Case Study: The Body Shop: Financial Model

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Financial models are tools that are built to forecast the company’s financial performance in the future.Therefore, financial modelling involves aprocess of constructing a representation of the state of finance of the company in the real- world. Financial models are mathematical models and they are created to represent financial assets’ performance. The financial forecast is usually based on the historical performance of the company. It requires the financial analyst to make use of the cash flow statements, income statements, balance sheet, and other supporting schedules. The body shop has provided some historical financial statements which can be used to forecast. The financial …show more content…

It is founded on the argument that income statements and financial position ofaccounts change with sales. Sales forecast is the key determinant of the method of percentage of sales. Based on this method, financial statements of Pro-Forma can beprepared. In addition, the Body Shop will be able to identify external financial need (EFN). In this method, the first step is usually the expression of the income statements and balance sheet accounts which differ directly with change in sales. The Body shop company will do this by dividing the balance for the accounts for (2001) by sales revenue for the current year (2001). In the Body Shop balance sheet, the accounts which are generally tied with sales are cash (calculated as 3.7%), inventories (calculated as 13.7%),and net fixed assets (calculated as 29.6%), other current assets (calculated as 4.7%),accounts receivables (calculated as 8.1%), other assets (calculated as 1.8%), and accounts payable (which is 2.9%).The overdrafts, other current liabilities, and long-term liabilities are not tied with sales directly. The change that result in these accounts depends on the method Body Shop decides to employ in raising the required amount of cash to sustain the sales growth as forecasted. For income statements, costs are also expressed as the percentage of sales. The assumption in this case is that all costs remain at a sales percentage that is fixed. The cost of sales …show more content…

To achieve this goal, it prepares projected cash flow statement, balance sheet, and projected income statement. These projected financial statement are called pro forma. The Pro forma income statements provides a budget for the operation of the company. They can help to determine whether the expenses thatare expected to rise or fall. It can also be used to project the profit of the company. The pro forma financial statements are like the historical financial statements but now projecting the future.The Pro forma will help the Body Shop calculate its projected financial

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