The Body Shop was one of the fastest growing manufacturer- retailers in the late 1990s. However, throughout the years, they failed to maintain its brand image by becoming something of a mass-market line. Anita Roddick, the shops founder and Patrick Gournay, CEO are looking for assistance in short and long-term planning for The Body Shop. The goal is to yield practical insights while being straightforward. To get started, we assumed the growth rate for sales is 13%; the cost of goods sold percent change is 38% changes, and a 50% change for operating expenses. The amount of external financing, the variables affecting the estimates, what the best way to raise the financing, along with important ratios, the internal growth rate, the sustainable growth rate, and future recommendations will all be discussed. External financing helps companies to be profitable and obtain growth. One way to determine if external financing is needed is to look at the pro forma balance sheet, if the trial assets are less than the trial liabilities, a company will not be in need of external financing. The opposite is also true. If the trial liabilities are less than the trial assets, than the company will be in need of external financing. While looking at the trial assets and liabilities, The Body Shop will not need external financing in 2002. The trail assets are £187 million compared to the trial liabilities which are £248 million. However in 2003 and 2004, external financing will be needed. In 2003, the trial assets are approximately £12 million greater than trial liabilities and in 2004; it is about £30 million greater. It seems The Body Shop is in greater need of external financing every year. Another way to determine if external financing is needed is to analysis the external financing equation. Using this method, the company will need external financing for all three years. In 2002, The Body Shop will need £ 27,912 million in external financing. In 2003 and 2004, the need decreases to around £ 15,000 million. 2. Plugging numbers into a formula is always easy, understanding how each number is calculated and what role it plays in determining the answer is more difficult. In calculation of external funds needed (EFN) for years 2001, 2002, and 2003 we used several figures like current sales, projected sales, net profit margin (NPM), retention ratio, etc. These figures depend greatest on variables like sales growth ratio, cost of goods sold ratio, and operating expenses ratio. The sales growth ratio has a massive impact on current liabilities and current assets. While all three of the variables have an enormous impact the net income and retained earnings and practically every other item on the income statement and balance sheet. So it is crucial for us to set appropriate ratios as they essentially determine how much external funding we’ll need or don’t need.
3. Let us begin by focusing on Cost of Goods Sold (CoGS). Cost of Goods Sold, as you may know, is the direct costs attributable to the production of the goods sold by a company. (www.investopedia.com) Examples of Cost of Goods Sold are in this case ingredients that the company is using to make their body, bath, and skin care products, direct labor costs associated with production of the products, and material costs. Let us now observe how a change of CoGS ratio affects the external funds needed for the next three years. At a current level with CoGS ratio at 38%, operating expense ratio of 50%, and expected growth of 13% for each of the next three years we will need £28.84 million in 2001 for 2002, £15.83 million in 2002 for 2003, and £16.27 million in 2003 for 2004. Let us now see if and how the need for external funds will change if we decrease the CoGS ratio to 33% of sales. We notice that some things change, while other don’t. The EFN for 2002 remains the same, however, the EFN for 2003 and 2004 decreases significantly. The EFN in 2002 for 2003 goes down to £0.22 million, a difference...
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