Several significant and necessary assumptions have been made for The Body Shop’s case analysis, in order to create the pro forma statement of The Body Shop from based on the historical data from the year 1999 to 2004.
The growth rate of Turnover
It is crucial to forecast the growth rate of turnover when making a pro forma statement. Even a little change in sales will have a huge influence on the ending profit of every fiscal year. Based on the historical data from the Body Shop from the year 1999 to 2000, we can see the turnover of each year:
Table 4.1 Turnover
Based on the data above, we can figure out the growth rate of year from 1999 to 2000 and 2000 to 2001:
We assume that the Body Shop will continue their strategy used before, so the growth rate of turnover during the fiscal year 2002-2004 is 13%.
The cost of gold sold
The cost of goods sold(COGS) is the second largest expense for the Body Shop, so it is vital to forecast accurate figure for this item. According to historical data from years 1999 to 2001, the average rate of cost of goods sold is around 40% of sales. However, it is expected to increase operational efficiency and reduce inventory costs because of the new supply chain management system issued by the CEO of the Body Shop. So we decided to use 40% as the rate of cost of good sold during the fiscal year 2002-2004.
An operating expense is an expense a business incurs through its normal business operations. According to the historical data from 1999 to 2001, operating expenses rose slightly from 1999 to 2001 and reached to around fifty-two percent in 2001. We believe that the operating expenses will continue to increase because of implementation of new supply chain management. So we decided to use 52% as the percentage of operating expenses during the fiscal year 2002-2004.
Net Interest Expense
Interest expense is affected by many aspects, such as economic condition, demand for credit and so on. We assume that net interest expense is 6% of debt, EFN and excess cash during fiscal year 2002-2004.
Usually, a company’s tax rate is stably based on government policies, however, futures is unpredictable, so a range of tax rates is from twenty-five percent to thirty-five percent, is assumed for next three years as possibility. Using this assumption, a sensitive analysis will show the influence of each tax rate on the EFN/excess cash. The result is under all tax rates in the range, the company needs an external fund.