Ch 12

The strategic profit model

(Net Profit) * (Asset turnover) * (Financial leverage) = (RONW) (Net Profit / Net sales) * (Net sales / Total asset) * (Total asset / Net worth) = (Net profit / Net worth)

Ch 12 Notes

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Ch 12 PowerPoint

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Preliminary Budgeting Decisions

1. Specific budgeting authority 2. Define time frame 3. Determine budgeting frequency 4. Establish cost categories 5. Set levels of detail 6. Prescribe budget flexibility

Increasing Asset Turnover

24/7 operations Outsourcing delivery and credit operations Lease instead of own assets (virtual corporation owns few assets) Reduce inventory levels through quick response, through reducing product proliferation, and through drop shipping Utilize second-use locations to reduce store renovation expenses Utilize inexpensive fixtures--pipe rack, cut case displays

Enhancing Productivity

A firm can improve employee performance, sales per foot of space, and other factors by better matching employee workloads to store traffic patterns, upgrading training programs, increasing advertising, evaluating item probability and turnover, etc. It can reduce costs By automating, having suppliers perform certain tasks, etc.

Cost of goods sold

Amount a retailer has paid to acquire the merchandise sold during a given time period. It equals the total cost of merchandise available for sale minus the cost value of ending inventory.

Assets

Any items a retailer owns with a monetary value.

To examine resource allocation

Both the magnitude of costs and productivity need to be examined. Cost can be divided into capital and operating categories; both must be regularly reviewed. Opportunity cost mean foregoing possible benefits if a retailer invest in one opportunity rather than another. Productivity is the efficiency with which a retail strategy is carried out; the goal is to maximize sales and profits will keeping costs in check.

To look at retail budgeting

Budgeting outlines a retailer's planned expenditures for a given time based on expected performance; costs are linked to goals. There are six preliminary decisions: (1) responsibility is defined by top-down and/or bottom-up methods (2) The timeframe is specified (3) Budgeting frequency is set (4) Cost categories are established (5) The level of detail is ascertained (6) Budgeting flexibility is determined The ongoing budgeting process then proceeds: goals, performance standards, planned spending, actual expenditures, monitoring results, and adjustments. With zero based budgeting, each budget starts from scratch; with incremental budgeting, current and past budgets are guides. The budgeted vs actual profit-and-loss statement and the percentage profit-and-loss statement are vital tools. In all budgeting decisions, cash flow (which relates the amount of timing of revenues received with the amount of timing of expenditures made) must be considered.

Resource Allocation

Capital Expenditures: Long-term investments in fixed assets Operating Expenditures: Short-term selling and administrative costs in running a business

Cost Classifications

Capital expenditures: long-term investments (can be leased, often appreciated) Fixed costs: constant over range of sales Direct costs: can be traced to departments, stores, products Natural account expenses: classified by name such as salaries Operating expenses: short run expenses Variable costs: based on sales levels Indirect expenses: general overhead that can be allocated to cost centers Functional account expenses: classified by purpose or activity, such as cashiers, customer service personnel

Causes/Examples of Bad Costs

Cause: Over-centralizing stores operations Example: Common hours of operation and services regardless of location needs. Cause: Reducing all expenses on a proportionate basis Example: Some services are more highly valued like low waiting lines or custom made sandwiches Cause: Trading-up to capture more affluent customers Example: Illuminating existing customers and do not attract more fluent ones Cause: Not responding to changes in consumer behavior due to technology Example: Ignoring web- order on-line and pick up in-store; using catalogs vs web Cause: Not responding to competition Example: Not understanding low-cost competition, and bundled pricing opportunities

Major components of a profit-and-loss statement: Donna's Gift Shop 2012

Ch 12 PP slides 5 & 6

Cost categories

Chapter 12 pg 316

Two examples of strategies that divers retailers have used to raise productivity

Chapter 12 pg 320

Other key business ratios

Chapter 12 pg 310-311

Hidden assets

Depreciated assets, such as store buildings and warehouse, that are reflected on a retailer's balance sheet at low values relative to their actual worth.

Gross profit (margin)

Difference between net sales and the total cost of goods sold. It is also known as gross margin.

To describe asset management, including the strategic profit model, other key business ratios, and functional trends in retailing.

Each retailer has assets and liabilities to manage. A balance sheet shows assets, liabilities, and net worth at a given time. Assets are items with a monetary value owned by a retailer; some appreciate and may have a hidden value. Liabilities are financial obligations. The retailer's net worth, also called owner's equity, is computed as assets minus liabilities. Asset management may be measured by reviewing the net profit margin, asset turnover, and financial leverage. Net profit margin = net profit / by net sales. Asset turnover = net sales / by total assets. By multiplying the net profit margin by asset turnover, a retailer can find its return on assets—which is based on net sales, net profit, and total assets. Financial leverage = total assets / by net worth. The strategic profit model incorporates asset turnover, profit margin, and financial leverage to yield the return on net worth. It allows a retailer to better plan and control its asset management. Other key ratios for retailers are -the quick ratio, -current ratio, -collection period, -accounts payable to net sales, and -overall gross profit (in percent). important financial trends involve -the state of the economy; -funding sources; -mergers, -consolidations, & spinoffs; -bankruptcies & liquidations; and -questionable accounting & financial reporting practices.

Productivity

Efficiency with which a retail strategy is carried out.

Net profit after taxes

Equals gross profit munus retail operating expenses.

Benefits of budgeting

Expenditures are related to expected performance. Costs can be adjusted as goals are revised. Resources are allocated to the right areas. Spending is coordinated Planning is structured and integrated. Cost standards are set. Expenditures are monitored during a budget cycle. Planned budgets vs actual budgets can be compared. Costs/performance can be compared with industry averages.

Strategic profit model

Expenses the numerical relationship among net profit margin, asset turnover, and financial leverage. It can be used in planning or controlling a retailer's assets.

Liabilities

Financial obligations a retailer incurs in operating a business.

Increasing Profit Margins

Increase sales of private label brands Centralized buying to increase bargaining power Reduce SKUs in each category to increases bargaining power Reduce operating expenses via self-service operation, and through " buy online, pick up in-store" to reduce delivery costs Increase web sales Reduce labor expenses through increased use of part-time help, better scheduling

Balance sheet

Itemizes a retailer's assets, liabilities, and net worth at a specific time--based on the principle that assets equal liabilities plus net worth.

Funding Sources

Mortgage refinance (due to low interest rates) REIT (retail-estate investment trust) to fund construction -Company dedicated to owning and operating income-producing real estate Initial public offering (IPO)

To define operations management.

Operations management involves efficiently and effectively implementing the tasks and policies to satisfy the retailer's customers, employees, and management.

Budgeting

Outline the retailer's planned expenditures were given time based on expected performance. Costs are linked to satisfying target market, employee, and management goals.

Budgeting

Outlines a retailer's planned expenditures for a given time based on expected performance.

Net profit margin

Performance measure based based on a retailer's net profit and net sales. It is equal to net profit divided by net sales.

Asset turnover

Performance measure based on a retailer's net sales and total assets. It is equal to net sales divided by total assets.

Return on net worth (RONW)

Performance measure based on net profit, net sales, total assets, and net worth. RONW = (Net profit / Net sales) * (Net sales / Total assets) * (Total assets / net worth)

Financial leverage

Performance measures based on the relationship between a retailer's total assets and net worth. It is equal to total assets divided by net worth.

Return on assets (ROA)

Performance ratio based on net sales, net profit, and total assets. ROA = (Net profit / Net sales) * (Net sales / Total assets) = (Net profit / Total assets)

Opportunity costs

Possible benefits a retailer forgoes if it invests in one opportunity rather than another.

Zero based budgeting

Practice followed when a firm starts each new budget from scratch and outlines the expenditures needed to reach that period's of time a budget is done.

Operations management

Process used to efficiently and effectively enact the policies and tasks to satisfy a firm;s customers, employees, and management (and stockholders, if a publicly owned company).

Incremental budgeting

Process whereby a firm uses current and past budgets as guides and adds to or subtracts from them to arrive the coming period's expenditures.

Profit planning

Profit-and-loss (income) statement -Summary of a retailer's revenues and expenditures over a given period of time. -Review of overall and specific revenues and costs for similar periods and profitability.

Other Key Business Ratios

Quick ratio: cash plus accounts receivable divided by total current liabilities (due with one year) Current ratio: total current assets (including inventory) divided by total current liabilities Collection period: accounts receivable divided by net sales and then multiplied by 365 (aging accounts receivable) Accounts payable to net sales: accounts payable divided by annual net sales Overall gross profit: net sales minus the cost of goods sold and divided by net sales

Cash Flow

Relates the amount and timing of revenues received to the amount and timing of expenditures for a specific time. In cash flow management, the usual intention is to make sure revenues are received before expenditures are made. If cash flow is weak, short-term loans may be needed or profits may be tied up in inventory and other expenses. For seasonal retailers, erratic cash flow may be unavoidable.

Cash flow

Relates the amount and timing of revenues received to the amount and timing of expenditures made during a specific time.

Capital expenditures

Retail expenditures that are long-term investments in fixed assets.

Net worth

Retailer's assets minus its liabilities.

Net sales

Revenues received by a retailer during s given time, period after deducting customer returns, markdowns, and employee discounts.

Ongoing Budgeting Process

Set goals Specify performance standards Plan expenditures in terms of performance goals Make actual expenditures Monitor results Adjust budget

Operating expenditures (expenses)

Short-term selling and administrative costs of running a business.

Financial Trends in Retailing

Slow growth in US economy Funding sources Mergers, consolidations, spinoffs Bankruptcies and liquidations Questionable accounting and financial reporting practices

Profit-and-loss (income) statement

Summary of retailer's revenues and expenses over a period of time, usually a month, quarter, or a year.

A retail Balance Sheet for Donna's Gift Shop

Table 12-2 pg 307 ch 12 slide 8

Bad Costs

That costs are costs incurred for customer service is that: Customers do not value (will pay not additional prices for) Are not required by customers

Asset management

The balance sheet -Assets -Liabilities -Net worth -Net profit -Asset turnover -Return on asset -Financial leverage

Operations Management

The efficiency and effective implementation of the policies and tasks necessary to satisfy the firm's customers, employees, and management.

Taxes

The portion of revenues turned over to the federal, state, and/or local government.

To discuss profit planning

The profit-and-loss (income) statement summarizes a retailer's revenues and expenses over a specific time, typically on a monthly, quarterly, and/or yearly basis. It consist of these major components: Net sales Cost of goods sold Gross profit (margin) Operating expenses Net profit after taxes

The retail Budgeting Process

fig 12-3 pg 315

Operations management

involves the efficient and effective implementation of the policies and tasks necessary to satisfy the firm's customers, employees, and management (and stockholders, if a public company). This has a major impact on both sales and profits.

The Effects of Cash Flow

table 12-6 pg 318 ch 12 pp slide 26

Ch 12 Terms

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