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Percentage of sales forecasting
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Case Studies in Finance Edition: 7 Authors: Robert F . Bruner, Kenneth Eades, & M ichael Schill ISBN: 9780077861711
Week 4 reading:
In this week, you need to finish the reading of case 9:
- Case 9: The Body Shop
Introduction case 9:
In this case, you are cast in the role of adviser to Anita Roddick, the managing director of the Body Shop. You are to 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 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.
Main skill to develop: Percentage of sales forecasting
Please listen the video to learn how to do Percentage of sales forecasting:
The process to do percentage-of-sale forecasting for the body shop:
- Calculate the growth rate of sale in each year: from 1999 to 2000, from 2000 to 2001.
- Calculate the percentage of each item with respect of sales (turnover) in each year.
- Based on the calculation of 1), estimate the sale growth rate during years 2002-2004.
- Based on the calculation of 2), estimate the percentage of each item with respect to sale during year 2002-2004.
- Estimate the values of items in financial statements in each year.
- Adjust the “cash” and “overdraft” to make the balance sheet balanced: total asset= total liability.
Key points in case 9:
Pay attention:
- Sources of assumptions: growth rates could originate from the following:
- historical growth rate for the firm
- historic growth rates for peers
- target growth rates used by the firm
- When processing forecasting, which items are changed with sale, and which are not changed with sales?
- The use of Overdrafts, cash to make the total asset=total liability
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