The body shop income statement

Question 1: Why would a company like the Body Shop want to forecast its financial statements?

In 1998 Anita Roddick the founder of The Body Shop, resigned from her position, after the ineffective attempts to reaffirm the company. Patrick Gournay was placed as a new CEO with a slight of management change. Moreover, the company was able to increase its revenue by 13% in 2001 while the pretax profit declined by over 21%. Gournay stated, "This is below our expectations, and we are disappointed with the outcome." Gournay had high expectations of implementing a new strategy to improve the company's results. This strategy contained three major basic objectives, which are, to enhance The Body Shop Brand through a focused product strategy and increased investment in stores, and to achieve operational efficiencies in the company's supply chain by reducing product and inventory costs, and to reinforce the company's stakeholder culture. To implement this new strategy efficiently, it was essentially required for Gournay to forecast the company's financial statements. Doing so will lead to an increase in operational efficiencies and lower product and inventory costs.

Question 1 (b): How did you prepare your forecast and what numbers did you get?

I used two different methods of financial forecasting when preparing the financial forecast for the next three years for The Body Shop. The first method is the percentage-of-sales forecasting which is forecasting the sales at first then estimating other financial statement accounts based on some acknowledged association between sales and that account. While the second method is T-accounting forecasting, which requires us to start with a base year of financial statements, such as final years. While knowing that the most used approach of financial forecasting is a hybrid of both methods, as T-accounts are used to predict shareholders' equity and fixed assets, whereas, percent-of-sales forecasting method is used to estimate the income statements, current assets, and current liabilities.