Overview Premier Sound Systems (PSS) is a privately owned company, major shareholders are the chairman and his wife's family. It provides commercial sound system solutions and professional broadcasting systems. It services include designing, installing and maintenance of high-quality sound systems. The company was established in 2015 by Tim Wong, its chairman and CEO, who earned a double master's degrees in electrical and electronic (EE). He worked as regional sales director for a would famous consumer electronic manufacturer in the US before starting his own business - PSS. The management team includes a CFO, Ben Wong (son of Tim) graduated last year from a UK university with BA in accounting, and currently he is pursuing his CPA qualification. He just joined PSS in late 2021 to replace the experienced financial controller Peter Chow, who retired from the business. CTO, Simon Walker, is an experienced and well-known acoustic engineer in the field. Prior to joining the Premier Sound Systems, he worked as chief engineer in Super Sound laboratory, USA for many years With the experienced management and technically-competence team, PSS quickly built solid foundation and became one of the leading firms in the sound system industry in the region. Its services cover Hong Kong S.A.R. and the southern cities of mainland China. Its customer base across industries, PSS classifies its customers into three (3) categories (business segments), which are Corporates (Corp), Educational institutions (Edu) and Public Address Systems (PA). Corp segment serves all commercial customers and studios, Edu focuses on serving schools and universities and PA is responsible to provide solutions for public broadcasting facilities (e.g. train station, exhibition hall and public event venue). The company had a record of very glorious periods before pandemic, it enjoyed 40% CAGR (Compound Annual Growth Rate) top line growth for 5 years starting from 2015. Its revenue grew fivefold in just 5 years (2015 to 2020). PSS has only one business place which is a rented office located at Wanchai, Hong Kong. The office is a premier office suite close to HK Convention and Exhibition Centre () and The Hong Kong Academy for Performing Arts (). The nearby areas are also the home to the studios and international companies. Currently, the company totally employs 14 staff including a team of 7 engineers and technical staff, they are responsible for the design and installation. All the technical staff have all necessary technical/engineering licences required by Hong Kong and China governments. The company occasionally subcontract (outsource) PA projects to other installers where they are short of installation manpower in the peak periods. However, the subcontracted PA works must be led or followed by one dedicated technical staff from PSS for quality assurance. For tax consideration, the company did not set up operating office in mainland China. Its China works are liaised by a liaison office at Zhuhai China while the contract was negotiated and concluded in Hong Kong office. Hong Kong technical members are occasionally required to travel to China and stay there during the project installation. In addition, the company strictly control China project to be completed within 6 months. By doing so, PSSS would not be deemed to have permanent office in China and then its operating income would not subject to 25% income tax. Costs Structure Rent expense is related to the Hong Kong office rental which was signed under 3-year lease term and the rent is reviewed annually for inflation adjustment. Current contract will end at October 2023. PSS would sometimes sub-contract part of their PA projects to external installer, but subcontracting does not apply to Corp and Edu projects. It is company's policy that all Corp and Edu projects must be carried out by in-house team. Due to complexity of bidding process in government and large PA projects, the company employs consulting services to help advising on bidding paper works and assist in project pitch in Hong Kong. The consultant serves PSS in Hong Kong PA projects only. Moreover, the company also outsource customers support and enquiry services to outside call centre (Help Desk centre). The Help Desk centre provide Hot Line services for inquiry, compliant and user support. Both Hong Kong and China corporate customers (Corp) benefit from the Help Desk services. However, Edu and PA customers are NOT supported by the Help Desk services, they are handled by the company in-house resources. Special logistic costs. During the Covid-19 pandemic periods, a lot of shipments was either rerouted or delayed due to cross-border travel/transport restriction or lock down. PSS incurred extra costs for getting critical project components for keeping of project completion on time. The company identified and separately classified these costs and treated as one-off item in the management income report. Economic and Political Conditions Covid-19 pandemic hard hit the company's business in the past two years (i.e. 2021 and 2022). Revenue sustained a fall in 2020 and slowly picked up to 2019 level in 2022. PSS management also noted the following business and political changes in the previous years. - Fewer exhibition and public events were held that hit their PA business - Corporate and Education business segments posted only a low-single-digit growth in revenue thanks to their teams continuing to explore new customers. However, it is far behind its previous periods' 40% CAGR growth. - A lot of international events/Exhibitions organisers loss interest in holding activities in Hong Kong. Some of them have moved to Singapore or ASEAN countries, where imposed less onerous quarantine control measure on inbound businessmen and travellers. Unfortunately, when they have moved away, it is difficult to restore the situation in near term, - Apart from the international events and exhibitions, a few of international business undertakings, such as financial house and investment bank and some foreign companies" regional head quarters in Hong Kong, are also considering the move to Singapore or Greater Bay Area (GBA), China. - In recent years, China government advocates the development of the GBA, offering various benefits and incentives to attract businesses and educational institutions to land on the GBA. Since the introduction of GBA initiative, universities in Hong Kong and Macau have established or plan to establish campus in the GBA. Recent development and management concern After 2-year pandemic period, many countries start lifting existing Covid-19 preventive and control measures and opening their boarders with hope to restore countries' economy. Hong Kong and China central government are also thinking of following suit. PSS also have prepared to return to normal business and regain the rapid growth in the near future. Years 2021 and 2022 have been difficult for the PSS, due partially to the Covid-19 that affecting the economy. PSS's revenue was dropped by 10% in 2021 compared to a 2020. The sales in 2022 just levelled to 2020. PSS worries whether its business may go back to previous 40% CAGR. Management understand that the company has underdone a several years of rapid growth and becomes one of the leading companies in the industry. It may be difficult to sustain continuously higher growth in revenue by taking the market share from other players. Management think that it should not be expected to maintain double-digit growth without exploring of new market or new customer bases. PSS management is now considering its business future and rethink of the strategies to keep the company going. The management team also realised that the company was at a crossroad after the Covid-19 pandemic. Some business operation norms, economic structure, markets and customer bases have been changed in the post-pandemic era. They feel that it is the time to closely check its business performance and current business strategies see if they still align with company's goal and development. In the previous Broad and Management meeting, the following matters were widely discussed. - A broad member asked whether PSS would have any report on customer profitability or segment profitability. The company needed to focus on the bigger and important income contributors when making changes or setting strategies for the operations. [CFO responded that he had not had much solid experience in cost and management accounting and would try to make a report in next meeting.] - CTO pointed out in the meeting that he was wondering whether PSS could reduce their project invoice price, say 10%, to boost the sales. According to his gut feeling, project sales would increase by 30% if the price downed by 10%. Based on last year financial, PSS still earned 40% GP, a 10% price cut would still make positive contribution. [Tim asked Ben to study and evaluate the proposal] - Sales director suggested that PSS may continue existing strategies hoping to restore to prepandemic's glorious business after the reopen the economy. [One director estimated that the company may continue to grow 30% annually in coming few years, PSS should continue exiting strategies and previous periods success proved the strategies were correct. He believed that business would return to high growth once the covid-19 control measure and travel restriction have removed] - CEO pointed out that PSS should explore the GBA opportunity and plan to shift focus to the GBA markets. [Tim believed that PSS could grow China business (all segments) by 40% every year in coming few years on top of existing business if PSS would invest in the GBA business. He has roughly estimated that it only involved an initial capital investment $2,000,000, and rented an office at only RMB1,200,000 per year. After paying 25% local tax, significant income are expected.] - Another board member asked should consider establish Singapore or ASEAN branch office as soon as possible although tax and local regulation would make it difficult. [CFO responded that company should take extra care and an in-depth analysis and study are required. Cross-border investment and operations would subject to higher risks and greater uncertainty in many aspects.] After several meetings, the management decided to seek outside business consultant for help. They need consultant offering advice on how to move to a better position in the years ahead. I. Analysis - Customer profitability Review. - Business Segment/ Customer profitability Analysis. Some traceable costs (e.g. channel costs) related to specific segments should be allocated to the segment concerned for profitability analysis. - Financial performance analysis, you are required to perform financial ratio analysis to help understand the actual business performance. In addition, PSS management is keen to know their investment return. Appendix 2 - Operating Income and Expenses Appendix 3-Balance Sheet Appendix 1 - Customer Profitability After several meetings, the management decided to seek outside business consultant for help. They need consultant offering advice on how to move to a better position in the years ahead. CEO, Tim is an alumni of ABC, learned that ABC has a business consulting service unit to offer business solution and advice to SMEs. The ABC consulting unit was formed under ABC, consisting of members from excellent academia in business, faculty with previous practice in industry and a group of selected intelligent final year students. Tim approached the ABC consulting team to offer PSS advice on the matters including not limited to current business performance review, profitability analysis, review of strategies, identify problem and issues that PSS may encounter and propose feasible solutions or PSS would provide the ABC team with some information in the Appendixes. If additional information is needed but not included in the appendixes, you may make your assumptions and stated in the report that the assumptions you based. Memorandum to Team Members You are part of the ABC consulting service unit and this job have been assigned to your team for completion. The following information is given as general guidance and reference only. Actual works and analysis required for this special job will depend on your study and understand the case. However, you should also consider the following. I. Analysis - Customer profitability Review. - Business Segment / Customer profitability Analysis. Some traceable costs (e.g. channel costs) related to specific segments should be allocated to the segment concerned for profitability analysis. - Financial performance analysis, you are required to perform financial ratio analysis to help understand the actual business performance. In addition, PSS management is keen to know their investment return. Overview Premier Sound Systems (PSS) is a privately owned company, major shareholders are the chairman and his wife's family. It provides commercial sound system solutions and professional broadcasting systems. It services include designing, installing and maintenance of high-quality sound systems. The company was established in 2015 by Tim Wong, its chairman and CEO, who earned a double master's degrees in electrical and electronic (EE). He worked as regional sales director for a would famous consumer electronic manufacturer in the US before starting his own business - PSS. The management team includes a CFO, Ben Wong (son of Tim) graduated last year from a UK university with BA in accounting, and currently he is pursuing his CPA qualification. He just joined PSS in late 2021 to replace the experienced financial controller Peter Chow, who retired from the business. CTO, Simon Walker, is an experienced and well-known acoustic engineer in the field. Prior to joining the Premier Sound Systems, he worked as chief engineer in Super Sound laboratory, USA for many years With the experienced management and technically-competence team, PSS quickly built solid foundation and became one of the leading firms in the sound system industry in the region. Its services cover Hong Kong S.A.R. and the southern cities of mainland China. Its customer base across industries, PSS classifies its customers into three (3) categories (business segments), which are Corporates (Corp), Educational institutions (Edu) and Public Address Systems (PA). Corp segment serves all commercial customers and studios, Edu focuses on serving schools and universities and PA is responsible to provide solutions for public broadcasting facilities (e.g. train station, exhibition hall and public event venue). The company had a record of very glorious periods before pandemic, it enjoyed 40% CAGR (Compound Annual Growth Rate) top line growth for 5 years starting from 2015. Its revenue grew fivefold in just 5 years (2015 to 2020). PSS has only one business place which is a rented office located at Wanchai, Hong Kong. The office is a premier office suite close to HK Convention and Exhibition Centre () and The Hong Kong Academy for Performing Arts (). The nearby areas are also the home to the studios and international companies. Currently, the company totally employs 14 staff including a team of 7 engineers and technical staff, they are responsible for the design and installation. All the technical staff have all necessary technical/engineering licences required by Hong Kong and China governments. The company occasionally subcontract (outsource) PA projects to other installers where they are short of installation manpower in the peak periods. However, the subcontracted PA works must be led or followed by one dedicated technical staff from PSS for quality assurance. For tax consideration, the company did not set up operating office in mainland China. Its China works are liaised by a liaison office at Zhuhai China while the contract was negotiated and concluded in Hong Kong office. Hong Kong technical members are occasionally required to travel to China and stay there during the project installation. In addition, the company strictly control China project to be completed within 6 months. By doing so, PSSS would not be deemed to have permanent office in China and then its operating income would not subject to 25% income tax. Costs Structure Rent expense is related to the Hong Kong office rental which was signed under 3-year lease term and the rent is reviewed annually for inflation adjustment. Current contract will end at October 2023. PSS would sometimes sub-contract part of their PA projects to external installer, but subcontracting does not apply to Corp and Edu projects. It is company's policy that all Corp and Edu projects must be carried out by in-house team. Due to complexity of bidding process in government and large PA projects, the company employs consulting services to help advising on bidding paper works and assist in project pitch in Hong Kong. The consultant serves PSS in Hong Kong PA projects only. Moreover, the company also outsource customers support and enquiry services to outside call centre (Help Desk centre). The Help Desk centre provide Hot Line services for inquiry, compliant and user support. Both Hong Kong and China corporate customers (Corp) benefit from the Help Desk services. However, Edu and PA customers are NOT supported by the Help Desk services, they are handled by the company in-house resources. Special logistic costs. During the Covid-19 pandemic periods, a lot of shipments was either rerouted or delayed due to cross-border travel/transport restriction or lock down. PSS incurred extra costs for getting critical project components for keeping of project completion on time. The company identified and separately classified these costs and treated as one-off item in the management income report. Economic and Political Conditions Covid-19 pandemic hard hit the company's business in the past two years (i.e. 2021 and 2022). Revenue sustained a fall in 2020 and slowly picked up to 2019 level in 2022. PSS management also noted the following business and political changes in the previous years. - Fewer exhibition and public events were held that hit their PA business - Corporate and Education business segments posted only a low-single-digit growth in revenue thanks to their teams continuing to explore new customers. However, it is far behind its previous periods' 40% CAGR growth. - A lot of international events/Exhibitions organisers loss interest in holding activities in Hong Kong. Some of them have moved to Singapore or ASEAN countries, where imposed less onerous quarantine control measure on inbound businessmen and travellers. Unfortunately, when they have moved away, it is difficult to restore the situation in near term, - Apart from the international events and exhibitions, a few of international business undertakings, such as financial house and investment bank and some foreign companies" regional head quarters in Hong Kong, are also considering the move to Singapore or Greater Bay Area (GBA), China. - In recent years, China government advocates the development of the GBA, offering various benefits and incentives to attract businesses and educational institutions to land on the GBA. Since the introduction of GBA initiative, universities in Hong Kong and Macau have established or plan to establish campus in the GBA. Recent development and management concern After 2-year pandemic period, many countries start lifting existing Covid-19 preventive and control measures and opening their boarders with hope to restore countries' economy. Hong Kong and China central government are also thinking of following suit. PSS also have prepared to return to normal business and regain the rapid growth in the near future. Years 2021 and 2022 have been difficult for the PSS, due partially to the Covid-19 that affecting the economy. PSS's revenue was dropped by 10% in 2021 compared to a 2020. The sales in 2022 just levelled to 2020. PSS worries whether its business may go back to previous 40% CAGR. Management understand that the company has underdone a several years of rapid growth and becomes one of the leading companies in the industry. It may be difficult to sustain continuously higher growth in revenue by taking the market share from other players. Management think that it should not be expected to maintain double-digit growth without exploring of new market or new customer bases. PSS management is now considering its business future and rethink of the strategies to keep the company going. The management team also realised that the company was at a crossroad after the Covid-19 pandemic. Some business operation norms, economic structure, markets and customer bases have been changed in the post-pandemic era. They feel that it is the time to closely check its business performance and current business strategies see if they still align with company's goal and development. In the previous Broad and Management meeting, the following matters were widely discussed. - A broad member asked whether PSS would have any report on customer profitability or segment profitability. The company needed to focus on the bigger and important income contributors when making changes or setting strategies for the operations. [CFO responded that he had not had much solid experience in cost and management accounting and would try to make a report in next meeting.] - CTO pointed out in the meeting that he was wondering whether PSS could reduce their project invoice price, say 10%, to boost the sales. According to his gut feeling, project sales would increase by 30% if the price downed by 10%. Based on last year financial, PSS still earned 40% GP, a 10% price cut would still make positive contribution. [Tim asked Ben to study and evaluate the proposal] - Sales director suggested that PSS may continue existing strategies hoping to restore to prepandemic's glorious business after the reopen the economy. [One director estimated that the company may continue to grow 30% annually in coming few years, PSS should continue exiting strategies and previous periods success proved the strategies were correct. He believed that business would return to high growth once the covid-19 control measure and travel restriction have removed] - CEO pointed out that PSS should explore the GBA opportunity and plan to shift focus to the GBA markets. [Tim believed that PSS could grow China business (all segments) by 40% every year in coming few years on top of existing business if PSS would invest in the GBA business. He has roughly estimated that it only involved an initial capital investment $2,000,000, and rented an office at only RMB1,200,000 per year. After paying 25% local tax, significant income are expected.] - Another board member asked should consider establish Singapore or ASEAN branch office as soon as possible although tax and local regulation would make it difficult. [CFO responded that company should take extra care and an in-depth analysis and study are required. Cross-border investment and operations would subject to higher risks and greater uncertainty in many aspects.] After several meetings, the management decided to seek outside business consultant for help. They need consultant offering advice on how to move to a better position in the years ahead. I. Analysis - Customer profitability Review. - Business Segment/ Customer profitability Analysis. Some traceable costs (e.g. channel costs) related to specific segments should be allocated to the segment concerned for profitability analysis. - Financial performance analysis, you are required to perform financial ratio analysis to help understand the actual business performance. In addition, PSS management is keen to know their investment return. Appendix 2 - Operating Income and Expenses Appendix 3-Balance Sheet Appendix 1 - Customer Profitability After several meetings, the management decided to seek outside business consultant for help. They need consultant offering advice on how to move to a better position in the years ahead. CEO, Tim is an alumni of ABC, learned that ABC has a business consulting service unit to offer business solution and advice to SMEs. The ABC consulting unit was formed under ABC, consisting of members from excellent academia in business, faculty with previous practice in industry and a group of selected intelligent final year students. Tim approached the ABC consulting team to offer PSS advice on the matters including not limited to current business performance review, profitability analysis, review of strategies, identify problem and issues that PSS may encounter and propose feasible solutions or PSS would provide the ABC team with some information in the Appendixes. If additional information is needed but not included in the appendixes, you may make your assumptions and stated in the report that the assumptions you based. Memorandum to Team Members You are part of the ABC consulting service unit and this job have been assigned to your team for completion. The following information is given as general guidance and reference only. Actual works and analysis required for this special job will depend on your study and understand the case. However, you should also consider the following. I. Analysis - Customer profitability Review. - Business Segment / Customer profitability Analysis. Some traceable costs (e.g. channel costs) related to specific segments should be allocated to the segment concerned for profitability analysis. - Financial performance analysis, you are required to perform financial ratio analysis to help understand the actual business performance. In addition, PSS management is keen to know their investment return