The Body Shop International PLC was one of the fastest-growing manufacturers- retailers globally in the late 1990s. During the 90s, the firm experienced an annual growth rate of almost 20% annually. However, in the late 90s, the firm experienced a slowed growth rate of 8% annually. The decline in the growth rate resulted from increased competition in the markets. This growth rate slowed due to the entry of new retailers of the skin and hair based products, which brought intense competition for the body shop international. Amidst the intense competition, the body shop failed to maintain its brand image as well as expand its markets around the U.S.
One of the factors that led to the decline of net growth is the fact that the company's CEO at the time did not consider finance patterns to determine the financial health of the company. The manager at the time was Anita Roddick, who was the founder of the body shop. In one of her speeches, she argued that "finance bored pants off me," and it evident that Roddick focused only on the promotion of the company (Financing Policies and strategies Case Study 19). Her sole idea for advertising of the firm was based on social change, action, and skincare. Roddick was always frustrated by the fact that the media judged Body Shop PLC by the firm's profits and the product it sells, whereas she wanted the firm to be judged based on its positive impacts and its social actions to the larger society. Eventually, Roddick had to step down after failed attempts to re-invent the company back to its top.
After Roddick stepping down in 1998, the firm appointed another CEO by the name of Patrick Gournay. However, change in the management did not bear many fruits since problems in the firm persisted in the fiscal year 2001. In the fiscal year 2001, the firm had increased its revenue growth by 13%, but its pretax profit had decreased by 21%. This fact showed that the firm was not heading towards the right direction since, despite the increased in revenues, the firms seemed not have made any profits after the taxes, which means the firm was not making enough profits. The manager after the 2001 fiscal year reports agreed the results were below par, and he was disappointed by the outcome. Nevertheless, the CEO believed that with a change in strategies, things would eventually add up for the company.
The strategy by the manager consisted of three principles objectives. The objectives he advocated for included enhancing the body shop brand through a focused product strategy. Other goals included increased investments in the stores as well as trying to achieve operational efficiencies by reducing inventory costs to the firm’s shareholder culture. To achieve these objectives, the firm had to estimate its future net spending and earnings from the available financial statements. The firm had full-year balance sheets and income statements for years 1999, 2000, and 2001, which can be used to provide further insights into the company's financial health and future well-being.
Focusing on the future of Body Shop International PLC, there is a need to build a financial model to forecast the future business performance of the firm. The forecast in financial models is mainly based on a company's historical performance and assumptions of the future. It requires preparation of the income statement, cash flow statement, and balance sheets as well as supporting schedules to make the three statement model. Financial modeling is the process by which a firm provides a presentation of its future aspects (Samonas 3). Financial models are essential for making acquisitions on business or assets, growing businesses organically by entering new markets, or opening new stores. Furthermore, these models are critical for forecasting and budgeting for capital allocation and raising capital through debts or assets to grow the business. Finally, finance models are essential for evaluating the value of the company. Therefore, by building financial models for Body Shop International PLC, the firm will be able to determine its future value, among many other aspects.
The current financial statements provided Body Shop international PLC 2001 offers a lot of insights concerning the well-being of the company. From the financial statements provided, one can be able to determine the profitability and the solvency of the firm. For instance, based on the turnover, which measures a firm's sales relative to its assets, it is evident that the firm has recorded a continuous increase in revenue within the three years after a change of management. The same might be expected after financial modeling. Furthermore, the turnover of the firm is associated with increased gross profits for the firms. However, considering the earnings before tax, there is a decline in the profits, which means the firms had more tax expenses for the year 2001. Also, considering the profits and losses retained for the year 2001, the company retained an increase in the loss by 1.6%.
From the information provided in the balance sheets, Body Shop International PLC, the assets in the firms increased steadily for the three years. The assets of the firm probably increased due to an increase in sales and firm operations. Furthermore, considering the ability of the firm to pay its creditors based on the long term and short terms, it is worth noting that from the computation of the current ratio of the firm, the rate is at 1.0, which shows that the firm can pay its short term obligations. The current ratio is computed by dividing total assets by the total liabilities. Therefore, the current rate for Body Shop international is at 1.0, which shows the ratio is healthy, and it means the firm can meet its short term obligations.
Additionally, considering the total liabilities and equity, the liabilities also increased within three years. Ideally, almost all the essential elements in the income statements and balance sheets have increased within three years. By this fact, I mean that the gross profits, inventories, fixed assets, accounts payables, liabilities, and shareholders' equity. Considering the inventories, it is worth noting that inventories refer to complete finished products for sale. An increase in inventories shows that the firm is heading in the right direction. Furthermore, inventories for the Body Shop international termed as business assets because they add value to the firm. Inventories add the best value because the firms can sell them to make money. However, inventories are subdivided into two subgroups of supplies and product inventory. The conclusion from the financial statements available is that the firm is heading towards the right direction; however, there is much that needs to be done to ensure profits revenues after pretax is still sufficient to avoid losses after taxation. Besides, the firm needs to re-invent its brand to outdo its competitors to thrive in the markets effectively.
- Samonas, Michael. Financial forecasting, analysis, and modeling: a framework for long-term forecasting. John Wiley & Sons, 2015. https://b-ok.cc/book/2542761/e3956b. Accessed 8 Oct 2019.
- Financing Policies and strategies Case Study. "The Body Shop International PLC 2001: An Introduction to Financial Modeling."