Financial Strategy In Retail 2b3n5r
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Financial Strategy
Retailer Objectives Financial – not necessarily profits, but return on investment (ROI) – primary focus Societal – helping to improve the world around us Personal – self-gratification, status, respect
Financial Tradeoff Made by Retailers to Increase ROI Net Profit Margin
Asset Turnover
The Strategic Profit Model: An Overview
Profit Margin x Asset turnover Net profit x Net sales (crossed out)
= Return on assets
Net sales (crossed out) = Net profit Total assets Total assets
Components of the Strategic Profit Model
The Strategic Profit Model: Profit Management Sales Gross Margin
40 Net Profit Net Profit Margin
15
15%
-
Sales
Total Expenses
100
25
100 Cost of Goods Sold
60
The Strategic Profit Model: Asset Management Inventory
5 Sales Asset Turnover
100
2.5
+
Current Assets
s Receivable
10
4
+
+
Total Assets
40
Fixed Assets
Other Current Assets
30
1
The Strategic Profit Model: Return on Assets Sales Net Profit
15
Net Profit Margin
÷
15% Return on Assets
(
)
Net Profit Net Sales
-
-
Cost Goods Sold
Sales
Total Exp.
100
25
)Asset Turnover
Total Assets Assets
100
+
40
Net Profit =
5
÷
Net Sales Total Assets
Net Profit Sales
Sales
Total Assets
)
(
Net Sales
60
Inventory
Net Profit Total Assets
2.5
100
40
Times
37.5%
(
Gross Mar
Net x
Total
Current Assets
A/R
10
4
+
+
30
1
Fixed Assets Other Cur Assets
Components of Gross Margin Gross Sales Less Less Returns customer allowances
Gross Margin
Net Sales COGS
Types of Retail Operating Expenses
Selling expenses Commissions +
=
General expenses Miscellaneous
Sales staff salaries + Benefits =
Rent + Utilities + expenses
istrative expenses other than
=
Salaries of all employees
salespeople + Other istrative expenses
The Strategic Profit Model Net Sales
Cost of goods sold
Variable expenses
+ Fixed expenses
Profit Management
Gross margin
Total expenses
÷ Net profit Net profit margin Net Sales
x Inventory Net sales
+ s receivable
+ Other current assets
Total current assets
+
Fixed assets
Total assets
Return on assets
Asset turnover
÷ Asset Management
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 they get on their investments
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
Setting Objectives in Large Retail Organizations
Top Down Planning Corporate Developmental Strategy
Category, Departments and sales associates implement strategy
Setting Objectives in Large Retail Organizations Corporate
Bottom Up Planning Buyers and Store managers estimate what they can achieve
Operation managers must be involved in objective setting process
Financial Performance of Retailers Outputs Inputs Used by Retailers Performance • Sales • Inventory ($) • Profits • Real Estate (sq. ft.) • Cash flow • Growth in sales, • Employees (#) profits – Same • Overhead store sales growth (Corporate Staff and Expenses) • Advertising • Energy Costs
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
Examples of Performance Measures Used by Retailers Level of Productivity
Output
Input
Organization (Output/Input) Corporate Net sales on assets (measures of entire corporation) Net profits
Square feet of
Return
store space Number of employees
Growth in sales, Inventory
Asset turnover
Sales per
employee profits Advertising expenditures
Sales per square foot
Examples of Performance Measures Used by Retailers Level of Productivity
Output
Input
Organization (Output/Input) Merchandise Margin management (measures for a
Net sales
Inventory level
Gross
Return on Investment
(GMROI)
merchandise category) Inventory turnover
Gross margin
Growth in sales
Markdowns
Advertising expenses
Advertising as a
percentage of * These productivity measures are commonly expressed as an input/output.
sales *
Examples of Performance Measures Used by Retailers Level of Productivity
Output
Input
Organization (Output/Input) Store operations Net sales Net sales per (measures for a selling areas store or department Gross margin Expenses for within a store) utilities
Square feet of square foot Net sales per sales associate or per selling
hour Growth in sales
Number of sales Utility expenses
as associates
* These productivity measures are commonly expressed as an input/output.
a percentage of sales *
Illustrative Productivity Measures Used by Retailing Organizations Level of Productivity
Output
Input
Organization (Output/Input) Corporate Net profit profit / (chief executive officer) owners’
Owners’ equity
Net
owners’ equity = return on equity
Merchandising Gross margin margin / (merchandise manager and buyer) *Inventory = Average inventory at cost
Store operations Net sales /
Inventory
Net sales
*
Gross
inventory* = GMROI
Square foot
Benchmarks • Performance of retailer over time – retailer can compare its recent performance to its performance in the preceding months, quarters or years. Performance of a retailer compared to its competitors
Retailer Objectives Financial – not necessarily profits, but return on investment (ROI) – primary focus Societal – helping to improve the world around us Personal – self-gratification, status, respect
Financial Tradeoff Made by Retailers to Increase ROI Net Profit Margin
Asset Turnover
The Strategic Profit Model: An Overview
Profit Margin x Asset turnover Net profit x Net sales (crossed out)
= Return on assets
Net sales (crossed out) = Net profit Total assets Total assets
Components of the Strategic Profit Model
The Strategic Profit Model: Profit Management Sales Gross Margin
40 Net Profit Net Profit Margin
15
15%
-
Sales
Total Expenses
100
25
100 Cost of Goods Sold
60
The Strategic Profit Model: Asset Management Inventory
5 Sales Asset Turnover
100
2.5
+
Current Assets
s Receivable
10
4
+
+
Total Assets
40
Fixed Assets
Other Current Assets
30
1
The Strategic Profit Model: Return on Assets Sales Net Profit
15
Net Profit Margin
÷
15% Return on Assets
(
)
Net Profit Net Sales
-
-
Cost Goods Sold
Sales
Total Exp.
100
25
)Asset Turnover
Total Assets Assets
100
+
40
Net Profit =
5
÷
Net Sales Total Assets
Net Profit Sales
Sales
Total Assets
)
(
Net Sales
60
Inventory
Net Profit Total Assets
2.5
100
40
Times
37.5%
(
Gross Mar
Net x
Total
Current Assets
A/R
10
4
+
+
30
1
Fixed Assets Other Cur Assets
Components of Gross Margin Gross Sales Less Less Returns customer allowances
Gross Margin
Net Sales COGS
Types of Retail Operating Expenses
Selling expenses Commissions +
=
General expenses Miscellaneous
Sales staff salaries + Benefits =
Rent + Utilities + expenses
istrative expenses other than
=
Salaries of all employees
salespeople + Other istrative expenses
The Strategic Profit Model Net Sales
Cost of goods sold
Variable expenses
+ Fixed expenses
Profit Management
Gross margin
Total expenses
÷ Net profit Net profit margin Net Sales
x Inventory Net sales
+ s receivable
+ Other current assets
Total current assets
+
Fixed assets
Total assets
Return on assets
Asset turnover
÷ Asset Management
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 they get on their investments
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
Setting Objectives in Large Retail Organizations
Top Down Planning Corporate Developmental Strategy
Category, Departments and sales associates implement strategy
Setting Objectives in Large Retail Organizations Corporate
Bottom Up Planning Buyers and Store managers estimate what they can achieve
Operation managers must be involved in objective setting process
Financial Performance of Retailers Outputs Inputs Used by Retailers Performance • Sales • Inventory ($) • Profits • Real Estate (sq. ft.) • Cash flow • Growth in sales, • Employees (#) profits – Same • Overhead store sales growth (Corporate Staff and Expenses) • Advertising • Energy Costs
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
Examples of Performance Measures Used by Retailers Level of Productivity
Output
Input
Organization (Output/Input) Corporate Net sales on assets (measures of entire corporation) Net profits
Square feet of
Return
store space Number of employees
Growth in sales, Inventory
Asset turnover
Sales per
employee profits Advertising expenditures
Sales per square foot
Examples of Performance Measures Used by Retailers Level of Productivity
Output
Input
Organization (Output/Input) Merchandise Margin management (measures for a
Net sales
Inventory level
Gross
Return on Investment
(GMROI)
merchandise category) Inventory turnover
Gross margin
Growth in sales
Markdowns
Advertising expenses
Advertising as a
percentage of * These productivity measures are commonly expressed as an input/output.
sales *
Examples of Performance Measures Used by Retailers Level of Productivity
Output
Input
Organization (Output/Input) Store operations Net sales Net sales per (measures for a selling areas store or department Gross margin Expenses for within a store) utilities
Square feet of square foot Net sales per sales associate or per selling
hour Growth in sales
Number of sales Utility expenses
as associates
* These productivity measures are commonly expressed as an input/output.
a percentage of sales *
Illustrative Productivity Measures Used by Retailing Organizations Level of Productivity
Output
Input
Organization (Output/Input) Corporate Net profit profit / (chief executive officer) owners’
Owners’ equity
Net
owners’ equity = return on equity
Merchandising Gross margin margin / (merchandise manager and buyer) *Inventory = Average inventory at cost
Store operations Net sales /
Inventory
Net sales
*
Gross
inventory* = GMROI
Square foot
Benchmarks • Performance of retailer over time – retailer can compare its recent performance to its performance in the preceding months, quarters or years. Performance of a retailer compared to its competitors
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