Chapter 6 Financial Strategy

(1)

C H A P T E R 2 C H A P T E R 2 C H A P T E R 1 C H A P T E R 1 C H A P T E R 1 C H A P T E R 1 C H A P T E R 6 C H A P T E R 6

Financial Strategy

CHAPTER 06

McGraw-Hill/Irw

(2)

(3)

(4)

Objectives and Goals

•

• FinancialFinancial – – not necessarily not necessarily profits, but return onprofits, but return on

investment (ROI)

investment (ROI) – – primary focus primary focus

•

• SocietalSocietal – – helping to improve the world around us helping to improve the world around us

•

(5)

Components of the

Strategic Profit Model

(6)

(7)

C H A P T E R 2 C H A P T E R 1 C H A P T E R 1 C H A P T E R 6

The Strategic Profit Model:

An Overview

Profit Margin x Asset turnover = Return on assets

Net profit x Net sales (crossed out) = Net profit

Net sales (crossed out) Total assets Total assets

Net Profit Margin: reflects the profits generated from each dollar of sales Asset Turnover : assesses the productivity of a firm’s investment in its assets

(8)

(9)

Fiscal Annual Income Statement for

Family Dollar and Nordstrom

** ($ millions)

(10)

(11)

Profit Management Path for Family

Dollar Stores and Nordstrom

(12)

(13)

Profit Margin Management Path

• Net Sales = Gross Sales + Promotional

Allowances - Return

• Cost of Good Sold (COGs)

(14)

Profit Margin Management Path

• Operating Expense

• Variable (e.g.. sales commissions)

• Fixed (rent, depreciation, staff salaries)

(15)

Profit Margin Management Path

• Operating profit margin

• Operating profit margin = Gross margin - Operating

expenses - Extraordinary (recurring) operating expenses

• Net profit margin = Operating profit margin Taxes

(16)

Profit Margin Management Path

• Gross margin percentage is gross margin divided by net

sales.

• Retailers use to compare

• the performance of various types of merchandise

• their own performance with that of other retailers

with higher or lower levels of sales.

Gross margin

(17)

Profit Margin Management Path

• SG & A or operating expenses can be expressed as a

percentage of net sales to facilitate comparisons across items, stores, and merchandise categories within and between firms.

Operating expenses

(18)

Profit Margin Management Path

• Net operating profit percentage is gross margin minus

operating expenses divided by net sales

Gross margin - Operating expenses

(19)

Asset Management Path

• Assets:

• Economic Resources (e.g., inventory, buildings,

computers, store fixtures) owned or controlled by a firm

• Current Asset and Fixed Asset

• Current Assets = Cash + Account Receivable +

(20)

Asset Management Path

• Accounts receivable are primarily the monies owed to

the retailer by customers that have bought merchandise on credit.

• Fixed Assets = Fixture, Stores (owned)

• Asset Turnover = Sales/Total Assets

• Inventory Turnover = COGS/Avg. Inventory (cost)

Net sales

Total assets = Asset turnover Cost of goods sold

(21)

Asset Information from Family Dollar Stores’

and Nordstrom’s Balance Sheets

* ($ millions) * *

(22)

(23)

Asset Management Path for Family

Dollar and Nordstrom

(24)

(25)

Inventory Turnover

• A Measure of the Productivity of Inventory:

• It is used to evaluate how effectively retailers utilize

their investment in inventory

• Shows how many times, on average, inventory cycles

through the store during a specific period of time (usually a year)

Inventory Turnover = COGS/avg inventory (cost) Inventory Turnover = Sales/ avg inventory (retail)

(26)

Strategic Profit Model Ratios for

Selected Retailers

(27)

(28)

Income Statement Information for Gifts To Go Stores and Proposed Gifts-To-www.Go.com Internet

(29)

(30)

Balance Sheet Information for Gifts To Go Stores and Proposed Gifts-To-www.Go.com Internet Channel

(31)

(32)

Analysis of Financial Strength

• Cash-Flow Analysis

• Retailers need cash to meet their obligations — i.e.,

salary, rent, vendors, etc.

• Cash flow is calculated by making adjustments to net

profit involving adding or subtracting differences in revenue and expenses that occur from one period to the next.

(33)

Analysis of Financial Strength

• Debt-Equity Ratio

• The retailer’s short- and long-term debt divided by the value of the owners’ or stockholders’ equity.

• Current Ratio

• The is short-term assets divided by short-term

liabilities, it evaluates the retailer’s ability to pay its

(34)

Analysis of Financial Strength

• Quick Ratio

• “acid-test ratio”

• More stringent test because it removes inventory

from the short-term assets.

• If a retailer needs cash to pay its short-term liabilities,

it cannot rely on inventory to provide an immediate source for cash.

(35)

Setting and

Measuring Performance Objectives

• Retailers will be better able to gauge performance if it

has specific objectives in mind to compare performance.

• Should include:

• numerical index of performance desired

• time frame for performance

(36)

Setting Objectives

in Large Retail Organizations

Top-Down Planning

Corporate Developmental Strategy

Category, Departments and sales associates implement strategy

(37)

(38)

Setting Objectives

in Large Retail Organizations

Bottom-Up Planning Buyers and Store managers estimate what they can

achieve Corporate Operation managers must be involved in objective setting process

(39)

(40)

Productivity Measures

Input Measures – assess the amount of resources or money used by the retailer to achieve outputs such as sales

Output measures – asses the results of a retailer’s investment decisions

Productivity measure – determines how effectively

retailers use their resource – what return (e.g., profits) they get on their investments (e.g., expenses)

(41)

C H A P T E R 2 C H A P T E R 1 C H A P T E R 1 C H A P T E R 6 Outputs_– Performance • Sales • Profits • Cash flow

• Growth in sales, profits

• Same store sales growth

Inputs Used by Retailers

• Inventory ($)

• Real Estate (sq. ft.)

• Employees (#)

• Overhead (Corporate Staff and Expenses)

• Advertising

• Energy Costs

• MIS expenses

(42)

Examples of Performance

Measures Used by Retailers

(43)