12-1 Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall Operations Management: Financial Dimensions RETAIL MANAGEMENT: A STRATEGIC

12-1 Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Operations Management: Financial Dimensions

RETAIL MANAGEMENT:A STRATEGICAPPROACH

11th Edition11th Edition

BERMAN EVANS


Chapter Objectives

To define operations managementTo discuss profit planningTo describe asset management,

including the strategic profit model, other key business ratios, and financial trends in retailing

To look at retail budgetingTo examine resource allocation


Operations Management

Operations managementOperations 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.


Profit Planning

Profit-and-loss (income) statement Summary of a retailer’s revenues and

expenses over a given period of time Review of overall and specific

revenues and costs for similar periods and profitability


Major Components of a Major Components of a Profit-and-Loss StatementProfit-and-Loss StatementNet SalesCost of Goods

SoldGross Profit

(Margin)Operating

ExpensesTaxesNet Profit After

Taxes

Net Sales $330,000

CGS $180,000

Gross Profit $150,000

Operating Expenses $ 95,250

Other Costs $ 20,000

Total Costs $115,250

Net Profit before Taxes

$ 34,750

Taxes $ 15,500

Net Profit after Taxes

$ 19,250


Asset Management The Balance Sheet

Assets Liabilities Net Worth Net Profit Margin Asset Turnover Return on Assets Financial Leverage



Figure 12-1: The Strategic Profit Model


Other Key Business Ratios Quick ratio—cash plus accounts receivable

divided by total current liabilities (due within one year).

Current ratio—total current assets divided by total current liabilities.

Collection period—accounts receivable divided by net sales and then multiplied by 365.

Accounts payable to net sales—accounts payable divided by annual net sales.

Overall gross profit—net sales minus the cost of goods sold and then divided by net sales.


Financial Trends in Retailing

Slow growth in U.S. economy Funding sources Mergers, consolidations, spinoffs Bankruptcies and liquidations Questionable accounting and

financial reporting practices


Funding SourcesFunding 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)


Figure 12-2: The Demise of Linens ‘n Things


Budgeting

Budgeting outlines a retailer’s planned expenditures for a given time based on expected performance.

Costs are linked to satisfying target market, employee, and management goals.


Figure 12-3: The Retail Budgeting Process


Benefits of BudgetingBenefits 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 versus actual budgets can be

compared. Costs/performance can be compared with

industry averages.


Preliminary Budgeting DecisionsPreliminary Budgeting Decisions

1) Specify budgeting authority2) Define time frame3) Determine budgeting

frequency4) Establish cost categories5) Set level of detail6) Prescribe budget flexibility


Cost CategoriesCost Categories

Capital expenditures Fixed costs Direct costs Natural account expenses


Ongoing Budgeting ProcessOngoing Budgeting Process

Set goals Specify performance standards Plan expenditures in terms of

performance goals Make actual expenditures Monitor results Adjust budget


Cash FlowCash Flow

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.


Table 12-6: The Effects of Cash Flow


Resource Allocation

Capital Capital ExpendituresExpenditures Long-term

investments in fixed assets

Operating Operating ExpendituresExpenditures Short-term

selling and administrative costs in running a business


Enhancing ProductivityEnhancing Productivity

A firm can improve employee performance, sales per foot of space, and other factors by upgrading training programs, increasing advertising, etc.

It can reduce costs by automating, having suppliers do certain tasks, etc.


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12-1 Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall Operations Management: Financial Dimensions RETAIL MANAGEMENT: A STRATEGIC