Results
The results and the significance of them is subjective. By analyzing the patterns or trends you
can come up with entirely different conclusions based on factors that the analyzer may not be
conscious of. The results are significant because the assumptions we have utilized are average
and reasonable but still reflect the potential for more growth and a resurgence in popularity
due to the courses of action. The results accumulated in this analysis are based on a collection
of market research, sensitivity analyses, the financial ratios, the cash flow statement,
and trends in the pro forma financial statements. In the following section we will discuss our
recommendations to help The Body Shop once again be the nation’s premier natural body
product retailer and producer through a collection of information and data.
As shown in the financials the operating expenses took a steep increase due to investing in
new stores between 2000 and 2001.
The company has been increasing its inventory with a range of new products, but they are not
popular with customers, leading to more inventory being held each year as it is not sold. Unsold
goods increasing should lead to management analyzing the products individually and removing
the products that do not sell well. If this is done you will see the sales growth improve. If you
work on improving the sales growth percentage, you could then focus your efforts on lowering
product costs. By lowering products costs and increasing sales growth consecutively the
company would be on track for major success. When these techniques are implanted that
would cause a surplus of excess cash which could be used to leverage better deals. This would
go hand in hand with lowering product costs, because with more cash you can buy in bulk
which reduces costs. This will then increase profit margins and lower the cost of debt which will
make the Body Shop more attractive to investors. Having capital also decrease the risk of
bankruptcy through the ups and downs of the economy.
One of the substantial aspects that have an impact on this business is the rate of growth in
sales. Right now, sales are expected to increase by 14.5%. This level could be surpassed or not
even realized. It is important to take note that in the event the actual growth in sales increases
by a rate lower than 14.5%, the company will generate profits below the budgeted amount.
However, the burden on additional investments will require the financial plug to decrease. On
the other hand, an increase in sales above the forecasted rate of 14.5% will yield an increase in
profits, whereas the plug required will be greater.
It is imperative for the Body Shop’s management to ensure that the estimated sales forecast is
attained to achieve the expected growth in profits. To achieve a high growth rate in sales, the
company could choose to adopt Some suggestions to help attain a growth rate in sales that
exceeds expectations can be done by adding new products, discontinuing products that are not
performing well and using an aggressive marketing.
The Body Shop has a forecasted cost of sales percentage of 46% so it is expecting that the
business will earn a gross margin of 54%. Actual cost margins are will vary at this point. If the
margins decrease to a point that the company to suffer losses, they will then need a substantial
financial plug.
On the contrary, a decrease in the cost percentage will lead the business to earn higher
margins which will then have the effect of higher retained profits. Consequently, the financial
plug required will at a minimum or even no need for one if there is a substantial decrease in the
cost of sales percentage. This could be achieved by reducing the waste, using efficient
production techniques, and taking advantage of idle time.
It is important to mention the profitability of the business is very susceptible to changes in the
cost of sales which will cause a loss if there is a substantial increase in costs. Which will then
cause an increase of the financial plug. This company’s best chance in succeeding and making
profits will come from effectively managing costs.
Similar to the cost of sales, the numbers of the operating expensive are very sensitive to
changes. The projected percentage of operating expenses to sales is 48% for years 2002 to
2004. Actual operating expenses however might however from the budgeted level because of
changing aspects in the markets. For instance, expenses such as rent could rise above the
amounts budgeted for. If the operating expenses go above the forecasted amounts it could
cause the business to be in a deficit and require an increase in the financial plug. On the
contrary if management could reduce the operating expenses this could result in more profits
which would then eliminate the need for a financial plug.
Sensitivity analysis also known as what-if analysis is a great tool that produces the
different outcomes of an investment within specific boundaries from altering an input
variable. This has been done by evaluating the changes in several important inputs such as
growth rates in sales, cost of sales percentage, operating costs percentage, accounts receivable,
inventories and accounts payable from 2002 to 2004.
When the percentage of cost of sales is changed to 46% it causes a higher need for the EFN.
can see that with the higher cost of goods sold, the company needs the higher EFN. An EFN is
not needed when the percentage is at 44%, if fact there is excess cash. So, there is a major
changing point between 44% and 47%. The data table is a highly valuable tool for conducting a
sensitivity analysis. This way you can automatically calculate debt, excess cash, or a host of
other options you would like to focus on for your assumptions.
B y c h a n g in g t h e percentage of operating expenses of sales to 48% we can see that they
will need EFN depending on the amount the company spends on operating expenses.
percent, from the result we can conclude that the more operating expenses the company
spends, the more EFN it needs. When EFN is not needed there will be excess cash. This is
the ideal situation, so we want to stay at the percentage that achieves this goal. The
accounts receivable went up to 4%, when there are more accounts receivable it causes the
company to have less cash on hand, so the company needs more EFN.
Some of the variables will have an impact on the forecasted financial performance of the
business. Reviewing and analyzing these factors is helpful to evaluate which variables will have
a serious impact on the company and which variables are more sensitive to changes. In the case
of the Body Shop a key component to success would be the cost management. Being able to
effectively manage costs will give the company leverage to perform up to the standards
forecasted here. By using the assumption of a 14.5% growth of sales you can forecast out for
the next three years. The most important assumptions involve what is used as working capital,
so that would be the sales growth, the cost of sales, the operating expenses, and the accounts
receivable.