
20X1 20X0
Services
Products
1b Key performance data

20X1 20X0
Number of appointments (000)

Number of products sold (000)
20X1 20X0
2 Cost of sales
N G W Total N G W Total
£000 £000 £000 £000 £000 £000 £000 £000
Staff salaries 450 663 683 1,796 336 554 539 1,429
Product costs 83 203 151 437 139 98 113 350
Miscellaneous 47 64 59 170 36 49 51 136
580 930 893 2,403 511 701 703 1,915
Staff salaries relate to salon managers, senior stylists and stylists. Miscellaneous comprises tools, small items
of equipment, linens & laundry and assistants’ wages.
3 Administrative expenses
20X1 20X0
Rent, rates, utilities & postage

Directors' remuneration
Head office salaries – other
Insurance & security
Depreciation
Professional fees
Marketing & advertising
Other
Other comprises equipment rentals, IT purchases, reimbursements of staff expenses, settlements of legal
claims and other general costs.
4 Property, plant and equipment (PP&E)
£000
Cost
At 1 July 20x0 1,385
Additions 97
Disposals (22)
At 30 June 20X1 1,460
Depreciation
At 1 July 20x0 236
Charge in year 197
Disposals (18)
At 30 June 20X1
415
Carrying amount
At 30 June 20X1 1,045
At 30 June 20x0 1,149
PP&E comprises leasehold improvements, fixtures, fittings and equipment. Depreciation is provided to
write off the cost of these items on a straight-line basis over periods of between 5 and 15 years.
5 Inventories
Inventories comprise hair products purchased for use in the salon or for sale to clients. They are stated
at the lower of cost and net realisable value.
6 Receivables 20X1 20X0

£000 £000
Trade receivables (net of impairment) 77 69

Other receivables and prepayments 190 161
267 230
7 Current liabilities 20X1 20X0

£000 £000
Bank overdraft 140 518

Corporation tax 148 101
Other current liabilities 482 456
770 1,075
8 Employee numbers
The average number of salon, excluding assistants, during the year was as follows:
20X1 20X0
N G W Total N G W Total
Managers, senior stylists and stylists 20 33 34 87 17 28 29 74
In addition, there were 9 (20x0: 8) Head Office staff, including 5 (20x0: 5) directors.
EXHIBIT 8
Luvlox Ltd: Price list
Stylist Senior stylist

Cut and blow dry
Ladies £40 £45
Gentlemen £15 £18

(30% discount for over-65s and for students aged 16-19 in full-
time education)
Children aged 5-15 £10 £10
Babies / toddlers (aged under 5 years) £5 £5
Wash and finish
Ladies £20 £22
Gentlemen £8 £10
(30% discount for over-65s and for students aged
16-19 in full-time education)
Colour and other treatments Per individual requirements

Straightening, hair extensions, other services Per individual requirements
Wedding package (Wallsend only) By arrangement with the salon

manager ( special rates available for
groups of more than ten)
EXHIBIT 9
Luvlox Ltd: Extracts from insurance policies
(i) Public liability insurance (renewed annually on 1 March)
DEFINITIONS
For the purposes of this insurance, the following definitions apply:
• Injury: Physical injury, death, disease or illness but not mental injury, emotional trauma or nervous shock.
• Insured: Luvlox Ltd.
• Employee: Any person under a contract of employment or apprenticeship with the Insured, or any self-
employed person or any trainee or any person undergoing work experience for the Insured in connection with
the Business.
• Business: The trade or activity carried on by the Insured, comprising the rendering of services to clients and
the sale of related Products.
• Products: Any items sold, supplied, used or tested by the Insured in the course of Business.
COVER
Event 1 – Employer’s liability
The insurance company will indemnify the Insured against legal liability to pay compensation and claimant’s costs
and expenses in respect of Injury sustained by any Employee and arising in connection with the Business during
the course of his or her employment.
Event 2 – Public liability
The insurance company will indemnify the Insured against legal liability to pay compensation and claimant’s costs
and expenses in respect of Injury sustained by any person other than an Employee and arising in connection with
the Business.
Limits of indemnity
• Under Event 1: The insurance company’s liability for all compensation costs and expenses payable in respect of
any one claim or series of claims in the period arising out of one occurrence shall not exceed £1,000,000.
• Under Event 2: The insurance company’s liability for all compensation and claimant’s costs and expenses
payable in respect of the following shall not exceed £1,000,000: (i) any one claim or series of claims arising out
of one occurrence; (ii) all claims arising out of Injury, loss or damage occurring during any one Period of
Insurance and caused by or arising from Products.
Professional treatment risk
The insurance company will indemnify the Insured for liability arising out of treatment given by the
Insured or anything used or supplied in connection therewith, provided that the Insured and their Employees hold
qualifications recognised by the hairdressing and beauty industry appropriate for all the treatments that they
undertake. This clause shall not apply to liability in respect of Injury, loss or damage caused by or arising out of
operation of sunbeds which emit UV radiation.
(ii) Business interruption (renewed annually on 1 March)
DEFINITIONS
For the purposes of this insurance, the following definitions apply:
(i) General terms
• Business: The trade or activity carried on by the Insured at the Premises, comprising the rendering of services
to clients and the sale of related Products.
• Incident: The fire, flood or other force majeure event giving rise to an interruption of the Business.
• Indemnity Period: The period beginning when the Incident occurs and ending when the results of the Business
cease to be affected by the Incident. This period shall not exceed 12 months.
• Insured: Luvlox Ltd.
• Premises: The salon or salons specified as places of Business by the Insured.
• Products: Any items sold, supplied, used or tested by the Insured in the course of Business.
(ii) Financial terms
• Revenue: The amount earned by the Insured for services rendered and Products sold to clients in the course of
Business at the Premises.
• Cost of Sales: The total of staff salaries, product costs and miscellaneous.
• Gross Profit: The amount by which Revenue (less any discounts) shall exceed Cost of Sales.
• Gross Profit Percentage: The Gross Profit Percentage earned on the Annual Revenue. (Note: The Gross Profit
Percentage shall be calculated on an overall basis by reference to total Annual Revenue.)
• Annual Revenue: Revenue at the Premises affected by the Incident during the 12 months immediately before
the date of the Incident.
Note: Revenue, Cost of Sales and Gross Profit shall be calculated on the same basis as they are calculated for the
purposes of the Insured’s accounts.
PAYMENT FOR LOSS OF GROSS PROFIT
If the Business is interrupted as a direct result of the Incident, the insurance company will indemnify the Insured
for the loss of Gross Profit resulting from such interruption. This Insurance is limited to loss of Gross Profit due to
the following two items:
(a) Shortfall in Revenue: The amount produced by applying the Gross Profit Percentage to the value by which, as
a result of the Incident, Revenue during the Indemnity Period shall fall short of the Revenue for the equivalent
prior-year period, taking account of seasonality factors.
Note: Where the Premises affected by the Incident cannot be used for the Business during part or all of the
Indemnity Period, Revenue during the Indemnity Period shall be calculated as that deemed to have been earned
by the Insured from clients of the Premises affected by the Incident.
(b) Increase in Cost of Sales: The additional Cost of Sales necessarily and reasonably incurred for the sole purpose
of limiting the shortfall in Revenue at (a) above.
The Insured shall endeavour as far as possible to mitigate the loss of Gross Profit, provided that such endeavour is
not used to promote the Business excessively.
EXHIBIT 10
Luvlox Ltd: New incentive scheme (July 20X1)
LL is delighted to announce its inaugural incentive scheme for salon staff (salon managers, senior stylists and
stylists but not assistants). The scheme will take effect from 1 July 20X1 and will initially apply in respect of
the year to 30 June 20X2. It will be reviewed after that date.
Terms
An annual bonus will be paid in respect of any salon which achieves an increase of 10% or more over the previous
year in the following ratio:
Salon gross profit (measured in £000) divided by salon staff numbers
The bonus to be paid will be as follows:
i. An additional 10% of salary earned in the year to each salon staff member.
ii. A fixed bonus of £10,000 for the salon manager on top of her salary-based bonus.
These terms apply to all salon staff members on the payroll at 30 June 20X2, provided that they have been at
Luvlox continuously since 1 January 20X2.
For the purposes of this calculation, for the year to 30 June 20X1:
• The salon gross profits were: Newcastle: £782,000; Gateshead: £1,157,000: Wallsend: £1,139,000.
• The salon staff numbers were: Newcastle: 20; Gateshead: 33; Wallsend: 34.
• In the management accounts:
o No accruals for the bonus will be made in the year to 30 June 20X2. o The
costs of the bonus will instead be reflected in the year to 30 June 20X3.
o The costs will then be excluded for the purposes of determining the level of
any incentives for the year to 30 June 20X3.
• No adjustments will be made in respect of any items that might be considered to be one-off, unusual or
exceptional in nature for either the year to 30 June 20X1 or the year to 30 June 20X2.
EXHIBIT 11a
Hair still a vital issue for women, says survey (Beauty Today, March 20X2)
According to a recent survey commissioned by a leading hair product manufacturer, the typical UK
woman now spends over £25,000 (equivalent to the average annual UK salary) on her hair in a
lifetime. She also spends 12 months of that lifetime having it cut, styled or coloured – of those
questioned, 30% admitted devoting over half-an-hour to their hair before a night out.
Many women have a number of items of styling equipment at home, enabling them to supplement
their visits to the hairdresser with (cheaper, but usually rather less professional) sessions on their
own, and they will often take this equipment with them on holiday so that any problems can be
dealt with as quickly as possible.
The survey concluded that hair remains what it has been for centuries – a vital issue for women –
confirming that the demand for hair products should remain high for a good many more years.
Men catching up
The male grooming market is also thriving, according to other recent research. Like his female
counterpart, the average male in the UK is spending more time and money on his hair. Four out of
five men now visit a salon or barber regularly – a habit viewed as a luxury a few generations ago,
when the majority of men had their hair cut at home.
In particular, tinting and dyeing – once considered the ultimate symbols of vanity – have become
more mainstream. In the past few years, there has been a large rise in the number of men visiting
salons to have their hair dyed. Though some male celebrities have been mocked for their hair dye,
an increasing number have openly admitted to such enhancements.
The growth in the male market has meant that hairdressing salons are one of the few types of high
street businesses to flourish. There are now more salons in the UK than independent bakers,
butchers, greengrocers and fishmongers put together.
The industry’s prosperity coincides with a sharp fall in the number of traditional retail outlets on the
high street, reflecting the UK economy’s profound shift away from goods towards services. In 1971,
two-thirds of household expenditure was incurred on goods; now it is barely half.
EXHIBIT 11b
Are sunbeds safe? (adapted from NHS website)
Sunbeds give out ultraviolet (UV) rays that can cause skin cancer, often in higher doses than the midday
Mediterranean sun. The risks are greater for young people. Evidence shows that those with excessive
exposure to UV rays before the age of 20 or who suffer sunburn in childhood have a higher risk of skin
cancer later in life.
The Sunbeds (Regulation) Act, which came into force in April 20X1, prevents under18s from being allowed to
use tanning salons and sunbeds at premises such as beauty salons, from being offered the use of a sunbed or
from being allowed in areas reserved for sunbed users.
EXHIBIT 11c
Undercutting the salons?

Sullivan Supermarkets enters new territory
Hair News, 4 February 20X2
Sullivan Supermarkets – known for its catchphrase ‘Low prices, high value’ and for undercutting competitors – is
now literally under-cutting them. In a move seen by cynics as a cheap way to raise its profile, Sullivan has begun to
offer hair styling services. Although it has already branched out successfully from its core offering (groceries) to
provide banking and insurance to consumers, many believe that this latest move into a new service could be
illadvised. And, they point out, you cannot have your hair cut online.
Sullivan has set up ‘test’ salons at several stores in the north-east and north-west of England, offering styling and
colouring as well as manicure, waxing and other beauty treatments. No appointments are necessary – clients can
just walk in after, or during, their weekly shopping expedition and rest from their weary exertions. Prices are
around half of those typically paid at high street salons. But with loyalty being a key feature of the hairdressing
industry, experts doubt whether Sullivan can achieve enough clients to make the venture worthwhile. They believe
that the space would be more profitably used if it was occupied by shelves selling the company’s most popular
products, such as baked beans and washing powders.
Hair products will also be available at discounted prices, thanks to an exclusivity agreement signed with Indigo
Products. Indigo, an established Canadian supplier of hair products, has doubled its worldwide revenue over the
past two years, largely through overseas expansion and an aggressive campaign of exclusivity agreements with
major supermarkets such as Sullivan and small-to-medium-sized salon chains in the UK and Europe. Under these
agreements, salons are prevented from using or selling the products of any other supplier.
EXHIBIT 11d
Can you cut it? Jobs Weekly, April 20X2
British hairdressing is widely acknowledged as the best in the world for its technical skills, creativity and
business success. So it perhaps comes as little surprise that, at this time of high unemployment in many
sectors throughout the UK, there appear to be several thousand vacancies in salons and barber shops across
the country.
Experts point out that hairdressing is a career with constant opportunities to learn. It is always developing as
a part of the wider fashion and beauty industry, so stylists have to stay on top of trends. It offers a high level
of job satisfaction, appealing to those who enjoy day-to-day contact with a wide range of clients. For the
very best, there can even be chances to travel the world. And for those who want to work in the field but do
not see themselves as stylists, there are also positions for photographers, trainers and managers.
Many people who are now well established originally came into the profession almost by accident. One girl
we spoke to, who is now a successful stylist, started her working life as a secretary at the head office of a
large retailer but soon recognised that this was not the vocation for her. Her next-door neighbour was a
hairdresser and she suddenly realised that this was her future. After several interviews, she was taken on as
an apprentice by a well-known salon, spending one day a week at college and the rest learning on the job
from colleagues. Now, several years later, she is a well-respected figure at the salon with a reputation for her
technical excellence. So much so that a few weeks ago, she took on a part-time position teaching the stylists
of tomorrow at her local college. “If you had said to me when I left school that I would have ended up doing
this, I never would have believed it”, she told us, grinning from ear to ear.
EXHIBIT 11e
Knightwaves counts cost of flood damage Salon Stories, 2nd November 20X1
The final financial toll from last year’s flash flood in eastern England is still not known but it is expected to run
into tens of millions of pounds, according to estimates by insurance companies – not to mention the disruption
to local people’s livelihoods.
One business that was badly affected by the flood has taken many months to return to something close to its
previous levels of activity, according to its owner. David Knight, manager of Knightwaves hair and beauty salon,
has been spending “too much” of his time since the terrible events of October 20x0 trying to restore
Knightwaves to its former glory. At least he had not lost his sense of humour in the process: “It’s been pretty
hairy”, he told us.
Last month, David was finally able to announce that the salon was fully open again – though some way short of
the 60% average occupancy that had been typical right up until the day of the flood. He was sceptical about
whether he would ever get back to the 60%. But it wasn’t easy even to reach this point. For the first few weeks,
he had no business at all as he tried to salvage whatever fittings, equipment and inventory that he could from
the salon. However, most of these items were too badly damaged to be used and he was forced to throw them
away.
David was determined not to be out of work for any longer than was absolutely necessary and – after some
earnest enquiries – he was able to secure a short lease on a nearby property that could be quickly converted
into a makeshift salon. This was opened in January at a fitting-out cost of £15,000, but by then a number – David
estimates up to a quarter – of his clientele had transferred their loyalties. It was going to be a slow process to
regain them, but it was helped considerably by his offer of a 40% discount to all existing and previous clients on
all appointments for the following nine months. This initially proved so popular that on some days he was busy
from morning till evening.
What is more, the new premises could not accommodate David’s team of 20 stylists. He was able to employ 12
of them on the temporary site and he continued to pay the other eight while they were still contracted to
Knightwaves, but at 50% of their salary, with the promise that they would receive a bonus once the original
salon reopened. Perhaps not surprisingly, all but one of the eight – being uncertain when David would have
work for them again – resigned and found positions at other salons; so David was also left to spend time and
effort recruiting replacements for when the normal business resumed.
As well as the practical aspects of keeping his business running, David has also had to deal with his insurance
claim. In addition to the cost of restoring his original salon and fitting out his temporary base, the claim covered
the company’s loss of profits for the period when the original salon was shut. For other salon owners having to
face a similar situation, he explains that this was a complex exercise.
So is David happy with the outcome? “All in all, I’m reasonably satisfied,” he says. “I’m just glad to be back doing
what I love doing.”

Case Study July 20X2

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CASE STUDY

This material is issued prior to the examination session on 25 July 20X2.

Copyright © ICAEW 20X2. All rights reserved. 159473

Assessment of the Case Study

• Assimilating and using information 20%

• Lack of professional independence or objectivity

2 The UK hairdressing industry: Background

3 Hairdressing: The business model

4 Luvlox Ltd: History and overview

5 Luvlox Ltd: The business

8 Luvlox Ltd: Price list

9 Luvlox Ltd: Extracts from insurance policies

10 Luvlox Ltd: New incentive scheme (July 20X1)

• Analysing financial performance to identify areas for improvement

Market size, key statistics and trends

Trade associations and industry resources

Did you know?

Hairdressing Around The World: Some Facts

Licensing and registration

The Good Salon Guide (GSG)

Services and products

Location, tools and equipment

Pricing and payment

Promotion, marketing and advertising

• Advertising in local newspapers and magazines, on local radio or at cinemas.

Health and safety

Insurance and security

A hairdressing salon may have a number of insurance policies, including:

Luvlox Ltd: History and overview EXHIBIT 4

The first salon: Newcastle-upon-Tyne

The next stage: Gateshead and Wallsend salons

Luvlox Ltd: The business EXHIBIT 5

Q1 (to 30 Sept) Q2 (to 31 Dec) Q3 (to 31 March) Q4 (to 30 June)

Advertising and marketing

IT and financial reporting systems

Key risks and threats to the business

• competition and price sensitivity;

Health and safety, security and environmental issues

Net cash used in investing activities (96) (171)

CASH FLOWS FROM FINANCING ACTIVITIES

Cash and cash equivalents at beginning of year (445) (897)

Cash and cash equivalents at end of year 61 (445)

The salon names are abbreviated as follows: N = Newcastle, G = Gateshead, W = Wallsend.

1b Key performance data

Number of appointments (000)

Rent, rates, utilities & postage

4 Property, plant and equipment (PP&E)

6 Receivables 20X1 20X0

Trade receivables (net of impairment) 77 69

7 Current liabilities 20X1 20X0

Bank overdraft 140 518

Stylist Senior stylist

Ladies £40 £45

Gentlemen £15 £18

Babies / toddlers (aged under 5 years) £5 £5

Wash and finish

Ladies £20 £22

Colour and other treatments Per individual requirements

Wedding package (Wallsend only) By arrangement with the salon

(i) Public liability insurance (renewed annually on 1 March)

For the purposes of this insurance, the following definitions apply:

Event 1 – Employer’s liability

Event 2 – Public liability