THE BODY SHOP INTERNATIONAL PLC 2001: AN INTRODUCTION TO FINANCIAL MODELING

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CASE 9

THE BODY SHOP INTERNATIONAL PLC 2001:

AN INTRODUCTION TO FINANCIAL MODELING

Synopsis and Objectives

In this case, the student is cast in the role of adviser to Anita

Roddick, the managing director of the Body Shop. The student must

prepare a three-year forecast of the firm’s income statements and balance

sheets. The case is intended to introduce percentage-of-sales forecasting

and walks the student through the preparation of a simplified forecast, first

using pencil and paper, then using a spreadsheet program on the personal

computer. The case emphasizes the importance of being able to speak

plainly about one’s financial forecast and the insights that are of use to the

general manager.

Suggested Instructions for Advance Assignment to Students

Advance instructions to students for this case are relatively simple:

Work through the exercises in this case, first using pencil and paper, and then

using your personal computer. Then follow the directions in the case to make the

three-year forecast, and prepare responses to the questions posed at the end of the

case.

The Microsoft Excel spreadsheet file, UVA-F-1349X, supports student analysis and saves a few

keystrokes in formatting and entering data for the final exercise of the case. The instructor’s

work file, UVA-F-1349TNX, contains the completed model shown in Exhibit TN2—this model

should not be distributed to the students.

This teaching note was written by Robert F. Bruner. The author thanks Professor Oyvind Bohren for comments,

copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced,

stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic,

mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

A suggested

complementary

case dealing with

percentage of sales

forecasting:

“Deutsche

Brauerei,” (UVA-F-

1355)

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Supplemental References

The case presents a self-contained exposition of forecasting, and will require two to four

hours of preparation by a novice student. We have been reluctant to load more preparation upon

the student. The instructor may wish to offer supplemental resources depending on the audience,

setting, and the availability of student preparation time. The following are potentially valuable

complements to this case.

Higgins, Robert C. “Financial Forecasting” in Analysis for Financial Management. 6th ed. (Burr

Ridge, IL: Irwin/McGraw-Hill, 2001). This is one of the best concise discussions of financial

forecasting, and would be especially useful with executive audiences.

Current corporate finance textbooks offer presentations that link the mechanics of forecasting to

the larger subject of financial planning. Two good discussions are these:

Brealey, Richard A., and Stewart C. Myers, “Financial Analysis and Planning.” chap. 28 in

Principles of Corporate Finance. 6th ed. (Burr Ridge, IL: Irwin/McGraw-Hill, 2000).

Ross, Stephen, Westerfield, Randolph, and Jaffe, Jeffrey. “Corporate Financial Models and Long-

Term Planning.” chap. 28 in Corporate Finance. 6th ed. (Burr Ridge, IL: Irwin/McGraw-

Hill, 2002).

Some novices will ask for more practice drills in forecasting mechanics. The following is a CD-

ROM–based tutorial that walks students through the preparation of spreadsheet forecasting

models for three companies:

Bruner, Robert F., Kenneth M. Eades, and Robert S. Harris. Finance Interactive. (Burr Ridge, IL:

Irwin/McGraw-Hill, 1997). Students welcome the self-guided aspect of this tutorial, and

show quicker mastery when they use it. We provide this resource after students have received

the introduction in the Body Shop case.

Hypothetical Teaching Plan

Although the mechanical tasks in the case are straightforward, a discussion of this case

easily fills a solid class period. The instructor will need to balance faithfulness to the breadth of

issues raised with appeals from novices for in-depth pointers.

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

This opening is a useful motivator for the discussion and lends seriousness to the

exercise. The basic point should be that finance is concerned with expected performance.

Investors forecast to value and invest. Managers forecast to plan and finance. Financial

forecasts such as the exercises in this case lend rigor to expectations about future

performance.

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2. Let us vault past the exercise questions and go straight into the three-year forecasts: How

did you prepare your forecast and what numbers did you get?

Exhibit TN1 offers a template for a transparency based on case Exhibit 8. The instructor

can use the template to enter the forecasts for 2002 and 2003. One approach is to call on a

student to present his or her entire set of results, then call on other students to describe

their differences, innovations, and points of difficulty. The instructor might keep a list on

the chalkboard of modeling questions and their answers.

3. How much debt financing will the Body Shop need over this forecast period? What are

the key drivers of this need, and how much do debt needs vary as the assumptions vary?

This phase of the discussion pushes students past mere modeling into the exercise of their

models and the interpretation of results. The aim here should be to engage the students in

the insights to be derived from data tables, the intuitive explanations for the significance

of key drivers, and an appreciation of sensitivity analysis, scenario analysis, and the

identification of break-even assumptions.

4. What issues does this analysis raise for Roddick?

This segment of the discussion should distill the insights from the sensitivity analysis into

practical questions or suggestions for a general manager. For instance, key drivers