The Body Shop - Methodology
In order to determine The Body Shop’s financial needs, the group selected a reliable method that would give us an accurate estimate of the company’s future financial performance. The methodology’s main purpose is to focus on the key principles of analysis, forecasting and financial modeling. These principles enabled us to forecast The Body Shop’s financial position for the years 2002-2004, which in turn allowed us to estimate its debt financing needs. These determinations aided us in recommending the appropriate actions for the company to make in order to increase their financial performance in the upcoming years.
The first step in forecasting the company’s financial performance is to create pro-forma financial statements. Pro forma, which means “as a matter of form”, is a method we used to project the financial statements for the upcoming years. It provides us with an accurate snapshot of what the firm’s financial position would be over a specified period of time based on different assumptions and calculations. It displays estimated revenues, expenses, and cash flows for that time period. These statements help us to estimate cash requirements for the company and provide us guidance on to how to continue to operate the business. The following exhibits are examples of the pro-forma statements we used for our case.
Exhibit 1: Pro-forma Income Statement
Income Statement | |
Turnover | xxxx |
Cost of sales | xxxx |
Gross profit | xxxx |
Operating expenses | |
–excluding exceptional costs | xxxx |
–exceptional costs | xxxx |
Restructuring costs | xxxx |
Net interest expense | xxxx |
Profit before tax (PBT) | xxxx |
Tax expense | xxxx |
Profit/(loss) after tax | xxxx |
Ordinary dividends | xxxx |
Profit/(loss) retained | xxxx |
Exhibit 2: Pro-forma Balance Sheet
Balance Sheet | |
Cash | xxxx |
Excess Cash (Plug) | xxxx |
Accounts receivable | xxxx |
Inventories | xxxx |
Other current assets | xxxx |
Net fixed assets | xxxx |
Other assets | xxxx |
Total assets | xxxx |
|
|
Accounts payable | xxxx |
Taxes payable | xxxx |
Accruals | xxxx |
Overdrafts | xxxx |
Other current liabilities | xxxx |
Long-term liabilities | xxxx |
EFN (Plug) | xxxx |
Other liabilities | xxxx |
Shareholders' equity | xxxx |
Total liabs. & equity | xxxx |
To generate the financial statements for the years 2002-2004, we used the percentage of sales method. This method estimates cash requirements by expressing revenues and expenses as a percentage of sales. Predictions are derived by assuming a specified growth rate for sales and then calculating various accounts based on their percentage of sales. This method has proven to be effective in producing efficient pro-forma statements that assist us in forecasting financial performance. However, there are a few limitations that come with this approach, including lack of historical data or the current economic state of the country. One major limitation is the fact that some accounts on the pro-forma statements are not directly tied to sales. This has proven to be an issue as some variables may change or even remain constant in the upcoming years despite the expected growth in turnover. Exhibit 3 illustrates which accounts are affected by a change in sales and those accounts that are not affected by a change in sales.