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Complex Model Applications for teaching
Retail & Wholesale Managementon the
Commerce Specialization of BA Programme
Csaba Sólyomsenior lecturer
Budapest Business School, FCCTDepartment of Commerce
2009.
Education Goals and Learning OutcomesEducation Goals and Learning OutcomesRWHMRWHM
• Improve students’ knowledge and skills in the management of retail and wholesale firms
• Learn how to analyze and control business activities of the firm focusing on profitability and cash management capability of the trading company
• Help students to recognize interrelationships among product assortment, stockturn efficiency, cash-cycle and capital needs of the company by problem based learning tools
• Develop students’ skills how to handle and solve company problems in a trade enterprise
Some Important Specialities of Trade Some Important Specialities of Trade CompaniesCompanies
RWHMRWHM
• Return on Sales (ROS) figures are usually law (2-3%)
• Number of goods merchandised are high (1000-60000 items) – still you must have control over assortment.
• Trade companies need to make high sales value by relative small own capital invested to run the firm profitable and to achieve the planned Return on Equity (ROE) (10-15%)
• You have to face high business risk in Commerce
• Efficiency of inventory control measured in stockturn time has a high influence on the payment capability of the firm
Conclusion: Students should recognise and understand these relationships in practice
RWHMRWHM
Goods inflow
Average stockturn time (days)
Goods sold
Average terms of payment given to
customers
Cash inflow
Terms of payment given
by supplier
Average cash-cycle time (days) (capital bounded in inventory)
0 day A day B day C day
Cash outflow Cash Cash outflow Cash inflowinflow
Goods- and Capital-stockturn Relationships
RWHM Average stockturn time (days) (STD) formula
STD = IVPP * N / CGSWhere IVPP = average inventory on purchase prices
N = number of days in the time intervalCGS = cost of goods sold in the time interval
Average cash cycle time (days) (CCD) formula
CCD = STD – PPT + SPTWhere PPT = average purchase payment terms (delay)
SPT = average sales terms of payment (delay)
CCD = average capital in stocks * N / CGS
and
average capital in stocks = CGS * (STD – PPT + SPT) / N
RWHM For recognizing interrelationships between
PROFITABILITY and
LIQUIDITY (Capability of paying liabilities)
of the firm on annual basis you must compare
income statement
and
annual cash-flow
made in the next MS Excel spreadsheet
RWHM Income statement
cost ratio1 value Annual cash-flow items
value (excl VAT) VAT total
Net sales 100,0% 80 000 000 Sales value 80 000 000 16 000 000 96 000 000
0 Inventory changes (final-initial) 0
0 Purchase 57 600 000 11 520 000 69 120 000
Cost of goods sold 72,0% 57 600 000 cost of goods sold 57 600 000
Gross profit 28,0% 22 400 000 VAT of sales – purchase 0 4 480 000 26 880 000
Energy costs 2,0% 1 600 000 Energy consumption 1 600 000 320 000 1 920 000
0 Material stock change (final-initial) 0
0 Material purchase 2 000 000 400 000 2 400 000
Material costs 2,5% 2 000 000 Material consumption 2 000 000
Labour costs + social insurance 10,5% 8 400 000 Labour cost expenditures 8 400 000 8 400 000
Depreciation costs 3,0% 2 400 000 0 0
Other costs (subcontractors) 6,0% 4 800 000 Other expenditures 4 800 000 960 000 5 760 000
Financial earnings/losses 0 Financial cash inflow/outflow 0 0 0
Extraordinary earnings/losses 0 Extraordinary cash inflow/outflow 0 0 0
Earnings/losses (EBIT) 4,0% 3 200 000 Annual cash flow of the entreprise 0 2 800 000 8 400 000
Corporation tax 512 000 Corporation tax 0 0 512 000
Net income after corp tax 12,0% 2 688 000 Gross cash-flow of company 0 0 7 888 000
Annual VAT liability 2 800 000
Annual net cash-flow produced 5 088 000
RWHM Income statement
cost ratio1 value Annual cash-flow items
Value (excl VAT) VAT total
Net sales 100,0% 80 000 000 Sales value 80 000 000 16 000 000 96 000 000
0 Inventory changes (final-initial) 0
0 Purchase 57 600 000 11 520 000 69 120 000
Cost of goods sold 72,0% 57 600 000 cost of goods sold 57 600 000
Gross profit 28,0% 22 400 000 VAT of sales - purchase 0 4 480 000 26 880 000
Energy costs 2,0% 1 600 000 Energy consumption 1 600 000 320 000 1 920 000
0 Material stock change (final-initial) 0
0 Material purchase 2 000 000 400 000 2 400 000
Material costs 2,5% 2 000 000 Material consumption 2 000 000
Labour costs + social insurance 10,5% 8 400 000 Labour cost expenditures 8 400 000 8 400 000
Depreciation costs 3,0% 2 400 000 0 0
Other costs (subcontractors) 6,0% 4 800 000 Other expenditures 4 800 000 960 000 5 760 000
Financial earnings/losses -300 000 Financial cash inflow/outflow -300 000 0 -300 000
Extraordinary earnings/losses 0 Extraordinary cash inflow/outflow 0 0 0
Earnings/losses (EBIT) 3,6% 2 900 000 Annual cash flow of the entreprise 0 2 800 000 8 100 000
Corporation tax 464 000 Corporation tax 0 0 464 000
Net income after corp tax 10,9% 2 436 000 Gross cash-flow of company 0 0 7 636 000
Annual VAT liability 2 800 000
Annual net cash-flow produced 0 4 836 000
RWHM Income statement
Cost ratio1 value Annual cash-flow items
Value (excl VAT) VAT total
Net sales 100,0% 80 000 000 Sales value 80 000 000 16 000 000 96 000 000
0 Inventory changes (final-initial) 0
0 Purchase 57 600 000 11 520 000 69 120 000
Cost of goods sold 72,0% 57 600 000 cost of goods sold 57 600 000
Gross profit 28,0% 22 400 000 VAT of sales - purchase 0 4 480 000 26 880 000
Energy costs 2,0% 1 600 000 Energy consumption 1 600 000 320 000 1 920 000
0 Material stock change (final-initial) 0
0 Material purchase 2 000 000 400 000 2 400 000
Material costs 2,5% 2 000 000 Material consumption 2 000 000
Labour costs + social insurance 10,5% 8 400 000 Labour cost expenditures 8 400 000 8 400 000
Depreciation costs 3,0% 2 400 000 0 0
Other costs (subcontractors) 6,0% 4 800 000 Other expenditures 4 800 000 960 000 5 760 000
Financial earnings/losses -300 000 Financial cash inflow/outflow -300 000 0 -300 000
Extraordinary earnings/losses 500 000 Extraordinary cash inflow/outflow 600 000 120 000 720 000
Earnings/losses (EBIT) 4,3% 3 400 000 Annual cash flow of the entreprise 0 2 920 000 8 820 000
Corporation tax 544 000 Corporation tax 0 0 544 000
Net income after corp tax 12,8% 2 856 000 Gross cash-flow of company 0 0 8 276 000
Annual VAT liability 2 920 000
Annual net cash-flow produced 0 5 356 000
RWHM Income statement
Cost ratio1 value Annual cash-flow items
Value (excl VAT) VAT total
Net sales 100,0% 80 000 000 Sales value 80 000 000 16 000 000 96 000 000
0 Inventory changes (final-initial) 2 400 000
0 Purchase 60 000 000 12 000 000 72 000 000
Cost of goods sold 72,0% 57 600 000 cost of goods sold 57 600 000
Gross profit 28,0% 22 400 000 VAT of sales - purchase 0 4 000 000 24 000 000
Energy costs 2,0% 1 600 000 Energy consumption 1 600 000 320 000 1 920 000
0 Material stock change (final-initial) 0
0 Material purchase 2 000 000 400 000 2 400 000
Material costs 2,5% 2 000 000 Material consumption 2 000 000
Labour costs + social insurance 10,5% 8 400 000 Labour cost expenditures 8 400 000 8 400 000
Depreciation costs 3,0% 2 400 000 0 0
Other costs (subcontractors) 6,0% 4 800 000 Other expenditures 4 800 000 960 000 5 760 000
Financial earnings/losses -300 000 Financial cash inflow/outflow -300 000 0 -300 000
Extraordinary earnings/losses 500 000 Extraordinary cash inflow/outflow 600 000 120 000 720 000
Earnings/losses (EBIT) 4,3% 3 400 000 Annual cash flow of the entreprise 0 2 440 000 5 940 000
Corporation tax 544 000 Corporation tax 0 0 544 000
Net income after corp tax 12,8% 2 856 000 Gross cash-flow of company 0 0 5 396 000
Annual VAT liability 2 440 000
Annual net cash-flow produced 0 2 956 000
RWHM Income statement
cost ratio1 value Annual cash-flow items
value (excl VAT) VAT total
Net sales 100,0% 80 000 000 Sales value 80 000 000 16 000 000 96 000 000
0 Inventory changes (final-initial) 2 400 000
0 Purchase 60 000 000 12 000 000 72 000 000
Cost of goods sold 72,0% 57 600 000 cost of goods sold 57 600 000
Gross profit 28,0% 22 400 000 VAT of sales - purchase 0 4 000 000 24 000 000
Energy costs 2,0% 1 600 000 Energy consumption 1 600 000 320 000 1 920 000
0 Material stock change (final-initial) -600 000
0 Material purchase 1 400 000 280 000 1 680 000
Material costs 2,5% 2 000 000 Material consumption 2 000 000
Labour costs + social insurance 10,5% 8 400 000 Labour cost expenditures 8 400 000 8 400 000
Depreciation costs 3,0% 2 400 000 0 0
Other costs (subcontractors) 6,0% 4 800 000 Other expenditures 4 800 000 960 000 5 760 000
Financial earnings/losses -300 000 Financial cash inflow/outflow -300 000 0 -300 000
Extraordinary earnings/losses 500 000 Extraordinary cash inflow/outflow 600 000 120 000 720 000
Earnings/losses (EBIT) 4,3% 3 400 000 Annual cash flow of the entreprise 0 2 560 000 6 660 000
Corporation tax 544 000 Corporation tax 0 0 544 000
Net income after corp tax 12,8% 2 856 000 Gross cash-flow of company 0 0 6 116 000
Annual VAT liability 2 560 000
Annual net cash-flow produced 0 3 556 000
RWHM The capability of paying liabilities on annual basis needs The capability of paying liabilities on annual basis needs
positive annual cash-flow, positive annual cash-flow,
Depending on: Depending on: • Depreciation costs (higher depreciation increases cash-flow)
• Net profit achieved
• Inventory changes (final-initial stock, inv. stock-up reduces cash-flow)
• Financial earnings/losses => cash inflow/outflow
• Extraordinary earnings/losses => cash inflow/outflow (inflow/outflow may differ from earnings/losses)
However: These requirements are only necessary but not sufficient conditions for maintaining permanent liquidity
Let’s look on the financial budget of the trade firm via MS- Excel table:
RWHM PDec Jan Feb Mar Apr Nov Dec Total NJ
initial cash 4 000 2 044 2 015 3 103 4 468 9 338
seasonal indexes of sales 40% 50% 80% 130% 180% 140% 1200%
sales value 0 4 000 5 000 8 000 13 000 18 000 14 000 120 000
extraordinary sales (incomes) 0 0 0 0 0 0 0 1 200
VAT duty after sales 0 800 1 000 1 600 2 600 3 600 2 800 24 240
cash incomes
cash sales value (monthly) 3 600 4 500 7 200 11 700 16 200 12 600 108 000
cash of current m. invoices 400 500 800 1 300 1 800 1 400 12 000
cash of prev. m. invoices 0 0 0 0 0 0 0 0
cash of extraordinary sales 0 0 0 0 1 200 0 1 200
other cash in/outflow (financial) 0 0 0 -2 100 0 0 -300
taking loans 0 0 0 0 0 0 0
VAT inflow (paid by customers) 800 1 000 1 600 2 600 3 840 2 800 24 240 0
Total cash inflow 4 800 6 000 9 600 13 500 23 040 16 800 145 140 0
RWHM PDec Jan Feb Mar Apr Nov Dec Total NJ
cash expenditures 0
labour cost expenses 420 525 840 1 365 1 890 1 470 12 600
costs of goods purchased 2 880 3 600 5 760 9 360 12 960 10 080 86 400 0
purchasing for stock-up 600 0 0 600 0 0 2 400
subcontractor services 1 200 0 0 1 200 0 0 4 800
material + energy expenses 400 400 400 400 400 400 4 800
other cost expenses 200 200 200 200 200 200 2 400
extraordinary expenses 0 600 0 0 0 0 600
loan repayments 0 0 0 0 0 0 0
VAT paid to suppliers (re-embursing later) 1 056 960 1 272 2 352 2 712 2 136 20 280 0
VAT payment to tax office 0 -256 40 328 8 888 3 296 664
corporation tax payment 0 0 0 200 0 200 800
Total cash outflow 6 756 6 029 8 512 16 005 18 170 15 374 138 376 664
Monthly cash-flow balan. -1 956 -29 1 088 -2 505 4 870 1 426 6 764 6 100
Final cash 2 044 2 015 3 103 598 9 338 10 764
RWHM How seasonal changes in sales influence capital needs
0
2 000
4 000
6 000
8 000
10 000
12 000
14 000
16 000
18 000
20 000
1 2 3 4 5 6 7
Alternatives
Valu
es in
100
0 H
UF
minimum monthly sales
av erage monthly sales
max imum monthly sales
av erage finishing cash v alue
capital need for inv entory
RWHMRWHM The actual capital needs of the firm depend on:The actual capital needs of the firm depend on:
• Seasonality of sales (seasonal indexes),Seasonality of sales (seasonal indexes), trigonometric seasonal trigonometric seasonal changes increase capital need more than unique fallbacks in sales changes increase capital need more than unique fallbacks in sales
• Outsourcing activitiesOutsourcing activities if they are smoothing monthly overhead if they are smoothing monthly overhead expenditure changes reduce capital needsexpenditure changes reduce capital needs
• Purchasing lead timePurchasing lead time (the advance time you have to (the advance time you have to order and order and buy buy the goods earlier) growth increase capital needs, but the goods earlier) growth increase capital needs, but the the JIT system JIT system implemented will reduce capital needs.implemented will reduce capital needs.
• Terms of payment given by suppliersTerms of payment given by suppliers – you can measure the – you can measure the impacts of payment terms changes impacts of payment terms changes
• Payment terms given to customersPayment terms given to customers – you can prove how a – you can prove how a cash&carrycash&carry system will reduce the capital needs of the trading company. system will reduce the capital needs of the trading company.
• Assortment changesAssortment changes may influence capital needs in two ways: may influence capital needs in two ways:
– Balanced assortment with different high/low seasons may reduce Balanced assortment with different high/low seasons may reduce capital needs. capital needs.
– Balanced assortment of high/ slow moving goods can reduce capital Balanced assortment of high/ slow moving goods can reduce capital needs, if the ratio of fast moving goods is increasing within the needs, if the ratio of fast moving goods is increasing within the assortment.assortment.
RWHMRWHM Possibilities and Possibilities and PrProblems of modell oblems of modell
applicationapplications heres here::
• Data forecasting Data forecasting maymay be problematic in crisis be problematic in crisis situationsituations,s, like now like now – – however however it would be it would be more important to improve estimationsmore important to improve estimations..
• Data reliability can be inadequate, you must be Data reliability can be inadequate, you must be careful by defining the model frame in time too. careful by defining the model frame in time too.
• Accuracy might need more detailed model, Accuracy might need more detailed model, however the handling of it will become more however the handling of it will become more and more complicated, finally user might and more complicated, finally user might loose overviewloose overview
Thank you for your attention!
