7/31/2019 Financial Strategy in Retail
1/22
Financial Strategy
7/31/2019 Financial Strategy in Retail
2/22
Retailer Objectives
Financial not necessarily profits, but returnon investment (ROI) primary focus
Societal helping to improve the worldaround us
Personal self-gratification, status, respect
7/31/2019 Financial Strategy in Retail
3/22
Financial Tradeoff Made by Retailers to
Increase ROI
Asset Turnover
Net Profit Margin
7/31/2019 Financial Strategy in Retail
4/22
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
7/31/2019 Financial Strategy in Retail
5/22
Components of the Strategic Profit Model
7/31/2019 Financial Strategy in Retail
6/22
The Strategic Profit Model:Profit Management
Net ProfitMargin
Sales
Net Profit
GrossMargin
Total
Expenses
Sales
Cost ofGoods Sold
15%
15
40
100
60
100 25
-
-
7/31/2019 Financial Strategy in Retail
7/22
The Strategic Profit Model:Asset Management
AssetTurnover
Total Assets
Sales
CurrentAssets
Fixed Assets
Inventory
AccountsReceivable
2.5
100
10
5
4
40
30
+ +
+
Other CurrentAssets
1
7/31/2019 Financial Strategy in Retail
8/22
The Strategic Profit Model:
Return on Assets
Net Profit Margin
Sales
Net ProfitGross Mar
Total Exp.
Sales
Cost Goods Sold
15%
1540
100
60
100 25
-
-
Asset Turnover
Total Assets
Sales
Current Assets
Fixed Assets
Inventory
A/R
2.5
100
10
5
4
40
30
+ +
+
Other Cur Assets
1
Return on
Assets
37.5%
Times
Net Profit Net Profit Net Sales
Total Assets= Net Sales
xTotal Assets
Net Sales
Total Assets( )
Net Profit
Net Sales( )
Net Profit
Total Assets( )
7/31/2019 Financial Strategy in Retail
9/22
Net
Sales
Gross MarginGross Margin
Gross SalesLess Returns
Less customer
allowances
COGS
Components of Gross Margin
7/31/2019 Financial Strategy in Retail
10/22
Types of RetailOperating Expenses
Selling expenses = Sales staff salaries + Commissions +
Benefits
General expenses = Rent + Utilities + Miscellaneous
expenses
Administrative expenses = Salaries of all employees other than
salespeople + Other administrative expenses
7/31/2019 Financial Strategy in Retail
11/22
Profit Management
Asset Management
The Strategic Profit Model
Net Sales
Cost of goods
sold
Variable
expenses
Fixed expenses
Gross margin
Total expenses
Net profit
Net Sales
Net profitmargin
Asset turnover
Return on
assets
-
-
+
Inventory
Accounts
receivable
Other current
assets
Total current
assets
Fixed assets
Net sales
Total assets
+
+ +
x
7/31/2019 Financial Strategy in Retail
12/22
Productivity Measures
Input Measures assess the amount of resources or money used by the retailer to
achieve outputs such as sales
Output measuresasses the results of a retailers investment decisions
Productivity measure determines how effectively retailers use their resource
what return they get on their investments
7/31/2019 Financial Strategy in Retail
13/22
Setting and Measuring Performance Objectives
Retailers will be better able to gauge performance if it has specific objectives in mind to
compare performance. These Should include:
numerical index of performance desired
time frame for performance
necessary resources to achieve objectives
7/31/2019 Financial Strategy in Retail
14/22
Setting Objectives in Large Retail Organizations
Top Down PlanningCorporate Developmental Strategy
Category, Departments and sales
associates implement strategy
7/31/2019 Financial Strategy in Retail
15/22
Setting Objectives in Large Retail Organizations
Bottom Up PlanningBuyers and Store managers
estimate what they can
achieve
Corporate
Operation managers must be
involved in objective setting
process
7/31/2019 Financial Strategy in Retail
16/22
Financial Performance of Retailers
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
7/31/2019 Financial Strategy in Retail
17/22
Productivity - Outputs/Input
Corporate Level
ROA = Profits/Assets (ROE = Profit/Equity)
Overhead/Sales
Buyers (Inventory, Pricing, Advertising)
Gross Margin % = Gross Margin/Sales Inv Turnover = COGS/ Avg. Inventory (cost)
GMROI Gross Margin/Average Inventory
Advertising/sales
Stores (Real Estate, Employees)
Sales/Square Feet inv. Shrinkage/sales
Sales/Employee
7/31/2019 Financial Strategy in Retail
18/22
Examples of Performance
Measures Used by Retailers
Level of Output Input Productivity
Organization (Output/Input)
Corporate Net sales Square feet of Return on assets
(measures of store space
entire corporation)Net profits Number of Asset turnover
employees
Growth in sales, Inventory Sales per employee
profits
Advertising Sales per square
expenditures foot
l f f
7/31/2019 Financial Strategy in Retail
19/22
Examples of Performance
Measures Used by Retailers
Level of Output Input Productivity
Organization (Output/Input)
Merchandise Net sales Inventory level Gross Margin
management Return on
(measures for a Investment (GMROI)
merchandise
category) Gross margin Markdowns Inventory turnover
Growth in sales Advertising Advertising as a
expenses percentage of
sales *
Cost of Markdown as a
merchandise percentage of
sales*
* These productivity measures are commonly expressed as an input/output.
E l f P f
7/31/2019 Financial Strategy in Retail
20/22
Examples of Performance
Measures Used by Retailers
Level of Output Input Productivity
Organization (Output/Input)
Store operations Net sales Square feet of Net sales per
(measures for a selling areas square foot
store ordepartment Gross margin Expenses for Net sales per
within a store) utilities sales associate
or per selling hour
Growth in sales Number of sales Utility expenses as
associates a percentage of
sales *
* These productivity measures are commonly expressed as an input/output.
Ill t ti P d ti it M
7/31/2019 Financial Strategy in Retail
21/22
Illustrative Productivity Measures
Used by Retailing Organizations
Level of Output Input ProductivityOrganization (Output/Input)
Corporate Net profit Owners equity Net profit /
(chief executive owners equity =
officer) return on owners
equity
Merchandising Gross margin Inventory * Gross margin /
(merchandise inventory* =
manager and GMROI
buyer)
Store operations Net sales Square foot Net sales /
(director of stores, square foot
store manager)
*Inventory = Average inventory at cost
7/31/2019 Financial Strategy in Retail
22/22
Benchmarks
Performance of retailer over time retailer cancompare its recent performance to its performance inthe preceding months, quarters or years.
Performance of a retailer compared to its competitors
Top Related