The Body Shop International: an Introduction to Financial Modeling
The body Shop Case study
Question 1: Base Case Assumptions In order to derive this forecast, ‘percent-of-sales’ forecasting was used, which involves initially forecasting sales and then forecasting other financial statement accounts based on their direct relationship with sales. This method of forecasting was used due to the lack of information available (only the last three years of financial statements). As a result, every account in the pro forma financial statements are based on one or more key assumptions about their relationship with sales:
Sales: It is assumed that sales turnover will continue to grow at a rate of 11% every year. This figure is the historical average of growth (change) in the last 3 years and reiterates Patrick Gournay’s plans to increase sales. It is unlikely that the firm will be able to achieve 20% growth again as the firm has reached its ‘maturity phase’ in the business cycle (further discussed in 3).
COGS: A historical average was taken to get an initial percentage of 40% and then it was assumed that this would decrease at rate to the power of 1.05. The reason for this assumption is because Gournay stated that he aimed to specifically target and reduce costs. However, change is often initially met by resistance, so there may be considerable time lag for large-scale changes to occur. For this reason it is assumed that COGS would decrease at an exponential rate to the power of 1.05 (based on the historical average) (further discussed in 3).
Operating Expenses: For both types of operating expenses an initial rate based on the historical average was chosen, and then decreased at a rate to the power of 1.05. This was done for the same reason as COGS (further discussed in 3).
Restructuring Cost Rate: Restructuring costs are assumed to initially increase, and then decrease at a rate to the power of 1.1. This is because Gournay has plans to totally restructure the company (hence there will be large restructuring costs similar to those in
Question 1: Base Case Assumptions In order to derive this forecast, ‘percent-of-sales’ forecasting was used, which involves initially forecasting sales and then forecasting other financial statement accounts based on their direct relationship with sales. This method of forecasting was used due to the lack of information available (only the last three years of financial statements). As a result, every account in the pro forma financial statements are based on one or more key assumptions about their relationship with sales:
Sales: It is assumed that sales turnover will continue to grow at a rate of 11% every year. This figure is the historical average of growth (change) in the last 3 years and reiterates Patrick Gournay’s plans to increase sales. It is unlikely that the firm will be able to achieve 20% growth again as the firm has reached its ‘maturity phase’ in the business cycle (further discussed in 3).
COGS: A historical average was taken to get an initial percentage of 40% and then it was assumed that this would decrease at rate to the power of 1.05. The reason for this assumption is because Gournay stated that he aimed to specifically target and reduce costs. However, change is often initially met by resistance, so there may be considerable time lag for large-scale changes to occur. For this reason it is assumed that COGS would decrease at an exponential rate to the power of 1.05 (based on the historical average) (further discussed in 3).
Operating Expenses: For both types of operating expenses an initial rate based on the historical average was chosen, and then decreased at a rate to the power of 1.05. This was done for the same reason as COGS (further discussed in 3).
Restructuring Cost Rate: Restructuring costs are assumed to initially increase, and then decrease at a rate to the power of 1.1. This is because Gournay has plans to totally restructure the company (hence there will be large restructuring costs similar to those in