Essay Example: The Body Shop International

The Body Shop International In this case, the key is to understand and study the conditions and circumstances of how revenue grew by 13 percent and the decline in pretax profit of 21 percent in 2001. The underlying factor that caused this, would be the company’s lack of forecasting, which would be the usage of the financial modeling. The financial model gives a better forecast prior to the project as well as a good monitor during the project. For the forecast, we only had financial statements from the years 1999-2001. The forecasting was done by using the percent-of-sales method.

Using this method, we forecast the sales with its relation to all the other accounts. Therefore the financial statements are based on the assumptions and their relationship to sales. It is assumed that sales will grow constantly at 11 percent every year. The figure is a historical average of the three years 1999-2001. At that time, the company was going through its maturity stage of its products life. We use financial forecasting to see how it can impact the company. 1)Our consulting group derived our analysis by using your current financial statements and forecasting forward the next two years.

Since we cannot forecast what some factors will be in the future, our firm took an average of various costs, assets, and liabilities for the previous three years. We choose base case assumptions because future factors are highly correlated with the past, since we only had access to the previous three year statements, an average was suffice. Exceptional costs are assumed to be ? 0 for the following three years, since this costs where associated with closing unprofitable shops in 1999, costs of supply chain development and redundancy costs in 2001.

Those are random costs that the firm does not plan to incur during the next years. In the same way, Restructuring costs are also 0 for the period 2002 – 2004 since the previous year costs are related to the sale of manufacturing plants, and reorganization during previous periods. We assumed that the firm will not incur any of those random costs during the analyzed period. Dividends have remained constant during the previous periods, so it is expected to remain at ? 10. 9 Million for the coming years. )If both the COGS and operating expenses remain constant at 40% and 52%, there will be no need for additional financing in 2003. The firm will need to be careful not to increase its costs of goods sold to over 42% of the projected sales, because at that point the Body shop will need to start financing some of its operations. This shows that the firm will still be capable to accept some unexpected price increases in raw materials or labor costs. If the firm can hold the growth rate of sales (13%), it will be able to manage up to a 2% increase in COGS with out any additional financing.

In the same way, the Body shop will be able to manage up to a 3% increase or 43% in the COGS for 2004. 3)The key drivers that contribute to analysis are COGS, Operating expenses, sales growth and fixed assets. These assumptions are important to the analysis because it gives the Body Shop a baseline model to know if costs are on the rise and if additional financing will be needed. Small changes in cost of good sold and Operating expenses will significantly change the financial needs of The Body Shop; that is the reason why we consider them to be the key drivers for the analysis. As previously discussed, a change in the COGS of over 2% will force the Body shop to start financing some of its operations in 2003. -Changes in operating Expenses will have the biggest impact on the financing needs of the Body Shop. Based on our analysis, Operating expenses are about 52% of the company sales, so any increase (or decrease) will significantly affect the company financing needs. -Since our analysis and projections of the financial statements are based on percentages of sales, any increase on sales will result on an increase on all other expenses by the same percentage.

But with the current operating capacity (Assumption) of the Body Shop, the company will be able to increase its sales without incurring any new operating costs or without the necessity of new equipment or warehouses. This will be possible only up to certain level of sales depending on the current operation capacity of the company. Once this level of sales is reached, it will be completely necessary to increase operating cost either by increasing the company labor force or buying new equipment (or both).