The Body Shop International: an Introduction to Financial Modeling
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 …show more content…
All other Liabilities: All other liability accounts are determined as a percentage of sales based on a historical average. This was for the same reason as ‘all other assets.’
Shareholder Equity: Shareholder equity was directly controlled by the amount of retained earnings/loss from the previous year. For example, if you made a profit of ₤3.96 then the shareholder equity would increase by ₤3.96 the next year, as occurred in 2003-2004.
Question 2 – The Need for Additional Financing The level of financing needed in the future is represented by the ‘overdrafts’ category, which is based on excess cash shortfalls and financing to cover a minimum cash balance. Our pro forma projections demonstrate that additional financing will be needed in all three periods by the positive numbers in the ‘overdrafts’ categories: 2002 2003 2004
OVERDRAFTS 2.282248 20.71516908 34.83740319 In 2002, the ₤2.28 million extra financing is not because of a direct short fall in cash, but is instead due to the minimum cash balance restriction that this model assumes. That is, there is only an excess cash of ₤7.72