Chapter 1212Operations Management: Financial Dimensions

RETAIL MANAGEMENT:

A STRATEGICAPPROACH,

9th Edition

BERMANBERMAN EVANS EVANS

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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

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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

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Major Components of a Profit-and-Loss Statement

• Net Sales• Cost of Goods Sold• Gross Profit

(Margin)• Operating Expenses• Taxes• Net 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

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Asset Management

The Balance Sheet– Assets– Liabilities– Net Worth– Net Profit Margin– Asset Turnover– Return on Assets– Financial Leverage

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Figure 12.1 The Strategic Profit Model

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Other Key Business Ratios

Quick RatioCurrent RatioCollection PeriodAccounts Payable to Net SalesOverall Gross Profit

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Financial Trends in Retailing

Slow growth in U.S. economyFunding sourcesMergers, consolidations, spinoffsBankruptcies and liquidationsQuestionable accounting and financial

reporting practices

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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 estateInitial public offering (IPO)

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Figure 12.2 Rebuilding Kmart

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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

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Figure 12.3 The Retail Budgeting Process

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Budget Benefits 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

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Preliminary Budgeting Decisions

1) Specify budgeting authority

2) Define time frame

3) Determine budgeting frequency

4) Establish cost categories

5) Set level of detail

6) Prescribe budget flexibility

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Cost Categories

Capital expendituresFixed costsDirect costsNatural account expenses

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Ongoing Budgeting Process

Set goalsSpecify performance standardsPlan expenditures in terms of performance

goalsMake actual expendituresMonitor resultsAdjust budget

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Resource Allocation

• Capital Expenditures– Long-term

investments in fixed assets

• Operating Expenditures– Short-term selling

and administrative costs in running a business

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Enhancing 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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