N23 - AI Analysis - Proforma Report

November 2023: Advance Information (AI) Analysis and Proforma Report
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Exhibit 1: Introduction
Use in exam: report cover page
Key Narrative Points

Stockard Matelier, external advisor at Newell Mast, reporting to Ali Fisk.
Disclaimer needed.
Fulsome Digital Marketing (FDM) Limited

o Digital marketing agency.
o Sells to businesses across the UK.
o Based in London.

Exhibit 2: UK digital marketing sector
Use in exam: context points
Key Narrative Points Key Numerical Points

Digital marketing
o Wide range of activities: UK digital marketing services market:
▪ SEO, app building, social media, content creation, marketing o 2013-2023: CAGR >10%
strategy, website design, ad campaigns. o 2023: market size >£16 billion
o New activities emerge with new internet technologies. o Almost 8k agencies
o Some agencies focus on one activity; others offer a full service.
o Market expansion has resulted in M&A but market concentration Proportion of retail sales online:
has fallen due to more businesses (low entry barriers). o 2021: 38%
o Increased demand for digital marketing services due to consumer o 2028 forecast: 53%
shift to online and despite economic conditions.
o Key enabler of growth is capacity which requires staff retention
and recruitment. Sources of traffic (2022):
o Upward pressure on wages as staff are in high demand. o Direct link: 22%
o Churn (client retention) is an ongoing issue. o Digital ads: 21%
o Winning new clients is expensive. o Online search: 17%
o Marketing helps win new clients and reduce churn. o Social media promotions: 16%
o Email marketing: 14%
o Referrals: 9%
Martech
o Marketing technology used in the creation, execution,
management and measurement of digital marketing activity: Average marketing spend: 4.3% of revenue
▪ automated drafting and editing of marketing copy
▪ automated buying and selling of digital ad space Martech apps: around 10,000 in 2022
▪ AI-driven CRM: management of sales and marketing teams;
identify most effective sales approaches and opportunities;
improved productivity and sales performance
Legal and Regulation

o GDPR: consent to use personal data.
o Self-regulated code of practice: advertising claims supported by
evidence; legal, decent, honest and truthful.

Exhibit 3: FDM
Use in exam: throughout

FDM
o Full-service agency. Small clients: higher GPM
o Well regarded in digital marketing sector and awards in recent years.
o SEO, paid search management, social media, content creation,
marketing strategy, website design, ad campaigns. Large and Major clients:
o SEO: increases traffic from search engine. o more costly to service
o Paid search management: increases traffic from advertising spend. o high-profile clients enhance
o Helps client improve brand strength and understand customers. reputation and have lower churn
o Clients (accounts) across a range of industries.
Board of Directors
o Brienne Saffire: Managing; 35%; ex-Big Bison; online presence; billable.
o Jerzel Morales: Sales and Technology; 30%; ex-Big Bison; billable.
o Jai Williamson: Finance; 25%; ex-Big Bison; support.
o Zizi Zettner: HR; 5%; joined 2020; billable.
o Ron Ashton: Operations; 5%; joined 2022; support.
- Appointments contingent on becoming shareholders at agreed valuation.
Staff
o Fast-evolving industry requires highly skilled and motivated staff. 2022: 72 billable; 13 support; 85 total
o Staff capacity is enabler of revenue growth.
o Grades: manager, team leader, team member. Non-billable time allowance: 15%
o Occasionally outsources creative work to freelancers. Activities must benefit FDM
Sustainability
o Brienne Saffire keen to promote social and environmental responsibility.
o Aware this may create tension with clients.

Exhibit 4 and 5: Management accounts
Use in exam: primarily requirement 1 / context requirement 2 and 3
Please note that calculations have been prepared in a spreadsheet and rounded to 1dp.
REVENUE 2022 2021 Change % Reasons Trends/Significance/
(£k) (£k) (£k) Further Analysis
Major 2,068 1,824 244 13.4% Typical: £80k-210k (avg. £150k); Target 2023: £2,792k
Sublime; client loss; low switching costs
Large 2,068 1,757 311 17.7% Typical: £36k-79k (avg. £50k) Target 2023: £2,792k
Medium 1,985 1,689 296 17.5% Typical: £16k-35k (avg. £25k); Compere Target 2023: £2,680k
Small 2,151 1,489 665 44.8% Typical: £4k-15k (avg. £10k); HSG Target 2023: £2,903k
Accepted increase in charge-out rates
Total 8,272 6,756 1,516 22.4% Businesses shift towards digital model Target
Expansion in capacity (headcount) 2023: 35% / £11,167k
2022: 25% / £8,445k
SEO: 20%; lower margin; clients stay for
longer as results take time
2019-22: CAGR 24.1%
Paid search mgt: 40%; growing; increase 2021: £6,756k / 19.4%
in performance fee billing; higher margin; 2020: £5,660k / 30.7%
clients want rapid results; programmatic 2019: £4,331k
ad tech automates buying of ad space
Market
Other: 40%; generally higher margin; 2013-23: CAGR >10%
content creation lower margin
25% target missed due to lower AMFIH

and client loss (higher charge-out rates)
Mix: A range of client sizes helps staff Target: 25% each
retention via career progression
Major 25.0% 27.0% (2.0%) Lower margin (more complex and 2020: 24.0%
demanding but helps FDM brand)
Large 25.0% 26.0% (1.0%) Lower margin (more complex and 2020: 23.0%
demanding but helps FDM brand)
Medium 24.0% 25.0% (1.0%) Higher margin 2020: 26.0%
Small 26.0% 22.0% 4.0% Higher margin 2020: 27.0%
Headcount 85 68 17 25.0% Higher than revenue growth Target
Recruitment carried out early in year 2023: 115
Recruiting for growth 2022: 85
Risk of understaffing and overstaffing but
better to be overstaffed 2020: 53
Billable 72 57 15 26.3% 2020: 45
Support 13 11 2 18.2% Operations director (Ron Ashton) recruited 2020: 8
Needs to be sufficient to support billable
AMFIH £8.1 £8.3 (£0.2) (2.0%) Revenue / Headcount at end / 12 Target
2023: £8.1k
Headcount increase > revenue increase
due to recruiting ahead of revenue 2020: £8.9k (peak)
2019: £8.8k
Well placed for future

growth
Attrition rate 11.8% 15.1% (3.3%) Leavers in headcount at start / Doesn’t include leavers
Headcount at start who joined in year
Sector average: 30%
Aggressive staff poaching 2019: 9.8%
Early responsibility to reduce attrition
Leavers: in 8 8 0 Attrition rate * Headcount at start
headcount at start
Attrition rate: revised 26.5% 26.4% 0.1% Total leavers / Headcount at start Includes leavers who
joined in year
Lower for those who stay longer Sector average: 30%
2019: 17.1%
Leavers: joined in year 10 6 4 All junior staff 2019: 3
Leavers: total 18 14 4 Attrition rate: revised * Headcount at start

2022 2021 Change % Reasons Trends/Significance/
Further Analysis
Client churn 15.2% 14.6% 0.6% No. of clients lost / No. of clients at start 2020: 16.1%
Client loss: higher charge-out rates Client acquisition efforts

undermined by losses
New clients gained > clients lost
Winning new clients is
Factors: expensive
- How well served clients feel
- Fees
- Pricing method
- Switching costs
- Client account manager
- Team continuity
Clients lost 40 36 Churn rate * No. of clients at start
Clients at start 264 247 Approximate (below)
Major 8.3% 0% 8.3% Large multinationals with low switching 2020: 16.7%
costs causes erratic changes
Lower churn rate

Lost to a rival who also poached several

key staff
Large 5.7% 7.7% (2.0%) Lower churn rate 2020: 4.8%
Medium 11.8% 11.9% (0.1%) 2020: 11.1%
Small 19.5% 17.6% 1.9% 5% (estimate) if performance-based fee 2020: 19.8%
Avg. 18-20%

Number of clients Revenue / typical distribution average

(approximate)
Major 14 12 2 16.7% Revenue / £150k 2020: 9
Large 41 35 6 17.1% Revenue / £50k 2020: 26
Medium 79 68 11 16.2% Revenue / £25k 2020: 59
Small 215 149 66 44.3% Revenue / £10k 2020: 153
Total 349 264 85 32.2% 2020: 247

COST OF SALES 2022 2021 Change % Reasons Trends/Significance/
Billable staff 3,280 2,583 697 27.0% 2021 salary increases; team
members up >8%; premium paid to
counter poaching
2022 minimal increases; cost
increase due to headcount (volume)
Other 1,755 1,576 179 11.4% Recruitment (increased headcount;
lower attrition reduces cost)
IT upgrades/licenses/software
PPE depreciation
Training and development (lower
attrition reduces training)
Outsourced services
Total 5,035 4,159 876 21.1%
As % of revenue:
Billable staff 39.7% 38.2% 1.5% 2020: 34.7%
Other 21.2% 23.3% (2.1%) 2020: 24.9%
Total 60.9% 61.6% (0.7%) 2020: 59.6%
Avg. billable staff 45.6 45.3 0.2 0.5% Billable staff / billable headcount 2020: £43.6k
cost 2022: minimal salary increases 3.9% increase
GROSS PROFIT / 2022 2021 Change % Reasons Trends/Significance/

GPM (£k) (£k) (£k) Further Analysis
Major 589 493 96 19.5%
Large 724 632 92 14.6%
Medium 854 718 136 18.9%
Small 1,070 754 316 41.9%
Total 3,237 2,597 640 24.6% 2022 target: £3,247k
2020: £2,285k
GPM
Major 28.5% 27.0% 1.5% More price-competitive 2020: 29.9%
Discounted charge-out rates
Large 35.0% 36.0% (1.0%) Pre-agreed time budgets 2020: 37.0%
Higher cost to service
Highly experienced staff
Medium 43.0% 42.5% 0.5% 2020: 43.0%
Small 49.7% 50.7% (1.0%) Junior employees 2020: 50.0%
Less demanding clients
Total 39.1% 38.4% 0.7% Revenue mix shift towards higher 2022 target: 38.4%
margin small increases GPM 2020: 40.4%
2019: 40.9%
Paid search mgt work and
performance fee billing increases
GPM
Recruiting ahead of revenue / lower

AMFIH reduces GPM
Mix
Major 18.2% 19.0% (0.8%) Lowest GP contributor
Large 22.4% 24.3% (1.9%)
Medium 26.4% 27.6% (1.2%)
Small 33.1% 29.0% 4.1% Highest GP contributor

ADMIN & SELLING 2022 2021 Change % Reasons Trends/Significance/
EXPENSES (£k) (£k) (£k) Further Analysis
Total 908 713 195 27.3% Selling and marketing costs
PPE depreciation
As % of revenue 11.0% 10.6% 0.4% 2020: 9.4%
Support staff:
Avg. payroll cost 45.4 44.1 1.3 2.9% Billable and support
Total staff costs 3,859 2,999 860 28.7% Avg. payroll cost * total headcount
Billable staff (3,280) (2,583)
Support staff 579 416 163 39.2% Total – billable = support
As % of revenue 7.0% 6.2% 0.8% 2020: 5.6%
Avg. support staff 44.5 37.8 6.7 17.8% Support staff / support headcount 2020: £39.5k
cost
Lower than billable due to market
demand for respective skills
New director increases avg.
Total ex support staff 329 297 32 10.7%

As % of revenue 4.0% 4.4% (0.4%) Well controlled Sector average: 4.3% of
revenue on promotion
OPERATING 2022 2021 Change % Reasons Trends/Significance/

PROFIT / OPM (£k) (£k) (£k) Further Analysis
OP 2,329 1,884 445 23.6% 2020: £1,751k
OPM 28.2% 27.9% 0.3% Lower than GPM increase 2020: 30.9%
because admin costs increased Target: 30%
faster than revenue
CASH 2022 2021 Change % Reasons Trends/Significance/

Cash 1,757 1,534 223 14.5% + cash from operations 2020: £539k
- receivables increase
- payables (deferred income) decrease
- capex (IT to support headcount)
- dividends
RECEIVABLES 2022 2021 Change % Reasons Trends/Significance/

Trade 985 871 114 13.1% Increase in activity
Trade days 43.5 47.1 (3.6) 2021: longer periods of credit to 2020: 29.5
(TR/revenue selected clients
*365)
PAYABLES 2022 2021 Change % Reasons Trends/Significance/

Deferred Income 603 1,181 (578) (48.9%) 2021: payment in advance required 2020: £299k
from some clients e.g. Compere
Trade 228 221 7 3.2%

Exhibit 6: Business model
Use in exam: throughout / R2/3 proposal

FDM goal: meet all client’s digital marketing needs. Annual variations but broadly constant:
SEO: 20%
Aims to reduce churn and reliance on one activity by being a full- Paid search management: 40%
service agency. Other: 40%
Services
o SEO:
▪ improve ranking of client’s website in search results 20% of revenue
▪ clients stay for longer as results take time (less switching) Stable revenue stream
▪ cross-sell other services Lower margin
o Paid search management:

▪ manage the purchase of ad space using programmatic 40% of revenue
advertising technology which automates buying of ad space Revenue from providing programmatic
(media buying) and publishing suitable ads advertising technology (not selling ad space).
Higher margin
o Other:
▪ social media, content creation, marketing strategy, website 40% of revenue
design, campaign management Higher margin: social media, marketing
strategy, brand design, email marketing
Lower margin: content creation
Marketing funnel
o Increases customers for client.
o Customer engagement points that lead to revenue for FDM.
o Each section of funnel has KPIs (tracking analytics).
o Number of customers reduce as they pass through funnel. Example:
▪ Awareness: Reach and Visitors Reach: 100k; Visitors: 10k (10%)
▪ Desire: Bounce Rate and Leads Bounce rate: 5k (50%); Leads 1k (20%)
▪ Conversion: Number of New customers Conversion: 100 (10%)
▪ Repeat Sales: Number of Returning customers Repeat sales: 40 (40%)
o Engagement might focus on specific funnel/KPI e.g. reduce
bounce rate.
Pricing
o Pricing method is key driver of profitability and depends on:
▪ new or existing client
▪ service offered
▪ strength of relationship with client
▪ what can be negotiated
o Billable hours and charge-out rates: 2022 charge-out rates:

▪ attempts to increase charge-out rate each year Director £215 (21: £200; 7.5% increase)
▪ mark up to cover costs and profit Manager £115 (21: £110; 4.5% increase)
+ profitable if hours billed and markup adequate
Team leader £90 (21: £80; 12.5% increase)
- relationship impact as client pays irrespective of success
- larger clients request discounts and resist increases Team member £66 (21: £60; 10% increase)
- simplistic method as ignores LTV
- can cause FDM to appear expensive
Fixed pricing:
▪ time budget agreed in advance
+ cost transparency
- reduced profit if overruns

o Performance-based pricing:
▪ typically for short-term campaigns
▪ pre-agreed measurable output e.g. visits, sales
+ attractive to clients as fee is contingent
+ reduces churn as engagement period usually extended
+ focus on adding value, not hours
+ higher fees and margins
- increased risk for FDM
- potential uncertainty over measurable output
o Lifetime value (LTV):

▪ FDM aim to retain clients Clients often cost more to service in early
▪ single campaign can be less than a month stages due to time required to understand
▪ some clients have been with FDM for several years client business and develop marketing plan
▪ billable hours fee basis may be uncompetitive
▪ assess client value over estimated lifetime, not engagement
+ client servicing costs reduce over time
+ helps win and retain clients
+ increases overall profitability
- lowers short-term profitability
- risky as clients do not enter multi-period contracts
Competitors
o Increasing number of digital marketing companies.
o More services being offered as technology evolves.
o FDM competes with full-service and specialist agencies.
o Geographic distance not an issue.
o FDM does not monitor specific agencies.
o Client more likely to be lost if key member of staff leaves and
takes client with them.
Collective Link:
▪ Manchester; SEO, PPC, social media, website design,
training and consulting.
Tribalist:
▪ London, Manchester and New York; data-driven,
proprietary technology platform; range of clients.
Bracket:
▪ London; CRM, tracking analytics and performance
marketing; thought leadership and educational resources
on website (blog posts and case studies); several awards.
Sustainability and ethics

o Sustainability:
▪ issues if clients are perceived to be unsustainable
▪ FDM keen to not be complicit in misleading public e.g.
‘greenwashing’
▪ Sublime wanted FDM to present green credentials despite
poor sustainability reputation
▪ Brienne Saffire not prepared to risk FDM reputation by
making unsubstantiated claims
▪ client required to demonstrate evidence for claims
o Business ethics and confidentially:

▪ potential conflicts are pre-empted
▪ separate teams used for rival clients
▪ non-disclosure agreements for staff not required unless
client requests

Exhibit 7: Client case studies
Use in exam: requirement 2/3 proposal

Compere
o Comparison app for ticket prices. Pricing: billable hours and charge-out rates
o Insufficient digital marketing skills, SEO ranking decline. Forecast:
o FDM presented solutions Compere had not considered. Hours per month
o Took over all SEO work. Director: 0.5
o SEO work by leaders and members. Manager: 1
o Client interaction by manager and director.
Team leader: 5
o Time estimates for SEO are straightforward and accurate
but unexpected events can cause a change in tactics. Team member: 25
o Monthly variations but average monthly hours accurate. Revenue pm: £2,110
o FDM was under workload pressure so proposed payment Revenue pa: £25,320 (Medium)
in advance to demonstrate commitment and cover initial GPM: 30% (2022 average: 43%; lower as SEO)
research costs. 4 months paid in advance (£8,440)
o Work started October 2021. Monthly fee in advance
o Initial 12-month engagement; continued on 3-month rolling
Advanced payment initially deferred income
basis (3 months’ notice at any time).
Attractive margin as minimal senior staff involvement
Sublime
o Online UK bed retailer. Pricing:
o Client since 2016. SEO: billable hours and discounted charge-out rates
o FDM persuaded Sublime that they could improve SEO,
increase revenue and differentiate. Paid search management:
o Within a year, SEO improved and brand repositioned. performance-based pricing
o FDM proposed paid search management work (cross-sell).
fee based on pre-agreed metric
o Sublime shared highly sensitive confidential operational
data which has been vital to success. invoice at end of each campaign
o FDM optimised ad spend using data analysis programs.
o Increased revenue within Sublime budgeted spend. Example: 30-day Facebook ad campaign
o Short-term campaigns. Metric: increase in revenue
o Technical and commercial knowledge acquired used on Reach: 400k; Visitors 40k (10%)
other clients. Bounce rate:
60% probability: 50% (sector average; actual)
30% probability: 45%
10% probability: 52.5%
Leads: 20%
Conversions: 10%
Sublime revenue per customer: £600
Revenue: 5% of attributable revenue increase
Staff costs estimate: £8k (actual)
GPM: 33.3% (based on 50% bounce rate)
Revenue pa average: £150k (Major)

GPM 2022: 29% (Major average: 28.5%)
SEO: low margin as charge-out rates heavily discounted
Paid search management: high margin but volatile as
performance-based pricing

Exhibit 8: Staff committee meeting notes: client with social mission
Use in exam: requirement 2/3 proposal

October 2021
HSG
o Charity.
o Unable to afford normal charge-out rates.
o Proposal 1: billable hours and discounted charge-out rates Charge-out rate discount: 33.3%
▪ low-cost staff mix (no director or manager) Forecast:
Hours per month
Team leader: 1
Team member: 10
Revenue pm: £500
Revenue pa: £6k (Small)
COS pm: £375
COS pa: £4.5k
GP pm: £125
GP pa: £1.5k
GPM: 25% (2022 Small average: 49.7%)
o Proposal 2: performance-based pricing Revenue: 4% of attributable donation increase

donations to generate £6k revenue:
£6k / 4% = £150k
o Brienne Saffire:
- low margin due to discount
- performance-based pricing risk
- sceptical about LTV calculation
- given rapid change in digital marketing, questionable
ongoing annual benefit
- prefers to let small, low-margin clients go elsewhere
+ performance-based pricing has upside potential Small client churn on performance-based pricing: 5%
+ performance-based pricing reduces churn Small client churn average: 18-20%
+ lower churn offsets lower margins
+ positive PR and increased social media followers
o LTV Annual GP x engagement lifetime

▪ used to assess trade off Engagement lifetime = 1 / Churn %
GP pa: £1.5k
Engagement lifetime: 20 (1 / 5%)
LTV: £30k (£1.5k x 20)
Small average (using 20% churn):

GP pa: £5k (Revenue: £10k; 50% GPM)
LTV: £25k (£5k x 5)
o Decision: proceed based on performance-based pricing

and beneficial reputational impact for personal brand.

Exhibit 9: Staffing policy
Use in exam: requirement 2/3 proposal / requirement 1

October 2022
Hierarchy
o Purpose of hierarchy: Directors: 5 (2021: 4; 2020: 4)
▪ facilitate staff progression Managers: 7 (2021: 6; 2020: 4)
▪ aid management of growing business Team leaders: 10 (2021: 11; 2020: 8)
▪ not too bureaucratic Team members: 63 (2021: 47; 2020: 37)
o Team members: informal levels based on skills and experience.
Total: 85 (2021: 68; 2020: 53)
o May need to create new formal levels due to expansion.
o Staff often have more than one role/specialism.
o FDM values flexibility.
o Support staff facilitate billable work.
o Client account manager:
▪ leads interaction with clients
▪ ensures clients are profitable, growing and retained
▪ team members (unlike at competitors)
▪ small clients provide opportunity for team members
▪ early responsibility reduces staff attrition and client churn
(clients value continuity)
Remuneration
Average remuneration (inc. bonus):
o Highly competitive.
2022: £45.4k
o Salary, discretionary performance bonus, health, pension.
2021: £44.1k
o Regularly benchmarked.
2020: £43.0k
o Attractive working conditions.
Induction training
o All billable staff unless they have proven experience.
o 6 weeks with local training firms.
o Recruitment tool: some competitors make staff pay.
o Time buffer when recruiting ahead of revenue.
o Staff buy into FDM culture.
Culture
o Aim for staff to feel valued.
o Non-billable activities must benefit FDM: Non-billable time allowance: 15%
▪ environmental credentials
▪ self-development
▪ client work difficult to bill may also be included: not all billable
staff time may be billed to client
o Social events.
o Office: fun and creative; 3 days a week in office; recent refurb.
o Uncapped holiday provided work is complete.
o High workload, tight deadlines, long hours, weekend working.
Staffing committee
o Broad purpose, monthly meetings. 2 Director (Zizi Zettner and another)
o Attendees elected on an annual rotating basis. 1 Manager
o Brienne Saffire joins for start of meeting.
1 Team Leader
o Members also take turns to attend board meetings to provide
staff perspective on FDM strategy. 2 Team Members
Attrition
o If goodwill with departing staff is high, it can result in a new client Sector average: 30%
or retention of an existing client.

Exhibits 10: Staffing strategy: recruit for growth
Use in exam: requirement 2/3 proposal / requirement 1

October 2022 2022 forecast
o Success of recruitment undertaken to achieve Revenue target: 25% growth (all client sizes/mix same as PY)
2022 targets informs 2023 recruitment plans. £8,445k
o Headcount is a critical enabler of revenue
growth; linear relationship. Headcount growth required: at least 25%
o Recruitment carried out early in year so training targeted headcount increase needed to be higher than
can be as early as possible. planned revenue growth due to natural attrition
o Risk of understaffing (inability to serve clients)
and overstaffing (margin impact and AMFIH: £8.3k (same as PY)
management difficulties).
o Due to high demand for skilled staff, better to be GPM target: 38.4% (same as PY for all client sizes)
overstaffed than to jeopardise revenue growth.
o Staffing strategy is to recruit for growth. GP target: £3,247k
o Staff recruitment planned to ensure capacity for
2023 revenue target. 2022 actual
Revenue: 22.4%/£8,272k; target missed due to lower AMFIH /
client losses (higher charge-out rates); still a successful year
Headcount: target met
AMFIH: £8.1k; target missed partly due to client losses
GPM target: 39.1% target exceeded due to revenue mix shift to

small / more paid search mgt work/performance-based fees
2023 forecast
Revenue target: 35% growth (all client sizes/mix same as PY)
£11,167k
Headcount growth required: at least 35%

Headcount target: revenue target / (AMFIH x 12) = 115
AMFIH: £8.1k (same as PY)

Exhibit 11: Strategic review of key risks
Use in exam: requirement 2/3 proposal/issue / requirement 1 context

October 2022
Strategic goals
o Highly successful full-service agency.
o Award-winning service levels.
o Highly engaged staff.
o Broad mix of satisfied and profitable clients.
o KPIs: client churn, staff attrition, revenue growth, OPM.
Key risks
1. Client churn
o Factors: how well served clients feel; fees; pricing method; switching Major: 8.3% (21: 0%; 20: 16.7%)
costs; account manager relationship; team continuity. Large: 5.7% (21: 7.7%; 20: 4.8%)
o Some major clients are multinationals who use FDM for selected Medium: 11.8% (21: 11.9%; 20: 11.1%)
services so have low switching costs: causes erratic churn %. Small: 19.5% (21: 17.6%; 20: 19.8%)
o Major and large: experienced staff, discounted charge-out rates. Total: 15.2% (21: 14.6%; 20: 16.1%)
2. Margin dilution
o Major and large: lower GPM.
o Domineering clients reduce FDM’s creativity and effectiveness.
Risk management
o Monitor client mix Target: 25% mix (average, over time)
▪ If significant deviation: Major: 25% (21: 27%; 20: 24%)
- active steps taken to move mix back to target.
Large: 25% (21: 26%; 20: 23%)
- move mix back to 25% by winning (not forgoing) clients.
- revenue growth higher priority than short term profitability. Medium: 24% (21: 25%; 20: 26%)
Small: 26% (21: 22%; 20: 27%)
o Flexible pricing
▪ Suitable pricing can improve profitability and client retention.
▪ Clients often cost more to service in early stages.
▪ Billable hours and charge-out rate pricing: can cause FDM to
appear expensive.
▪ LTV: factors in decline in service costs; helps win and retain
clients; increases overall profitability; but lowers short-term
profitability and risky (clients do not enter multi-period contracts).
o Range of capabilities
▪ Increase value of low margin clients by combining low-margin
(SEO, content creation) with high-margin (social media
management, email marketing).
o Reduce pitch costs and gain clients through reputation

▪ Reduce non-billable costs to improve margins.
▪ FDM will be sought after if perception it is oversubscribed; can
then be selective over clients.
o Focus on high-margin activities

▪ Focus on high-value services (strategy development, brand
design) to differentiate.
Other risks
o Failure to win new clients
▪ Lower revenue/profit, reputational harm
Management: remain competitive, client relationship teams,
recruit innovative technicians, manage staff capacity

o Staff recruitment and attrition targets not being met
▪ Lost clients/higher churn, missed growth
opportunities/understaffing, reputational harm
Management: competitive remuneration, staff engagement,
attrition KPI
o Increased costs of London office lease (renewal soon)

▪ Lower profit
Management: alternative physical and virtual locations; other
work models; renegotiate lease; explore financing options
o Confidential data misused/unauthorised access

▪ Reputational harm, fines, lower profit
Management: data security policies, compliance, IT audits,
ethics training

Exhibit 12: Offer for FDM shares
Use in exam: ethics / requirement 2/3 proposal
Key Narrative Points

1 July 2023
o Big Bison interest in buying FDM shares as wants client base and digital marketing capabilities.
o Brienne Saffire (Managing; 35%; ex-Big Bison):

▪ passed target of 1m social media followers
▪ TV chat show and discussion forum offers she would like to pursue
▪ keen to start looking for an exit
o Jerzel Morales (Sales and Technology; 30%; ex-Big Bison):

▪ prefers running own agency than working for big agency
▪ wants to support Brienne Saffire but needs to be an attractive offer to sell
▪ all directors need to agree
o Jai Williamson (Finance; 25%; ex-Big Bison):

▪ business logic to being part of a larger agency
▪ planned sale creates short-termism
▪ proposes ‘pump and dump’ strategy: focus on improving results over the short term
o Zizi Zettner (HR; 5%; joined 2020):

▪ concerns over short-termism, staff engagement, attrition, productivity
o Ron Ashton (Operations; 5%; joined 2022):

▪ present sale as opportunity to reward staff
▪ staff are generally young and ambitious
▪ suggests transparent profit-sharing bonus scheme to motivate staff
▪ suggests implementing some of his recommended operational improvements
▪ offers for shares should be considered seriously
▪ keen to encourage offers as borrowed a lot to purchase his shares

Exhibit 13: Operational improvements
Use in exam: requirement 1 / requirement 2/3 proposal

30 June 2023
Recruitment for growth or focus on profit?

o Challenge assumption that growth is based on headcount
and explore other growth models.
▪ invest in advanced martech
▪ develop/purchase software for staff utilisation and
workflow planning e.g. JetStrem (CRM)
▪ initial investment to implement
▪ enhanced productivity
▪ focus on profit and not just recruiting for growth
▪ generate more revenue/profit per employee/AMFIH
Attrition KPI
o Attrition KPI does not include leavers who joined in year. Recorded: 11.8% (21: 15.1%; 20: 9.8%)
o No exit interviews. Revised: 26.5% (21: 26.4%; 20: 17.1%)
o Informal reasons for leaving: inaccurate job description;
long hours/no holiday time; boring work; no recognition;
micro-management; but remuneration never mentioned.
▪ implement policy of formal interviews
▪ revised KPI should be used
▪ lower attrition reduces recruitment/training costs
Retention
o No clear process to measure impact of non-billable time.
o Evidence suggests used to mask client work time.
o Attrition lower for those who stay longer: shows resilience.
▪ ensure ‘right’ staff stay, ‘wrong’ staff leave
▪ strategically understaff to create demanding
environment where best staff thrive, improving AMFIH
and margins
▪ offer retention drivers: flexibility; work-life balance;
satisfaction, progression, recognition; reward
Relocation
o Staffing costs are very high. Salaries in north: 20-25% lower
o Manchester becoming a digital centre.
o Financial and non-financial upfront costs.

Exhibit 14: Media coverage
Use in exam: context
Key Points
Employees
o Employees want flexibility and a career that aligns with their goals.
o Power shifting towards employees who are starting to reject bad jobs.
o Paying close attention to what other companies are offering.
o Employers need to anticipate what employees want.
o ‘Quiet quitting’: over 30% do no more than minimum requirement.
o Lack of engagement, motivation and commitment is a cost to employer.
FDM recruitment
o Advertisement on social media.
o FDM described as fun, creative, exciting, ambitious, high growth, London based.
Sublime and BOL

o Bed Operations Limited (BOL):
▪ leading national bed chain
▪ no substitute for coming to our stores, trying products and discussing with our team.
o Sublime:
▪ a person has higher chances of sleep success buying online due to the amount of information
on their website being greater than any store salesperson.
▪ revenue: £22m (18% growth); OP: £2m
o National Bed Association: over 50% of mattresses now purchased online.
Big Bison (BB) acquiring Collective Link (CL)

o Lots of acquisition activity in digital marketing agency sector.
o BB: Manchester-based marketing agency.
o CL: full-service agency with impressive growth:
▪ CAGR: over 20% between 2018-2023 (FDM: CAGR 24.1% between 2019-2022)
▪ OP: £3.8m (FDM: £2.3m)
▪ OPM: 30% (FDM: 28.2%)
o Terms of deal not public.
o BB initial interest after 2020 growth spurt.
o Financial performance very strong in 2022 and 2023.
o Founders looking for attractive payoff.
o Possible synergies but BB could be looking to acquire client portfolio whilst removing competitor.
JetStream
o Top martech platform for remote working.
o Cloud-based enables team to work remotely.
o Collaboration and communication.
o Centralised hub for customer data.
o AI-driven reporting and analytics: sales performance, customer behaviour, streamlines tasks.
o Data security: highly encrypted access controls.

Possible Exam Scenarios and Reminders
R1
Revenue, GP (and OP), Client issue / churn
Revenue, GP (and OP), Staff issue / attrition
Revenue, GP (and OP), Inflating accounts (‘pump and dump’ strategy)
Revenue, GP (and OP), Cash
Wider context
o Increased demand for digital marketing services due to consumer shift to online, despite economic conditions.
o Market CAGR >10% (2012-2023)
o Key enabler of growth is capacity which requires staff retention and recruitment.
o Upward pressure on wages as staff are in high demand.

R2/R3
Pricing
o Churn (client retention) is an ongoing issue; winning new clients is expensive.
o Risks: failure to win new clients; margin dilution due to client mix shift towards large/major.
o Strategic goals: broad mix of satisfied and profitable clients; award-winning service levels.
o SEO:
▪ clients stay for longer as results take time (less switching)
▪ cross-sell other services
▪ 20% of revenue; stable revenue stream
▪ lower margin
o Paid search management:
▪ 40% of revenue
▪ higher margin
o Other:
▪ 40% of revenue
▪ higher margin: social media, marketing strategy, brand design, email marketing
▪ lower margin: content creation
o Marketing funnel example:

▪ Reach: 100k; Visitors: 10k (10%)
▪ Bounce rate: 5k (50%); Leads 1k (20%)
▪ Conversion: 100 (10%)
▪ Repeat sales: 40 (40%)
o Pricing method is key driver of profitability and depends on:

▪ new or existing client; service offered; strength of relationship with client; what can be negotiated
o Billable hours and charge-out rates:

▪ attempts to increase charge-out rate each year
▪ mark up to cover costs and profit
+ profitable if hours billed and markup adequate
- relationship impact as client pays irrespective of success
- larger clients request discounts and resist increases
- simplistic method as ignores LTV
- can cause FDM to appear expensive
2022 charge-out rates:
▪ Director £215 (21: £200; 7.5% increase)
▪ Manager £115 (21: £110; 4.5% increase)
▪ Team leader £90 (21: £80; 12.5% increase)
▪ Team member £66 (21: £60; 10% increase)
Example: Compere
▪ Time estimates for SEO are straightforward and accurate but unexpected events can cause a change.
▪ Monthly variations but average monthly hours accurate.
▪ FDM was under workload pressure so proposed payment in advance: commitment and initial research.
▪ Initial 12-month engagement; continued on 3-month rolling basis (3 months’ notice at any time).
▪ Forecast hours per month:
Director: 0.5
Manager: 1
Team leader: 5
Team member: 25
▪ Revenue pm: £2,110
▪ Revenue pa: £25,320 (Medium)
▪ GPM: 30% (2022 average: 43%; lower as SEO)
▪ 4 months paid in advance (£8,440)
▪ Monthly fee in advance
▪ Attractive margin as minimal senior staff involvement

Example: HSG
▪ Charity: unable to afford normal charge-out rates
▪ Discounted charge-out rates (33.3% discount)
▪ Low-cost staff mix (no director or manager)
▪ Forecast hours per month:
Team leader: 1
Team member: 10
▪ Revenue pm: £500
▪ Revenue pa: £6k (Small)
▪ COS pm: £375
▪ COS pa: £4.5k
▪ GP pm: £125
▪ GP pa: £1.5k
▪ GPM: 25% (2022 Small average: 49.7%)
o Performance-based pricing:
▪ typically for short-term campaigns
▪ pre-agreed measurable output e.g. visits, sales
+ attractive to clients as fee is contingent
+ reduces churn as engagement period usually extended
small client churn on performance-based pricing: 5%
small client churn average: 18-20%
+ focus on adding value, not hours
+ higher fees and margins
- increased risk for FDM
- potential uncertainty over measurable output
Example: Sublime
▪ Within a year, SEO improved and brand repositioned
▪ FDM proposed paid search management work (cross-sell)
▪ Sublime shared highly sensitive confidential operational data which has been vital to success
▪ Technical and commercial knowledge acquired used on other clients
▪ SEO: billable hours and discounted charge-out rates
▪ Paid search management: performance-based on pre-agreed metric; invoice at end of campaign
▪ 30-day Facebook ad campaign:
Metric: increase in revenue
Reach: 400k; Visitors 40k (10%)
Bounce rate:
60% probability: 50% (sector average; actual)
30% probability: 45%
10% probability: 52.5%
Leads: 20%
Conversions: 10%
Sublime revenue per customer: £600 (Sublime: revenue £22m/18% growth; OP £2m)
▪ Revenue: 5% of attributable revenue increase
▪ Staff costs estimate: £8k (actual)
▪ GPM: 33.3% (based on 50% bounce rate)
▪ Revenue pa average: £150k (Major)
▪ GPM 2022: 29% (Major average: 28.5%)
▪ SEO: low margin as charge-out rates heavily discounted
▪ Paid search management: high margin but volatile as performance-based pricing

Example: HSG
▪ Revenue: 4% of attributable donation increase
donations to generate £6k revenue: £6k / 4% = £150k
- low margin due to discount
- performance-based pricing risk
- sceptical about LTV calculation
- given rapid change in digital marketing, questionable ongoing annual benefit
- prefers to let small, low-margin clients go elsewhere
+ performance-based pricing has upside potential
+ performance-based pricing reduces churn
small client churn on performance-based pricing: 5%
small client churn average: 18-20%
+ lower churn offsets lower margins
+ positive PR and increased social media followers
▪ Decision: proceed based on performance-based pricing and reputational impact for personal brand
o Lifetime value (LTV):

▪ FDM aim to retain clients; single campaign can be less than a month; some clients for several years
▪ billable hours fee basis may be uncompetitive
▪ clients often cost more to service in early stages: time to understand business and develop marketing plan
▪ assess client value over estimated lifetime, not engagement
+ client servicing costs reduce over time
+ helps win and retain clients
+ increases overall profitability
- lowers short-term profitability
- risky as clients do not enter multi-period contracts
Annual GP x engagement lifetime

Engagement lifetime = 1 / Churn %
Example: HSG (using 5% churn: performance-based pricing)

GP pa: £1.5k
LTV: £30k (£1.5k x 20)
Example: Small client average (using 20% churn: average)

GP pa: £5k (Revenue: £10k; 50% GPM)
LTV: £25k (£5k x 5)
o Competitors
Collective Link: Manchester; SEO, PPC, social media, website design, training and consulting.
Tribalist: London, Manchester and New York; data-driven, proprietary technology platform; range of clients.
Bracket: London; CRM, tracking analytics and performance marketing; thought leadership and educational
resources on website (blog posts and case studies); several awards.

R2/R3
Staff
o Strategic goal: highly engaged staff.
o Risk: staff recruitment and attrition targets not being met.
▪ lost clients/higher churn, missed growth opportunities/understaffing, reputational harm
o Key enabler of growth is capacity which requires staff retention and recruitment.
o Upward pressure on wages as staff are in high demand.
o Purpose of hierarchy: facilitate staff progression; aid management of growing business; not too bureaucratic.
2022: Directors: 5; Managers: 7; Team leaders: 10; Team members: 63; Total: 85
o Team members: informal levels based on skills and experience; may need new levels due to expansion.
o Support staff facilitate billable work.
o Client account manager:
▪ team members (unlike at competitors); small clients provide opportunity for team members
▪ early responsibility reduces staff attrition and client churn (clients value continuity)
o High workload, tight deadlines, long hours, weekend working; 3 days a week in office.
o Non-billable activities must benefit FDM:
▪ time allowance: 15%; client work difficult to bill included: not all billable staff time may be billed to client
o Average remuneration (inc. bonus): 2022: £45.4k; 2021: £44.1k; 2020: £43.0k
o Attrition sector average: 30%
▪ 2022: 11.8%; revised: 26.5%
▪ lower attrition reduces recruitment/training costs
▪ informal reasons for leaving: inaccurate job description; long hours/no holiday time; boring work; no
recognition; micro-management; but remuneration never mentioned.
o Employees want flexibility and a career that aligns with their goals.
o Power shifting towards employees who are starting to reject bad jobs.
o Paying close attention to what other companies are offering.
o Employers need to anticipate what employees want.
o ‘Quiet quitting’: over 30% do no more than minimum requirement.
o Lack of engagement, motivation and commitment is a cost to employer.
o Social media job advert describes FDM as fun, creative, exciting, ambitious, high growth, London based.
Strategy
o Recruitment carried out early in year so training can be as early as possible.
o Risk of understaffing (inability to serve clients) and overstaffing (margin impact and management difficulties).
o Due to high demand for skilled staff, better to be overstaffed than to jeopardise revenue growth.
o Staffing strategy is to recruit for growth (October 2022).
2023 forecast:
Revenue target: £11,167k / 35% growth (all client sizes/mix same as PY)
Headcount growth: at least 35% (targeted headcount increase > revenue growth due to natural attrition)
Headcount target: revenue target / (AMFIH x 12) = 115
AMFIH: £8.1k (same as PY)
o Ron Ashton:
▪ challenge assumption that growth is based on headcount and explore other growth models:
- invest in advanced martech; software for staff utilisation and workflow planning e.g. JetStrem (CRM)
- initial investment to implement
- enhanced productivity
- focus on profit and not just recruiting for growth
- generate more revenue/profit per employee / higher AMFIH
▪ understaff to create demanding environment where best staff thrive, improving AMFIH and margins:
- ensure ‘right’ staff stay, ‘wrong’ staff leave
- offer retention drivers: flexibility; work-life balance; satisfaction, progression, recognition; reward
▪ transparent profit-sharing bonus scheme to motivate staff
- staff are generally young and ambitious
Martech
o Martech apps: around 10,000 in 2022
o AI-driven CRM: management of sales and marketing teams; identify most effective sales approaches and
opportunities; improved productivity and sales performance.
o JetStream:
▪ reported as top martech platform for remote working

▪ cloud-based enables team to work remotely
▪ collaboration and communication
▪ centralised hub for customer data
▪ AI-driven reporting and analytics: sales performance, customer behaviour, streamlines tasks
▪ data security: highly encrypted access controls
Relocation
o Staffing costs are very high; Manchester becoming a digital centre; salaries in north 20-25% lower.
o Financial and non-financial upfront costs.

Ethics
Legal and Regulation
o GDPR: consent to use personal data.
o Self-regulated code of practice: advertising claims supported by evidence; legal, decent, honest and truthful.
o Sublime claims that a person has higher chances of sleep success buying online due to the amount of
information of their website being greater than any store salesperson.
Sustainability
o Brienne Saffire keen to promote social and environmental responsibility.
o Aware this may create tension with clients.
o Issues if clients are perceived to be unsustainable.
o FDM keen to not be complicit in misleading public e.g. ‘greenwashing’.
o Sublime wanted FDM to present green credentials despite poor sustainability reputation.
o Brienne Saffire not prepared to risk FDM reputation by making unsubstantiated claims.
o Client required to demonstrate evidence for claims
Performance-based pricing
o Potential uncertainty over measurable output.
Confidentially / conflict of interest

o Potential conflicts are pre-empted.
o Separate teams used for rival clients.
o Non-disclosure agreements for staff not required unless client requests.
Confidential data misused/unauthorised access

o Reputational harm, fines, lower profit.
▪ Management: data security policies, compliance, IT audits, ethics training
o JetStream: Centralised hub for customer data; data security: highly encrypted access controls.
o Sublime shared highly sensitive confidential operational data which has been vital to success.
Staff
o High workload, tight deadlines, long hours, weekend working, uncapped holiday provided work is complete.
o Non-billable allowance: 15%; client work difficult to bill included: not all billable staff time may be billed to client.
o Understaff to create demanding environment where best staff thrive, improving AMFIH and margins.
Sale of shares
o Jai Williamson (Finance; 25%; ex-Big Bison):
▪ planned sale creates short-termism
▪ proposes ‘pump and dump’ strategy: focus on improving results over the short term
o Zizi Zettner (HR; 5%; joined 2020):
▪ concerns over short-termism, staff engagement, attrition, productivity
o Ron Ashton (Operations; 5%; joined 2022):
▪ present sale as opportunity to reward staff
▪ staff are generally young and ambitious
▪ suggests transparent profit-sharing bonus scheme to motivate staff
o Brienne Saffire: Managing; 35%; ex-Big Bison; online presence; billable
o Jerzel Morales: Sales and Technology; 30%; ex-Big Bison; billable
o CL: full-service agency with impressive growth:
▪ CAGR: over 20% between 2018-2023 (FDM: CAGR 24.1% between 2019-2022)
▪ OP: £3.8m (FDM: £2.3m)
▪ OPM: 30% (FDM: 28.2%)
o Financial performance very strong in 2022 and 2023.
o Founders looking for attractive payoff.
Brienne Saffire
o Online presence: passed target of 1m social media followers.
o TV chat show and discussion forum offers she would like to pursue.

Case Study Proforma Report: November 2023
TITLE PAGE
A report on FDM
TO: Directors of FDM

FROM: Newell Mast
DATE: 8 November 2023
This report is for the Board of FDM only and should not be distributed to third parties.
No liability can be accepted in this event.

Executive Summary
Review of Financial Performance for year ended 30 September 2023

Conclusions (number and reason)
3x most significant trend/further analysis points, consider:
▪ AMFIH/headcount changes
▪ growing (declining) client size
▪ significant changes in profit margins
▪ significant changes in KPIs
▪ cash
▪ additional analysis issue
▪ ethics (if required) (always have at least two ethics issues in ES)
Recommendations
4x most important/obvious recommendations (including one on additional analysis and ethics)
Financial Evaluation of X proposal

Conclusions
3x most significant points not included in conclusions, consider taking an additional point from:
▪ financial analysis
▪ assumptions
▪ ethics (if required) (always have at least two ethics issues in ES)
▪ strategic/operational issues
Recommendations
4x most important/obvious recommendations (including one on ethics)
Evaluation of X
Conclusions
3x most significant points not included in conclusions, consider taking an additional point from:
▪ financial analysis
▪ assumptions
▪ ethics (always have at least two ethics issues in ES)
▪ strategic/operational issues
Recommendations
4x most important/obvious recommendations (including one on ethics)

Review of Financial Performance for Year Ended 30 September 2023
REVENUE (per requirement)

Overall revenue increased (decreased) impressively (disappointingly) by £k (x%) to £2023k which is above (below)
the target of 35%/£11,167k and/but above (below) the market CAGR which is around 10%. AMFIH was £2023k (x%
increase/decrease) which is above (below) the target of £8.1k and/but not the previous peak of £8.9k, whereas
headcount of X (x% increase/decrease) is above (below) the target of 115 which shows that the revenue target (not)
being achieved was due to AMFIH/headcount/both. Staff capacity is an enabler of revenue growth, therefore the
higher headcount leaves FDM well placed for future growth. The fragile economy may have had a negative impact,
so the fact that the rate of growth is increasing (decreasing) (2022: 22.4%) is excellent (expected). Revenue from all
client sizes has increased/decreased. Many businesses have shifted towards a digital model due to the impact of
COVID-19 and this has increased demand for digital marketing. Churn has increased (decreased) to x% from 15.2%
due to (reason from exam scenario/performance-based pricing reduces churn/team members).
Major account revenue increased (decreased) impressively (disappointingly) by £k (x%) and is above (below) the
target of £2,792k due to reason (reason from exam scenario). Trend/significance/further analysis (e.g. compare size
of new clients to typical distribution). Churn has increased (decreased) to x% from 8.3% due to reason (reason from
exam scenario/churn can be erratic because MNCs have low switching costs and there are a small number of clients
in this category).
Large account revenue increased (decreased) impressively (disappointingly) by £k (x%) and is above (below) the
exam scenario/performance-based pricing reduces churn/team members).
Medium account revenue increased (decreased) impressively (disappointingly) by £k (x%) and is above (below) the
exam scenario/performance-based pricing reduces churn/team members).
Small account revenue increased (decreased) impressively (disappointingly) by £k (x%) and is above (below) the
exam scenario/churn for clients on performance-based pricing is estimated at 5%).
Major accounts for x% (22: 25.0%) of revenue, large x% (22: 25.0%), medium x% (22: 24.0%) and small x% (22:
26.0%) which is (not) in line with the 25% target. A range of client sizes helps staff retention via career progression.
COS AND GROSS PROFIT (if required)

COS increased (decreased) by £k (x%) due to an increase (decrease) in all costs and increased faster (slower) than
revenue which will have a negative (positive) impact on GPM.
Billable staff increased (decreased) by £k (x%) due to reason (reason from exam scenario) and is now x% (22: 39.7%)
of revenue. Average billable staff cost has increased (decreased) by x% to £x (22: £45.6k) which shows that the
increase (decrease) was due to salary increase/headcount/both. Attrition rate has increased (decreased) to x% from
11.8% with the revised rate now x% (22: 26.5%) due to reason (reason from exam scenario) and is above (below) the
sector average of 30%. Not achieving attrition KPI was identified as a risk/there is upward pressure on wages as high-
skilled staff are in high demand/significant salary increases were introduced in 2021 to counter poaching.
Other costs increased (decreased) by £k (x%) due to reason (reason from exam scenario/recruitment fees for the
increased headcount/lower recruitment fees due to lower attrition) and are now x% (22: 21.2%) of revenue.
Overall GP increased (decreased) impressively (disappointingly) by £k (%) to £2023 with GPM increasing (decreasing)
to x% from 39.1% due to reason (GPM increase (decrease) in all client sizes / revenue mix shift towards higher
(lower) margin small/medium (major/large) clients / revenue mix shift towards higher (lower) margin paid search
management/social media management/email marketing (SEO/content creation) work / more (less) work based on

performance fee billing / AMFIH increase (AMFIH decrease due to e.g. recruiting ahead of revenue)). GPM has (not)
continued to increase.
Major GP increased (decreased) impressively (disappointingly) by £k (%), with a GPM increase (decrease) to x% from
28.5%, due to reason (reason from exam scenario / revenue mix shift towards higher (lower) margin paid search
management/other (SEO) / more (less) work based on performance fee billing).
Large GP increased (decreased) impressively (disappointingly) by £k (%), with a GPM increase (decrease) to x% from
35%, due to reason (reason from exam scenario / revenue mix shift towards higher (lower) margin paid search
Medium GP increased (decreased) impressively (disappointingly) by £k (%), with a GPM increase (decrease) to x%
from 43%, due to reason (reason from exam scenario / revenue mix shift towards higher (lower) margin paid search
Small GP increased (decreased) impressively (disappointingly) by £k (%), with a GPM increase (decrease) to x% from
49.7%, due to reason (reason from exam scenario / revenue mix shift towards higher (lower) margin paid search
Major accounts for x% (22: 18.2%) of GP, large x% (22: 22.4%), medium x% (22: 26.4%) and small x% (22: 33.1%)
which shows e.g. the continuing importance of small clients.
OPERATING PROFIT (if required)

Admin and selling increased (decreased) by £k (x%) due to reason (reason from exam scenario) and increased faster
(slower) than revenue which will have a negative (positive) impact on OPM.
Support staff increased (decreased) by £k (x%) due to reason (reason from exam scenario) and is now x% (22: 7.0%)
of revenue. Average support staff cost has increased (decreased) by x% to £x (22: £44.5k) which shows that the
increase (decrease) was due to salary increase/headcount/both.
Excluding support staff, costs increased by £k (x%) due to reason (reason from exam scenario) and are now x% (22:
4.0%) of revenue showing that they have (not) been well controlled. Average marketing spend by digital marketing
companies is 4.3% of revenue which helps maintain reputation, win new clients and reduce churn.
OP has increased (decreased) impressively (disappointingly) by £k (x%) to £2023, with an OPM increase (decrease) to
x% (22: 28.2%) which is above (below) the 30% target, due to reason (reason from exam scenario / revenue mix shift
away from (towards) demanding major/large clients who increase overheads). OPM has (not) continued to increase.
ADDITIONAL ANALYSIS (per requirement)

Calculate numbers requested
Significance; impact on accounts; business impact; bias
Recommendations
3-4
ETHICS (if required)

For each issue:
▪ briefly describe ethical issue and potential impact
▪ consider whether it may not be unethical
▪ recommendations (under recommendations heading)
CONCLUSIONS
Conclude on every section asked for in requirement: copy key point(s) from each section - number and reason only
RECOMMENDATIONS
6 obvious action points on issues raised in each section
▪ Revenue and profit analysis by client
▪ Increase (reduce) charge-out rates
▪ Rebalance client mix by targeting small/medium/large/major clients

▪ Implement policies to reduce churn e.g. more performance-based pricing
▪ Introduce performance bonus based on AMFIH target
▪ Focus on increasing AMFIH, not just headcount
▪ Improve pay, conditions and career progression opportunities to reduce attrition
▪ Exit interviews to identify reasons for leaving
▪ Increase(reduce) recruitment to reduce risk of under(over) staffing
▪ Win more small clients to improve margins
▪ Cross-sell more non-SEO work to improve margins
▪ Introduce more performance-based billing to improve margins
▪ Investigate reasons for specific client decline/specific cost increase
▪ Consider relocating to reduce costs

PLEASE NOTE
This proforma assumes that requirement 1 will ask you to analyse the performance (revenue and profit)
of the whole business.
Please remember that you should always tailor your report headings (and subsequent points) to the
exact requirement wording and use the exam paper information for your reasons as to why numbers
have increased/decreased.
You do not need to include all the points in the proforma. You should focus on client sizes/numbers
which are the most significant in total, have seen a significant change during the year and/or have a
reason given in the exam paper as to why they have changed. You should try to finish requirement 1 on
time so that you have sufficient time for requirement 2 and 3. Including all the points in the proforma will
almost certainly cause you to overrun; this particularly applies to revenue and GP.

Financial Evaluation of X
CONTEXT
Existing knowledge of parties involved / basics of opportunity/issue
Link proposal back to relevant points in AI, including strategy and risks (Exhibit 11)
Fragile UK economy/inflation may impact proposal
RESULTS AND FINANCIAL ANALYSIS

Numbers per requirement request
Revenue:
▪ compare the different options
▪ consider 2023 performance (e.g. will help reverse slowing growth/achieve revenue growth KPI)
▪ compare to 2023 and comment if significant
▪ compare to average client and Sublime/Compere/HSG (as appropriate)
▪ potential future work/cross-selling/client mix impact/revenue beyond forecast period
Costs:
▪ opportunity cost of undertaking project if capacity limited
▪ client servicing costs reduce over time
GPM/OPM:
▪ compare to 2023/average client/Sublime/Compere/HSG
▪ consider impact of client mix/pricing basis/service e.g. SEO lower margin
▪ compare to 2023 OPM and 30% target
LTV: assess client value over estimated lifetime, not just engagement
KPI impact: staff attrition (30% target), client churn, AMFIH, headcount
Cash: compare different options and consider in context of current cash position (R1)
ASSUMPTIONS AND SENSITIVITY ANALYSIS

Justify why each assumption may be higher/lower based on AI/exam paper information/R1
Bias in source of information; missing information; missing costs; forecast period too short; timeframes challenging;
flaws in methodology of calculation; numbers which are fundamental to result; key risks
Any further changes to the assumptions will cause the results to change; perform sensitivity analysis by changing
one or two assumptions; explain basis for changing the assumption and state revised result
STRATEGIC AND OPERATIONAL ISSUES / BENEFITS AND RISKS / FACTORS TO CONSIDER (per requirement)
4-8 most obvious points from exam paper information (issue and impact on the business)
Be brief and aim for lots of different points rather than going into depth on each one
See table for list of other points – only include points which are very relevant to the specific scenario

For each issue:
CONCLUSIONS
Conclude on every section (copy key point from each section, including sensitivity analysis)
Clearly state how to proceed with brief justification why
RECOMMENDATIONS
▪ Negotiate
▪ Due diligence
▪ Research/corroborate all estimates
▪ Set timetable for activities
▪ Contact/consult affected stakeholders (staff, customers)

STRATEGIC OPERATIONAL FINANCIAL
Industry: Staff: Revenue
▪ Growth potential ▪ Recruitment/Training ▪ Other streams / potential new streams
▪ Experience/resources/competencies ▪ Capacity/Management time ▪ Future changes
▪ Competitors ▪ Motivation/Reward
▪ Customer power ▪ Key staff/Succession planning
▪ External factors (PESTEL) ▪ Technology
▪ Performance measurement
Company strategy: Technology: Costs
▪ Market position ▪ Data analytics ▪ Future changes
▪ Competitive advantage ▪ Automation/Robots/AI ▪ Opportunity cost
▪ Brand ▪ Cyber security
▪ Reputation ▪ System failure
▪ Data protection (GDPR)
▪ CRM systems
Growth opportunities: Profit
▪ New services ▪ Margins (GPM/OPM)
▪ New markets/customers
▪ Diversification (synergies, risk)
▪ Focus on core business
Customer: Cash
▪ Data analytics to identify trends, behaviour, ▪ Receivables, payables
key customers ▪ Capex
▪ Marketing: Pricing, Promotion, Service, Place, ▪ Future changes
Segmentation, CRM, Market research
▪ Customer service
▪ Feedback
Risk: Financing
▪ Third party involvement / dependency ▪ Equity v Debt (gearing)
▪ Diversification ▪ Surplus cash available
▪ Severity and frequency/likelihood
Proposal:
▪ Strength of negotiating position
▪ Timing/Timeframes (un)achievable
▪ Flexibility
▪ Uncertainty of forecasts/assumptions
▪ Exit strategy
▪ Legal/Regulation
▪ Sustainability / Corporate Social Responsibility

Evaluation of X
CONTEXT
Existing knowledge of parties involved / basics of opportunity/issue
Link proposal back to relevant points in AI, including strategy and risks (Exhibit 11)
Fragile UK economy/inflation may impact proposal
RESULTS AND FINANCIAL ANALYSIS

Numbers per requirement request
Revenue:
▪ consider 2023 performance (e.g. will help reverse slowing growth/achieve revenue growth KPI)
▪ compare to 2023 and comment if significant
▪ compare to average client and Sublime/Compere/HSG (as appropriate)
▪ potential future work/cross-selling/client mix impact/revenue beyond forecast period
Costs:
▪ opportunity cost of undertaking project if capacity limited
▪ client servicing costs reduce over time
GPM/OPM:
▪ compare to 2023/average client/Sublime/Compere/HSG
▪ consider impact of client mix/pricing basis/service e.g. SEO lower margin
▪ compare to 2023 OPM and 30% target
LTV: assess client value over estimated lifetime, not just engagement
KPI impact: staff attrition (30% target), client churn, AMFIH, headcount
Cash: compare different options and consider in context of current cash position (R1)
ASSUMPTIONS AND SENSITIVITY ANALYSIS

Justify why each assumption may be higher/lower based on AI/exam paper information/R1
Bias in source of information; missing information; missing costs; forecast period too short; timeframes challenging;
flaws in methodology of calculation; numbers which are fundamental to result; key risks
Any further changes to the assumptions will cause the results to change; perform sensitivity analysis by changing
one or two assumptions; explain basis for changing the assumption and state revised result
STRATEGIC AND OPERATIONAL ISSUES / BENEFITS AND RISKS / FACTORS TO CONSIDER (per requirement)
4-8 most obvious points from exam paper information (issue and impact on the business)
Be brief and aim for lots of different points rather than going into depth on each one
See table for list of other points – only include points which are very relevant to the specific scenario

For each issue:
CONCLUSIONS
Conclude on every section (copy key point from each section, including sensitivity analysis)
Clearly state how to proceed with brief justification why
RECOMMENDATIONS
▪ Negotiate
▪ Due diligence
▪ Research/corroborate all estimates
▪ Set timetable for activities
▪ Contact/consult affected stakeholders (staff, customers)

N23 - AI Analysis - Proforma Report

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November 2023: Advance Information (AI) Analysis and Proforma Report

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Key Narrative Points

Fulsome Digital Marketing (FDM) Limited

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Key Narrative Points Key Numerical Points

Legal and Regulation

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Key Narrative Points Key Numerical Points

Copyright © 2023 Accountancy Exam Masters Limited. All rights reserved.

25% target missed due to lower AMFIH

Well placed for future

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Client loss: higher charge-out rates Client acquisition efforts

Lower churn rate

Lost to a rival who also poached several

Clients lost 29 27 Churn rate * No. of clients at start

Number of clients Revenue / typical distribution average

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GROSS PROFIT / 2022 2021 Change % Reasons Trends/Significance/

Recruiting ahead of revenue / lower

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New director increases avg.

Total ex support staff 329 297 32 10.7%

OPERATING 2022 2021 Change % Reasons Trends/Significance/

CASH 2022 2021 Change % Reasons Trends/Significance/

RECEIVABLES 2022 2021 Change % Reasons Trends/Significance/

PAYABLES 2022 2021 Change % Reasons Trends/Significance/

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Key Narrative Points Key Numerical Points

o Paid search management:

o Billable hours and charge-out rates: 2022 charge-out rates:

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o Lifetime value (LTV):

Sustainability and ethics

o Business ethics and confidentially:

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Key Narrative Points Key Numerical Points

Revenue pa average: £150k (Major)

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Key Narrative Points Key Numerical Points

o Proposal 2: performance-based pricing Revenue: 4% of attributable donation increase

o LTV Annual GP x engagement lifetime

Small average (using 20% churn):

o Decision: proceed based on performance-based pricing

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Key Narrative Points Key Numerical Points

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Key Narrative Points Key Numerical Points

Headcount: target met

AMFIH: £8.1k; target missed partly due to client losses

GPM target: 39.1% target exceeded due to revenue mix shift to

Headcount growth required: at least 35%

AMFIH: £8.1k (same as PY)

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Key Narrative Points Key Numerical Points

o Reduce pitch costs and gain clients through reputation