Financial Management Issues in Retail Business

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FINANCIAL MANAGEMENT ISSUES

IN RETAIL BUSINESS


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PROJECT REPORT

ON

FINANCIAL MANAGEMENT ISSUES IN RETAIL BUSINESS

IN THE PARTIAL FULFILEMENT OF THE DEGREE OF

MASTER IN MANGMENT STUDIES UNDER

UNIVERSITY OF MUMBAI

(2013-2014)

Submitted by

Ms POOJA RAMMURAT YADAV

[Roll No: 39]

SPECIALIZATIONFINANCE

UNDER THE GUIDANCE OF

PROF KETAN VIRA

GNVS INSTITUTE OF MANAGEMENT

GTB NAGAR, SION (EAST), MUMBAI 400 037

(AFFILIATED TO UNIVERSITY OF MUMBAI)


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CERTIFICATE

This is to certify that Miss POOJA R. YADAV from GNVS INSTITUTE OF

MANAGEMENT, Mumbai who is currently pursuing Master of Management

Studies (M.M.S) has completed his project report on FINANCIAL

MANAGEMENT ISSUES IN RETAIL BUSINESS under guidance of Prof.

Ketan Vira.

We wish him all success for his Future Endeavour.

Prof. Ketan Vira Dr. R. K. Singh

(Internal Guide) (Director, GNVSIOM) (External Examiner)

GNVS INSTITUTE OF MANAGEMENT

GTB NAGAR, SION (EAST), MUMBAI 400 037


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(20122014)

DECLARATION

I, Miss Pooja Rammurat Yadav hearby declare that the project titled

FINANCIAL MANAGEMENT ISSUES IN RETAIL BUSINESS is submitted to GNVS

Institute of Mangement, Affiliated to University of Mumbai in partial fullfillment of

the requiremenent for the award of MASTER MANAGEMENT STUDIES under the

guidence and superisor of Prof. KETAN VIRA GNVS IOM, SION (EAST), MUMBAI-37.

This research is my original work and has not been submitted for award of any other

degree or diploma fellowship or other purpose.

Date : _________ ____________________

Place: POOJA R. YADAV

(GNVSIOM

FINANCE)

(Roll No. 201239)


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ACKNOWLEDGEMENT

I am very thankful to everyone who all supported me for helping me to

complete my project effectively moreover on time.

My deepest thanks to Prof. KETAN VIRA for guiding me for my project with

attention and care. He has been instrumental in guiding me the outline of this

project.

I express my thanks to Dr. R.K SINGH (Director GNVS - IOM) and

Bridg. (retd.) M.K. NAG (Chairman & founder GNVS - IOM) for their extended

support.

I would also thank my institution GNVS INSITITUTE OF MANAGEMENTSTUDIES, MUMBAI and faculty members without whom project would have been

distance reality. I also extend my heartful thanks to family & well wishers.


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INDEX

1. Executive summary------------------------------------------------------------------------062. An Introduction to Retailing------------------------------------------------------------073. Financial Management in Retail Business-------------------------------------------134. Reasons for Failure of Retail Business------------------------------------------------145. Working Capital Issues in Retail Business--------------------------------------------166. Sales Forecasting Issues in Retail Business------------------------------------------207. Inventory Turnover Issues---------------------------------------------------------------228. Impact of Seasonal Cycle----------------------------------------------------------------309. Cash Flow in Retail and Diversification Challenges--------------------------------3810.Credit control-------------------------------------------------------------------------------4611.Conclusion-----------------------------------------------------------------------------------6012.Bibliography---------------------------------------------------------------------------------61


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1.Executive SummaryIndia is the fifth largest retail market globally, with a size of INR 16 trillion, and has been

growing at 15% per annum. Organized retail accounts for just 5% of total retail sales and has

been growing at 35% CAGR. Though the journey as so far been rather mixed, organized

retail is being tipped as one of the biggest gainers from growing consumerism and rising

income. Indias robust macro and micro economic fundamentals, such as robust GDP

growth, higher incomes, increasing personal consumption, favourable demographics and

supportive government policies, will accelerate the growth of the retail sector.

Retailing in India is evolving rapidly, with consumer spending growing by unprecedented

rates and with increasing no of global players investing in this sector. Organized retail in

India is undergoing a metamorphosis and is expected to scale up to meet global standards

over the next five years. Indias retail market has experienced enormous growth over the

past decade. The most significant period of growth for the sector was between year 2000 &

2006, when the sector revenues increased by about 93.5% translating to an average annualgrowth of 13.3%.The sectors growth was partly a reflection of the impressive Indian

economic growth and over-all rise in income level of consumers.

For many independent retailers, the largest asset on the balance sheet is inventory.

Inventory is the active asset, which generates the businesses sales and profits. But without

careful planning, inventory can easily get out of line, resulting in heavy markdowns due to

overstocks and ultimately, serious cash flow problems.

Apparels and consumer durables are the fastest growing vertical in the retail sector. Mobile

phone as a product category has witnessed the highest growth in the consumer demandamongst all retail products offering, with increasing penetration of telecommunication in

towns and villages. The telecommunication sector has been adding on an average 5 million

new users every month. The other product categories are gaining traction predominantly in

the urban areas and emerging cities, with increasing average income and spending power of

young urban India.

Inventory turnover is a measure of how quickly a company can convert its inventory into

cash and profits. The goal of a company is to hold enough inventory to meet its clients

orders continuously, but not so much that the cost of holding it outweighs the profits. A

decreasing inventory indicates that the company is not converting its inventory into cash as

quickly as before. When this occurs, the company ends up having increased storage,

insurance andmaintenance costs.

Generally in inventory management issues, the problem usually boils down to one of two

things: out-of-stocks and overstocks. At first glance, the two issues appear unrelated out -of-

stocks resulting from unexpectedly high sales, and overstocks from unexpectedly low sales

but they are really the flip side of the same problem. Both result from inadequate planning

and sales forecasting.

India remained as the most attractive market for third year in a row in an index prepared by

At Kearney. Retail sector is the largest contributing sector to countrys GDP.


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2.An Introduction to RetailingOverview

Retailing encompasses the business activities involved in selling goods and services to

consumers for their personal, family, or household use. While retailing can be defined as

including every sale to the final consumer (ranging from cars to apparel to meals at

restaurants), we normally focus on those businesses that sell merchandise generally

without transformation, while rendering services incidental to the sale of merchand ise.2

Retailing today is at an interesting crossroads. On the one hand, retail sales are at their

highest point in history. Wal-Mart is now the leading company in the world in terms of sales

ahead of ExxonMobil, General Motors, and other manufacturing giants. New technologies

are improving retail productivity. There are lots of opportunities to start a new retail

business or work for an existing one and to become a franchisee. Global retailing

possibilities abound.

On the other hand, retailers face numerous challenges. Many consumers are bored with

shopping or do not have much time for it. Some locales have too many stores, and retailers

often spur one another into frequent price cutting (and low profit margins). Customer

service expectations are high at a time when more retailers offer self-service and automated

systems.

At the same time, many retailers remain unsure about what to do with the Web; they are

still grappling with the emphasis to place on image enhancement, customer information and

feedback, and sales transactions. These are the issues that retailers must resolve: How canwe best serve our customers while earning a fair profit? How can we stand out in a highly

competitive environment where consumers have so many choices? How can we grow our

business while retaining a core of loyal customers? Our point of view: Retail decision

makers can best address these questions by fully understanding and applying the basic

principles of retailing in a well-structured, systematic, and focused retail strategy.

That is the philosophy behind Retail Management: A Strategic Approach. Can retailers

flourish in todays tough marketplace? You bet! Just look at your favourite restaurant, gift

shop, and food store. Look at the growth of Shoppers Drug Mart/Pharma Prix, Loblaws, or

such iconic examples as Canadian Tire or Tim Hortons. Is it easy? No. Look at the experiencein early 2005 of Krispy Kreme, which was at that time closing stores in Ontario and facing

lawsuits from its shareholders over allegations of overstating revenues. To prosper in the

long term, all retailers need a strategic plan and a willingness to adapt.

The Framework of Retailing

To better appreciate the role of retailing and the range of retailing activities, let us view it

from three different perspectives:

Suppose we manage a manufacturing firm that makes vacuum cleaners. How should wesell these items? We could distribute via big chains (such as Future Shop) or small


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neighbourhood appliance stores, have our own sales-force visit people in their homes

(as Aerusformerly Electroluxdoes), or set up our own stores (if we have the ability

and resources to do so).We could sponsor TV infomercials or magazine ads, complete

with a toll-free phone number.

Suppose we have an idea for a new way to teach first graders how to use computersoftware for spelling and vocabulary. How should we implement this idea? We could

lease a store in a strip shopping centre and run ads in a local paper, rent space in a Y and

rely on teacher referrals, or do mailings to parents and visit children in their homes. In

each case, the service is offered live. But there is another option: We could use an

animated Web site to teach children online.

Suppose that we, as consumers, want to buy apparel. What choices do we have? Wecould go to a department store or an apparel store. We could shop with a full-service

retailer or a discounter. We could go to a shopping centre or order from a catalogue. We

could look to retailers that carry a wide range of clothing (from outerwear to jeans to

suits) or look to firms that specialize in one clothing category (such as leather coats).We

could zip around the Web and visit retailers around the globe.

Retailing does not have to involve a store. Mail and phone orders, direct selling to

consumers in their homes and offices, Web transactions, and vending machine sales all fall

within the scope of retailing. Retailing does not even have to include a retailer.

Manufacturers, importers, non-profit firms, and wholesalers act as retailers when they sell

to final consumers.

Types of Retail Outlets

Amarket place is a location where goods and services are exchanged. The traditionalmarket

square is acity square where traders set up stalls and buyers browse the stores. This kind of

market is very old, and countless such markets are still in operation around the whole

world.

In some parts of the world, the retail business is still dominated by small family-run stores,

but this market is increasingly being taken over by large retail chains

There are the following types of retailers by marketing strategy:

Department stores- very large stores offering a huge assortment of "soft" and "hardgoods; often bear a resemblance to a collection of specialty stores. A retailer of such

store carries variety of categories and has broad assortment at average price. They offer

considerable customer service.

Discount stores- tend to offer a wide array of products and services, but they competemainly on price offers extensive assortment of merchandise at affordable and cut-rate

prices. Normally retailers sell less fashion-oriented brands.

Warehouse stores-warehouses that offer low-cost, often high-quantity goods piled onpallets or steel shelves;warehouse clubs charge a membership fee;

Variety stores-these offer extremely low-cost goods, with limited selection;
http://en.wikipedia.org/wiki/Marketplacehttp://en.wikipedia.org/wiki/Market_squarehttp://en.wikipedia.org/wiki/Market_squarehttp://en.wikipedia.org/wiki/City_squarehttp://en.wikipedia.org/wiki/Department_storehttp://en.wikipedia.org/wiki/Department_storehttp://en.wikipedia.org/wiki/Discount_storehttp://en.wikipedia.org/wiki/Discount_storehttp://en.wikipedia.org/wiki/Warehouse_storehttp://en.wikipedia.org/wiki/Warehouse_storehttp://en.wikipedia.org/wiki/Warehouse_clubshttp://en.wikipedia.org/wiki/Variety_storehttp://en.wikipedia.org/wiki/Variety_storehttp://en.wikipedia.org/wiki/Variety_storehttp://en.wikipedia.org/wiki/Warehouse_clubshttp://en.wikipedia.org/wiki/Warehouse_storehttp://en.wikipedia.org/wiki/Discount_storehttp://en.wikipedia.org/wiki/Department_storehttp://en.wikipedia.org/wiki/City_squarehttp://en.wikipedia.org/wiki/Market_squarehttp://en.wikipedia.org/wiki/Market_squarehttp://en.wikipedia.org/wiki/Marketplace


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Demographic- retailers that aim at one particular segment (e.g., high-end retailersfocusing on wealthy individuals).

Mom-And-Pop Shop: is a small retail outlet owned and operated by an individual orfamily. Focuses on a relatively limited and selective set of products.

Specialty stores: A typical speciality store gives attention to a particular category andprovides high level of service to the customers. A pet store that specializes in selling dog

food would be regarded as a specialty store. However, branded stores also come under

this format. For example if a customer visits a Reebok or Gap store then they find just

Reebok and Gap products in the respective stores.

Boutiques or Concept stores are similar to specialty stores. Concept stores are verysmall in size, and only ever stock one brand. They are run by the brand that controls

them. An example of brand that distributes largely through their own widely distributed

concept stores isL'OCCITANE en Provence.The limited size and offering of L'OCCITANE's

stores are too small to be considered a specialty store proper.

General store- a rural store that supplies the main needs for the local community; Convenience stores: is essentially found in residential areas. They provide limited

amount of merchandise at more than average prices with a speedy checkout. This store

is ideal for emergency and immediate purchases as it often works with extended hours,

stocking every day;

Hypermarkets: provides variety and huge volumes of exclusive merchandise at lowmargins. The operating cost is comparatively less than other retail formats.

Supermarkets: is a self-service store consisting mainly of grocery and limited productson non-food items. They may adopt a Hi-Lo or an EDLP strategy for pricing. The

supermarkets can be anywhere between 20,000 and 40,000 square feet (3,700 m2).

Example: SPAR supermarket.

Malls:has a range of retail shops at a single outlet. They endow with products, food andentertainment under a roof.

Category killers or Category Specialist: By supplying wide assortment in a singlecategory for lower prices a retailer can "kill" that category for other retailers. For few

categories, such as electronics, the products are displayed at the centre of the store and

sales person will be available to address customer queries and give suggestions when

required. Other retail format stores are forced to reduce the prices if a category

specialist retail store is present in the vicinity.

E-tailers:The customer can shop and order through internet and the merchandise aredropped at the customer's doorstep. Here the retailers use drop shipping technique.

They accept the payment for the product but the customer receives the product directly

from the manufacturer or a wholesaler. This format is ideal for customers who do not

want to travel to retail stores and are interested in home shopping. However it is
http://en.wikipedia.org/wiki/Specialty_storehttp://en.wikipedia.org/wiki/Specialty_storehttp://en.wikipedia.org/wiki/Boutiquehttp://en.wikipedia.org/wiki/Boutiquehttp://en.wikipedia.org/wiki/L%27Occitane_en_Provencehttp://en.wikipedia.org/wiki/General_storehttp://en.wikipedia.org/wiki/General_storehttp://en.wikipedia.org/wiki/Convenience_storehttp://en.wikipedia.org/wiki/Convenience_storehttp://en.wikipedia.org/wiki/Hypermarkethttp://en.wikipedia.org/wiki/Hypermarkethttp://en.wikipedia.org/wiki/Supermarkethttp://en.wikipedia.org/wiki/Supermarkethttp://en.wikipedia.org/wiki/Shopping_Mallhttp://en.wikipedia.org/wiki/Shopping_Mallhttp://en.wikipedia.org/wiki/Category_killerhttp://en.wikipedia.org/wiki/E-tailerhttp://en.wikipedia.org/wiki/E-tailerhttp://en.wikipedia.org/wiki/E-tailerhttp://en.wikipedia.org/wiki/Category_killerhttp://en.wikipedia.org/wiki/Shopping_Mallhttp://en.wikipedia.org/wiki/Supermarkethttp://en.wikipedia.org/wiki/Hypermarkethttp://en.wikipedia.org/wiki/Convenience_storehttp://en.wikipedia.org/wiki/General_storehttp://en.wikipedia.org/wiki/L%27Occitane_en_Provencehttp://en.wikipedia.org/wiki/Boutiquehttp://en.wikipedia.org/wiki/Specialty_store


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important for the customer to be wary about defective products and non-secure credit

card transaction. Example: Amazon, Penknife and eBay.

Vending Machines: This is an automated piece of equipment wherein customers candrop the money in the machine and acquire the products.

Some stores take a no frills approach, while others are "mid-range" or "high end",depending on what income level they target.

Retail Industry in India

Introduction

The Indian retail industry has been thrown open to foreign majors and is packed with

players who strive to offer great products and value-for-money to Indian consumers. The

country holds vast promise for retailers with its burgeoning spending power and rising

middle class.

The US$ 500 billion market, growing at an annual rate of about 20 per cent, is largely

dominated by small shops and stores as of now. The organised segment is in its nascent

stage and has huge potential to harness in the sub-continent. Foreign giants like Wal-Mart

and IKEA have recently received the Governments nod to enter the Indian market, after

making all the necessary compliances.

Market Size

Indias retail market is majorly dominated by the unorganised sector. Organisedsegment accounts for 8 per cent of the total retail landscape, according to a study byBooz & Co and RAI.

The Indian retail industry has expanded by 10.6 per cent between 2010 and 2012 and isexpected to increase to US$ 750-850 billion by 2015, according to another report by

Deloitte. Food and Grocery is the largest category within the retail sector with 60 per

cent share followed by Apparel and Mobile segment.

The foreign direct investment (FDI) inflows in single-brand retail trading during April2000 to December 2012 stood at US$ 95.36 million, as per the data released by

Department of Industrial Policy and Promotion (DIPP).

Online Retail

Internet is the buzzword in India these days. People have online access 24x7 through their

laptops, iPads and mobile phones. As a result they have continued access to online retail

markets as well. Online retailers are emerging as important sales channels for consumer

brands in India as more and more people, especially the young generation, are shopping

online. From apparel to accessories, kids and infants product lines and almost everything

under-the-sun is available on the net these days. Apparel and accessory brands, such as

Puma, Nike and Wrangler, have recorded a big increment in online sales in 2012, led largely

by purchases from smaller towns and cities with consumers paying the full price for these

products.
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For instance, footwear brand Nike has tie-ups only with online retailers such as Myntra and

Jabong. And in a very unique initiative, it recently launched its new range of cricket gear on

Jabong. Such partnerships turn out to be very successful as online retailers provide greater

visibility than a physical store. "Our online store can carry around 10,000 options, while an

offline store can carry only 20 per cent of a given range," said an official.Online retail in India is projected to grow to US$ 76 billion by 2021, accounting for over 5

per cent of the Indian retail industry, according to a report by advisory services firm

Technopak. This forecast is encouraging more companies- big and small- to sell aggressively

online. Experts believe that much of this growth will come from the rising purchasing power

of consumers in smaller cities, who do not have access to brick-and-mortar stores stocking

high-end brands.

Retail Industry: Key Developments and Investments

Kottayam, in Thiruvananthapuram, is an emerging market for luxury cars. BMW haslaunched its mobile showroom in the city wherein people can check-out the brands

models and go-in for a test drive as well. A weather-proof and air-conditioned structure,

the mobile showroom is a replica of BMWs luxurious dealerships.

Hindustan Unilever (HUL), India's largest packaged consumer goods firm, will soonlaunch the country's first liquid laundry detergent, hoping that wealthy consumers will

not be hesitant to pay a premium for a product that promises to make their laundry

chore easier. The company claims that the new product removes stains two times better

than any other detergent powder in the market. With 90 per cent penetration in the

core detergent space, HUL is trying to create newer consumption opportunities in the

over Rs 15,000 cr. (US$ 2.51 billion) laundry market with niche and premium products

including Comfort fabric conditioner and Rin liquid blues in the post-wash segment.

Villeroy & Boch AG, the Germany-based bath, wellness and tableware firm, haspartnered with Delhi-based Genesis Luxury Fashion to commence its operations in

single-brand retail trade in India. Villeroy & Bochs application, seeking 50 per cent

equity in the joint venture (JV) company for single-brand retail trade, has recently got a

nod from the Foreign Investment Promotion Board (FIPB). The FDI infusion in the JV

would be to the tune of Rs 1.12 cr. (US$ 187,463.60). Genesis Luxury Fashion, that has

brands such as Paul Smith, Bottega Veneta, shoe brand Jimmy Choo, Italian label Etro

and Armani and home and personal care products from Crabtree and Evelyn under its

business in India, will exclusively manage the distribution of Villeroy & Boch tableware

products in the country. The alliance ensures the establishment of a distribution

network through the opening of Villeroy & Bochs exclusive retail stores in India.

In a bid to tap the branded footwear market in India, which is estimated to be about Rs30,000 cr. (US$ 5.02 billion), Aero Group (known for its flagship Woodland brand) is

planning to revive one of its old brands, Woods. The company is contemplating to openaround 30 new, revamped Woods stores in 2013. The eight-year-old brand would now


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lay its focus on the fashion quotient, rather than the typical outdoor, rough and tough

image of Woodland, and will have more of the range for women.

RP-Sanjiv Goenka Groups company Spencers Retail is on an aggressive growth strategy,with a focus on hyper-format stores. The company intends to infuse about Rs 600 cr.(US$ 100.46 million) in setting up new stores and come out with branded and co-

branded products in the food and beverage segment. One of the official spokesperson

from the company revealed that Spencers would set up 80 hyper stores in the next 48

months. As of now, the company has 132 stores, including 26 hyper stores, 14 super

market and 92 daily (convenient) stores.

Godrej Interio, the furniture retailing arm of Godrej Group, is aiming for Rs 5,000 cr.(US$ 837.14 million) of turnover by 2016-17, with plans to invest over Rs 300 cr. (US$

50.23 million) to expand manufacturing capacity and retail stores. The company is

planning to set up more than 75 stores in 2013 itself with focus on tier II and III cities.

The Indian branded furniture market is worth about Rs 10,000 cr. (US$ 1.67 billion) out

of which Godrej Interio accounts for 15 per cent of the share. The company also plans to

establish 200 speciality stores which will design and built products according to the

consumer's convenience and preference.

Government Initiatives

The Cabinet Committee on Economic Affairs (CCEA) has recently approved Swedish

furniture retailer IKEA's application to enter the Indian industry and set up a single brandretail venture in the country. FDI would be to the tune of Rs 10, 500 cr. (US$ 1.76 billion),

making it the largest investment to be made by a foreign brand in the Indian retail sector.

Moreover, the Government may further simplify investment norms in multi-brand retail to

please foreign retailers who intend to invest in India but are a little hesitant on certain

clauses. Mr Anand Sharma, the commerce and industry minister, has re-iterated that any

FDI proposal in multi-brand retail will be fast-tracked for sure.

The overall Indian retail sector is expected to grow 9 per cent in 2012-16, with organised

retail growing at 24 per cent or three times the pace of traditional retail (which is expectedto expand at 8 per cent), according to the report by Booz & Co and RAI.

Deloitte also seconds this forecast and expects that organised retail, which constitutes eight

per cent of the total retail market, will gain a higher share in the growing pie of the retail

market in India. Various estimates put the share of organised retail as 20 per cent by 2020.

Exchange Rate Used: INR 1 = US$ 0.01673 as on June 24, 2013


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3.Financial Management in Retail BusinessAreas of Financial Management in Retail Business are discussed as follows:

1.

Estimation of capital requirements: A finance manager has to make estimation withregards to capital requirements of the retail business. This will depend upon expected

costs and profits and future programmes and policies of a concern. Estimations have to

be made in an adequate manner which increases earning capacity of business.

2. Determination of capital composition: Once the estimation have been made, thecapital structure have to be decided. This involves short- term and long- term debt

analysis. This will depend upon the proportion of owned capital a retailer is possessing

and additional funds which have to be raised from outside parties such as relatives,

banks and other financial institutions or government schemes.

3. Choice of sources of funds: For additional funds to be procured, a retailer has manychoices like-

a. Loans to be taken from banks and financial institutions and relatives or friends.b. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period

of financing.

4. Disposal of surplus: The net profits decision have to be made by the finance manager.The volume of Retained profits has to be decided which will depend upon expansionary,

innovative, diversification plans of the retailer.

5. Management of cash: Finance manager has to make decisions with regards to cashmanagement. Cash is required for many purposes like payment of wages and salaries,

payment of electricity and water bills, payment to creditors, meeting current liabilities,

maintenance of enough stock, purchase of raw materials, etc.

6. Financial controls: The finance manager has not only to plan, procure and utilize thefunds but he also has to exercise control over finances. This can be done through many

techniques like ratio analysis, financial forecasting, cost and profit control, etc.

7. Working capital management: Working capital refers to that part of firms capitalwhich is required for financing short-term or current assets such as cash, receivablesand inventories. It is essential to maintain proper level of these assets. Finance manager

is required to determine the quantum of such assets.

8. Cost-volume profit analysis: This is popularly known as CVP relationship. For thispurpose, fixed costs, variable costs and semi variable costs have to be analysed. Fixed

costs are more or less constant for varying sales volumes. Variable costs vary according

to the sales volume. Semi-variable costs are either fixed or variable in the short-term.

The financial manager has to ensure that the income of the firm will cover its variable

costs, for there is no point in being in business, if this is not accomplished. Moreover, a

firm will have to generate an adequate income to cover its fixed costs as well. The

financial manager has to find out the break-even point that is, the point at which the

total costs are matched by total sales or total revenue.


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4.Reasons for Failure of Retail BusinessSlow Revenue growth due to rollout delays and poor same store growth

A large number of retailers are facing delays in rollouts due to delays by developers. This is a

significant risk and can lead to cost outcome. The delays on account of other retailers could

also create impact as malls will not be viable unless all tenants are tied in. The same store

sales as a whole have been falling steadily due to rising competition. Continued sharp

decline in the same in the future will be a risk to the growth.

Pressure on margins due to competition

With increasing competition, catchment areas are shrinking. Coupled with this, the short

age of quality retail space leading to spiralling rentals, underdeveloped supply chain, and

rising employee costs. Which adds to the cost and impact the margins.

Macro slowdown and Rising share of Debt

Macro concerns could hamper the domestic consumption trends and result in lower

footfalls. Going forward, the companies have to depend primarily on debt for funding

growth. Steep increase in cost of borrowing can impact the profitability of the company.

Access to Capital

In business, finances are often a paradox - it takes money to make money. While some

companies are able to start-up with little capital, they often reach a point where they need

additional financing to continue operations. Without those funds available, they are unableto meet their day-to-day expenses. Securing access to capital before the company needs it is

often the difference between success and insolvency.

Overheads

Its important to study success, but sometimes its just as insightful to study failure.

Whether you are considering starting your own wholesale retail store or have already

established it, this list of the top ten reasons for failure - and what you can do to avoid them

- will help you keep your business on the path to success.

Poor Sales

Sales, of course, are the life of any business and without them, the business soon flounders.

Some causes of poor sales, such as economic factors listed previously, are out of the hands

of company leadership. However, many of the reasons for poor sales can be directly traced

to management. For instance, if changes in customer preferences and the market in general

are ignored, sales will suffer. While there is no way to guarantee sales, managers can be

proactive and responsive to sales trends.

Management/Leadership Problems

Of the ten reasons listed, this is the one that is completely in the hands of the companys

owner(s). While many people are great entrepreneurs - able to start a company from just an


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idea - these same people sometimes arent ready for themanagement issues they face as

the company matures. Without prior experience or simply because of incompetence, many

wholesale retail store owners are the very reason their company eventually fails. Of course,

with more experience and the ability to spot and address problems before they get out of

hand, business owners are more likely to avoid these challenges.

Economic Factors

The economy is cyclical, which means it periodically goes through low times. Wholesalers

who are unprepared for those times of economic recession are often caught off-guard

financially. While the economy isnt something a individual company can change, business

owners can prepare for those difficult times through scenario training and financial planning

Overexpansion

Overexpansion is similar to the issue of excessive overhead. While it may make sense in

moderation, too much too quickly can often bankrupt a business. Supply problems, logistic

challenges, staffing issues, and financing concerns are potential obstacles in expanding.

Without adequate preparation and strategy, the attempt to capture more of the market can

quickly turn into a matter of survival.

The important idea within this top ten list is that all these reasons for a wholesale retail

stores failure can be avoided. With adequate preparedness, as well as balancing the short-

term challenges against the long-term needs of the company, you can successfully navigate

these obstacles and achieve the full potential of your own wholesale company.


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5. Working Capital Issues in Retail BusinessInventory - An Asset or a Liability

As discussed above, inventory can be seen as an asset or a liability. Bankers and accountants

typically view it as an asset. A merchant, however, may see the same stock as a liability.

Age is the key. As mentioned above, leading retailers have a monthly review process to

understand the age of their inventory. Age is typically defined as the length of time in weeks

since the retailer last received the merchandise. This definition may vary somewhat by

retailer, but the concept remains constant, age is important.

What defines old merchandise? This varies widely by retail segment. In ladies fashion

areas such as Dresses or juniors, anything older than six to eight weeks is deemed

transitory. For these merchants, goods in stock for over 10-12 weeks are considered old

and are a significant liability. This type of fast paced fashion goods has a short life span for aretailer and has a smaller tolerance for age.

Merchants who sell commodity goods such as bed pillows have a completely different range

to describe old age. Styles rarely change and may be continued by a vendor for years.

Innovation may add new styles, but rarely displace existing goods. For a merchant in this

type of business, the aging issue is not a concern. Goods can be in stock for months with

little concern about becoming unsellable to a consumer. The concern for this merchant is

not one of the age of the merchandise, but the amount of money tied up in slow selling

goods. Consumers express little reluctance to buy the same pillow style year after year.

Their only concern being that the pillow is clean and in good physical shape.

Other areas such as appliances, commodity clothing, household products and other similar

businesses see age as a problem at months, not weeks, and tend to take permanent price

reductions less frequently on the products.

Understanding these concerns, successful retailers view inventory as an asset or liability as a

combination of age and productivity depending on the type of merchandise considered.

Different rules should be defined for the needs of each category. Usage of current inventory

management systems will enable a retailer to better understand the status of their

inventory. Retailers can then anticipate problems and minimize any potential liabilities.

Purchasing Management

Purchasing management is a key component of smarter financial management for any

retailer, regardless of size. One of the most effective means of controlling purchases is to

implement and enforce the use of an Open-To-Buy process.

As stated above, OTB is a tool designed to direct and control spending by the buying and

merchandising divisions.

Open-To-Buy = Closing stock

opening stock

on order + sales.


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When the Open-To-Buy figure is negative, as in periods 1 and 3 above, retailers are said to

be overbought and have too much stock.

A true Open-To-Buy will account for many other factors such as markdowns and other

financial adjustments that might impact margins or inventory levels. Some retailers also

show unapproved On Order as a barometer for what else might happen.

As each month passes the planned numbers from the merchandise plans are updated with

either revised forecasts or actual numbers. As a forecasting tool the OTB can be revised

weekly to reflect updated plans based on trend and any anticipated changes in future

months.

A key aspect of using an OTB is the agreement of the revised forecast between the

merchant and their senior merchant (or owner perhaps in a small company). Once they

agree what the future might look like, they can then discuss an action plan to impact on-

orders, markdowns or even the promotional calendar to reflect their new view of what is tocome. By design, the OTB is not a sophisticated forecasting tool, but should rely on outside

applications and information to help the merchant revise forecasts.

The senior merchants role is one of summary, control and oversight. The senior merchant

should also have an OTB reflecting their area of responsibility. An aggregation of the lower

level OTB should be compared and managed to an OTB they maintain. They must monitor

merchant compliance to agreed actions, approve or deny additional purchase orders, and

hold monthly meetings to review.

Co-Op Funds and Vendor Advertising SupportMany larger retailers negotiate co-op funding from the vendors. This funding traditionally

covers advertising costs to market specific merchandise. These funds are restricted by the

vendor and will only be paid if certain pricing and presentation rules have been met.

Other vendor funding is negotiated in other segments. Its quite common in grocery to

negotiate and receive slotting fees from the vendors to obtain the best slots on the

shelving units. Fees are higher for eye level shelves near the ends of the aisles than would

be charged for a bottom shelf, middle of the aisle slot. As grocery purchases are heavily

based on impulse, vendors will pay these fees to have their product seen first.

In the department store segment, buyers often negotiate guaranteed margins for certain

products. The vendor commits to a minimum gross margin percent for their merchandise. If

the department store is forced to sell these products at a greater discount than anticipated,

the vendor will contribute enough funds to bring the gross margin of that product back to

the negotiated level. In this type of arrangement, the retailer and vendor often discuss retail

pricing and promotional schedules in advance.

Other co-op funding for larger retailers can be found in trailing rebates of 1-3% for

purchasing various volume levels of goods. In some cases vendors will purchase custom

fixtures and visual displays for the retailersstores.


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The problem for the mid-size retailer is a lack of leverage with the vendor, as they do not

have the buying power of the multi-billion dollar retailers. Often co-op funding is limited to

a single ad in a year or maybe a season. In some cases though, smaller retailers may be able

to negotiate volume rebates.

Budget Planning

Financial planning lies at the core of the retail planning and is divided into two broad sub

categories, "financial accounting" and management accounting. It is imperative to

understand that for success of any retailing business model, the most critical aspect is

financial planning. It is thus critical for the promoters of Retail Company to begin their

planning process with the following:

1. Detailed assessment of financial resources available2. Effective and timely use of these resources

The variance in retailing can be understood with examples of business doing an annual

turnover of Rs. 1 lakh, at the same time we have retailers that have an annual turnover of

over Rs. 100 million. It is therefore important for retailers to plan the format and size of

their operation on the basis of the resource available to them at the same time managing

effectively these resources on the scales of time and manpower.

We can consider two types of retail formats that are operational, the retail chain format and

the independent standalone format. While there is no doubt that the former, that is the

chain store retailing is far more profitable than independent retailing, it becomes critical for

a retailer to understand whether his available resources permit him to go for such format.Talking about financial strategy it is always advisable to go for retail chain format as it

provides much better economics of scale and duplication of efforts at a fraction of cost.

Having said this, we would like to consider planning, issues and controls relevant only to

independent format as they constitute vast majority of retailing operations in India.

Mobilising financial resources is an integral aspect of any business and retail is no exception.

There are a few critical check point and issues that is generally associated with organised

retailing in India.

a) The initial capital required in the setting up of a retail operation of a scale itself couldbe quite substantial. While real estate is easily available on lease to retailerthroughout the world, the situation in context to India is not very much conducive to

leasing or renting and this leads to a substantial part of Retail Operations investment

in a retail operation. This is also one of the reasons of slow catching up of chain retail

format in India.

b) Capital investment too forms a major component of initial investment as equipmentand fixtures form the basic infrastructure required in retail.

c) Lack of adequate knowledge of financial of organised retailing is one more criticalissue in propagation of organised retailing in India.


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Although the initial investment in terms of space and providing the necessary infrastructure

for a retail operation can be substantial, it needs to be understood that retailing is generally

a negative working capital business. While it is a common knowledge that most retailers buy

on credit and sell on cash, most products (merchandise) is available on extended credit

terms as well. In fact, an interesting thing to note here is the fact that the greater thenumber of stores, the higher would be the power that retailer holds which usually facilitates

from their supplies.

For example if a retailer has a sale of Rs 50 Lakhs per month and was getting an average

credit of 30 days, his total outstanding would usually be around the same value.

However, if the retailer has efficient inventory management systems in place, he should not

at any time be holding more than 15 days of inventory, and therefore have 15 days sale as

cash surplus which he could dedicate for further expansion. It is also critical to understand

that this surplus is not a short term surplus; rather it is a long term surplus and is likely to

increase with an increase in number of stores.

In other words, if financial planning is carefully conducted and all the systems and

procedures are in place, it is possible to generate surplus cash flow in retail operation.

While there is no doubt that this is easier said than done, many of the large multinational

retailers did take a long time to create a cash surplus situation and Indian retailers too

would have to work hard to understand the economics of a retail operation and arrive at

such favourable situations.

In fact, it is the interest free surplus that is used by financially poor retailers around the

world to fund their expansions, Retailers in India too must adopt careful financial methods

to achieve both a high level of credibility and success in their operations. It may also be a

good financial strategy for retailers who use their surplus for expansion to be able to offset

a large part of their profits in terms of taxation by the benefits like depreciation, that they

would avail from the new equipment for their new stores and this cycle could go on.

In other words a large part of what would have otherwise gone into paying taxes could be

used by the retailer for fuelling his growth.


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6.Sales Forecasting Issues in Retail BusinessGenerally in inventory management issues, the problem usually boils down to one of two

things: out-of-stocks and overstocks. At first glance, the two issues appear unrelated out-of-

stocks resulting from unexpectedly high sales, and overstocks from unexpectedly low salesbut they are really the flip side of the same problem. Both result from inadequate planning

and sales forecasting.

All too often, before theyve reached out to for assistance, their response has been to add

an additional layer of inventory to eliminate the out-of-stock problem, only to make the

overstock problems worse.

Once we begin to work together, and the discussion comes around to their sales forecasting

process, one of the first things that often emerges is that they have not been actually

forecasting sales at all. Their focus instead has been solely on how much to buy. Thats

putting the cart before the horse, however. And thats usually at the heart of the problem.

Lets approach it with some basic retail math, if simplified a bit, for any given month:

Beginning inventory + Merchandise ReceiptsForecasted Sales = Ending Inventory

When an independent retailer focuses on how much to buy, they usually start by looking at

how much theyve bought in the past. But we can rework the retail math to showthat they

need to start with a sales forecast and an inventory plan:

Ending Inventory + Forecasted SalesBeginning Inventory = Merchandise Receipts

If we know how much inventory we want to end the month with, and how much we expect

to sell during the month, and then subtract how much inventory were going to start the

month with, we can calculate how much we need to bring in during the month.

In other words, everything starts with a good solid sales forecast. From there, we can plan

how much inventory well need to have to support that plan. Only then can we determine

accurately how much inventory well need to buy.

A good sales forecast has the following attributes:

1. It takes into account relevant sales and inventory histories, to identify extraordinarysales and inventory levels and any other unusual patterns.

2. It drills down to the department, category and sub-category level, as appropriate, toidentify opportunities and trends, as well as the potential impacts of increased

competition, emerging technology, changes in promotional patterns and new

product introductions.

3. It rolls up from the subcategory, category and department levels to a totalforecasted sales increase that can be tested against the realistic expectations of

what can be actually achieved.

4. It plans in both units and sales dollars, so that the plan is well balanced between unitsales and the average selling price of each unit sold.


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5. It is dynamic, so that it can be continually updated and adjusted as each monthpasses and additional information is developed.

6. It identifies the most likely level of sales for any given month, not the level thatmight be possible if things broke just right. As a result, it has a bias toward a flat

sales forecast for any given department, category or subcategory, unless there isspecific reason to forecast an increase or decrease.

7. Effective inventory management begins with a carefully developed sales forecast.Only then can inventory levels be planned, and merchandise receipts scheduled

throughout the season. This is the key to eliminating both out-of-stocks and over-

stocks.


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7.Inventory Turnover IssuesWhat Does Decreasing Inventory Turnover Mean?

When a companysinventory turnover is decreasing, it means that it is holding its inventory

longer than previously measured time periods. The measure of how long a company holds

its inventory before selling it is referred to as the inventory turnover ratio.

Inventory Turnover

Inventory turnover is a measure of how quickly a company can convert its inventory into

cash and profits. The goal of a company is to hold enough inventory to meet its clients

orders continuously, but not so much that the cost of holding it outweighs the profits. A

decreasing inventory indicates that the company is not converting its inventory into cash as

quickly as before. When this occurs, the company ends up having increased storage,

insurance and maintenance costs.

Inventory Turnover Ratio

The equation for measuring the inventory turnover ratio is the cost of goods sold, or COGS,

divided by average inventory. To find average inventory use the following equation;

beginning inventory balance plus ending inventory balance divided by 2. Illustrated in an

example, say a business has COGS of $10,000, a beginning inventory of $2,000 and an

ending inventory of $2,100. To find the inventory turnover ratio: $10,000/($2,000 +

$2,100/2) = 4.88. The company turns over its inventory approximately five times turning the

year.

Decreasing Inventory Turnover

A company can determine if its inventory is decreasing by comparing the inventory turnover

ratio of different periods. For example, a company has COGS of $20,000 and an average

inventory of $7,000 for the previous year. The companys inventory ratio is $20,000/$7,000

= 2.86. Now, say this year, the company has COGS of $25,000 and an average inventory of

$10,000. The companys inventory ratio is $25,000/$10,000 = 2.50, denoting a decreasing

inventory turnover.

Days to Sell Inventory

Another helpful inventory number to determine if a company has a decreasing inventory is

the average number of days it takes a company to sell its inventory. To calculate the days to

sell, the company divides 365 by the inventory ratio. In the decreasing inventory example,

the days to sell for the previous year is 365/2.86 = 127.62 days. The days to sell for the

current year is 365/2.50 = 146. So, as the inventory ratio is decreasing the days to sell is

increasing.

The Advantages of High Inventory Turnover

Businesses monitor their inventory turnover to determine if the amount of inventory they

buy matches the demand for their product. High inventory turnover means a business must


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constantly purchase new inventory to full-fill demand. If a business doesn't monitor its

inventory turnover, it risks losing customers because of a lack of inventory.

Income

High inventory turnover typically means your business sells many goods during the fiscalperiod. If your business must continually restock its inventory and the reason isn't because

of natural disasters or other problems, you're earning revenue for each product sold. If your

starting inventory is 1,000 units and you replace them eight times, you've sold 8,000 units of

product during the fiscal period.

Supplier Negotiations

High inventory turnover may give your business more negotiation power with suppliers.

High turnover means your supplier is also doing well because of the amount of product it's

selling to you. If you believe your business' inventory turnover will remain high, you can

speak with your supplier about lower wholesale prices or price breaks for bulk orders.

Negotiating a lower price for your inventory lowers your cost of goods sold and may

increase net profit.

Shelf Life

Many inventory items have a shelf life that begins to tick away as soon as they leave the

manufacturer or supplier. This isn't limited to food and pharmaceutical drugs -- luxury

goods, electronic equipment and even clothes have a shelf life in the minds of consumers. If

your business has a high inventory rate, it sells products before they have a chance to expire

or become outdated. If a car dealership has a high turnover rate, it reduces the risk ofcarrying too many vehicles from the previous year.

Holding Costs

Most businesses must store inventory somewhere before it's sold to customers. If your

company has a warehouse or designated area for storing inventory, you spend money on

holding costs. The longer your inventory is stored, the higher this cost will be for each unit.

If a car sits at a dealership too long, the dealer would spend money cleaning the vehicle,

replacing the fluids and periodically driving it for maintenance reasons.

Disadvantages of High Inventory Levels

Having high inventory levels generally means your company is struggling to turn over

inventory and make sales. When you have a high level of inventory, you face significant

costs and inventory management requirements that have disadvantages relative to

companies that have better inventory turnover and require less resource utilization

to manage inventory.

Poor Turnover

Companies typically want to produce or maintain only enough inventory to meet immediate

demands and to avoid stock outs. When companies have excessive amounts of inventory,

they are generally not selling enough to prevent inventory build-up. This is not a good


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situation as businesses need to turn over inventory efficiently to maintain reasonably high

profit margins and to avoid the costs and other disadvantages that come with high levels of

inventory.

High Costs

Carrying excess inventory has significant costs. One of the highest costs for many companies

is financing the purchase and holding of inventory. Also, the more inventory you hold, the

more you have to spend on labour to manage it, space to hold it, and in some cases,

insurance to protect against its loss or damage. Physically counting and monitoring the

levels of inventory you hold also takes time and has costs.

Loss or Damage

Related to the high costs of high inventory, some inventory can also go bad after a certain

amount of time and go to waste. When retailers buy excess inventory of perishable food

items, for instance, they may have to throw out inventory that spoils or becomes rotten.

When you carry high inventory, you also have greater exposure to lost or damaged product.

Thieves have more products to choose from and you have greater potential for product to

turn up missing or broken when you count inventory.

Strategic Planning Time

Company leaders typically have to spend more time in strategic planning meetings when the

company has high inventory levels. Management must figure out how to communicate with

suppliers, how to improve ordering processes or how to increase market demand to reduce

the high levels of inventory. This problem takes away from the ability of these managers tofocus on other proactive or more important strategic decisions to move the company

forward. Dealing with inventory problems is a more reactive strategy to resolve the issue at

hand.

Advantages & Disadvantages to a Manual Inventory Control System

Even the smallest businesses need to implement some form of inventory control system to

keep an accurate merchandise count, as well as for accounting purposes. Business owners

generally have a choice between using a computerized or a manual inventory system.

A manual system offers a number of potential advantages and disadvantages.

Simplicity

For a very small business that carries a limited amount of inventory or that turns over

inventory slowly, a mechanized inventory system is unnecessary. The business owner can

easily keep track of how much merchandise is on hand with a manual system, or simply by

applying the "eyeball test" to see if it is time to order more. The owner won't need to spend

money on inventory software or take the time to learn how to operate it.

Sense of Control

A manual system gives a small business owner a greater sense of control. Rather than

relying on a computer to indicate when it's time to reorder, the owner can manage the


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process on his own. The need to view his merchandise on a regular basis, such as when

counting stock before placing an order, gives him the opportunity to assess the condition of

his merchandise, reducing the chance of a customer receiving damaged goods.

Labour-Intensive

A disadvantage of manual inventory systems is that they can be highly labour-intensive to

operate. They require continuous monitoring to ensure that each transaction is accounted

for and that products are maintained at the appropriate stocking levels. It is also more

difficult to share inventory information throughout the business, because the lack of

computerization makes accessing inventory records a more cumbersome process. The time

spent monitoring inventory levels could be used on more productive activities for the

business.

Human Error

A manual inventory system relies heavily on the actions of people, which increases the

possibility of human error. People might forget to record a transaction or simply miscount

the number of goods. This results in needless additional orders that increase the company's

inventory carrying costs and use up precious storage space. Inaccurate physical counts could

also result in not ordering enough of a product, meaning the business could run out of a

crucial item at the wrong time.

Push System vs. Pull System Inventory Control

An inventory manager must be able to develop an effective inventory control system to

manage customer demand. The demand for the product will control inventorycosts, carrying costs, ordering costs and storage costs. Inventory control systems are

generally categorized as push or pull models. Knowing the definitions, advantages and

disadvantages of each system will help a company establish which inventory control method

works best for their organization.

Push System

The push system of inventory control involves forecasting inventory needs to meet

customer demand. Companies must predict which products customers will purchase along

with determining what quantity of goods will be purchased. The company will in turn

produce enough product to meet the forecast demand and sell, or push, the goods to the

consumer. Disadvantages of the push inventory control system are that forecasts are often

inaccurate as sales can be unpredictable and vary from one year to the next. Another

problem with push inventory control systems is that if too much product is left in inventory.

This increases the company's costs for storing these goods. An advantage to the push

system is that the company is fairly assured it will have enough product on hand to

complete customer orders, preventing the inability to meet customer demand for the

product.

An example of a push system is Materials Requirements Planning, or MRP. MRP combines

the calculations for financial, operations and logistics planning. It is a computer-based


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information system which controls scheduling and ordering. It's purpose is to make sure raw

goods and materials needed for production are available when they are needed.

Pull System

The pull inventory control system begins with a customer's order. With this strategy,companies only make enough product to full-fill customer's orders. One advantage to the

system is that there will be no excess of inventory that needs to be stored, thus reducing

inventory levels and the cost of carrying and storing goods. However, one major

disadvantage to the pull system is that it is highly possible to run into ordering dilemmas,

such as a supplier not being able to get a shipment out on time. This leaves the company

unable to full-fill the order and contributes to customer dissatisfaction.

An example of a pull inventory control system is the just-in-time, or JIT system. The goal is to

keep inventory levels to a minimum by only having enough inventory, not more or less, to

meet customer demand. The JIT system eliminates waste by reducing the amount of storage

space needed for inventory and the costs of storing goods.

Push-Pull System

Some companies have come up with a strategy they call the push-pull inventory control

system, which combines the best of both the push and pull strategies. Push-pull is also

known as lean inventory strategy. It demands a more accurate forecast of sales and adjusts

inventory levels based upon actual sale of goods. The goal is stabilization of the supply chain

and the reduction of product shortages which can cause customers to go elsewhere to make

their purchases. With the push-pull inventory control system, planners use sophisticated

systems to develop guidelines for addressing short - and long-term production needs.

Choosing the Right System

It is difficult for inventory managers to always know how much inventory to order and

when. The type of inventory control system will depend in large part on what type of

product is being produced. Some items, automobiles for instance, may not be able to be

produced with the just-in-time or pull inventory control method. The production of large

items, such as automobiles, is too complex and takes too long to only produce the amount

needed to full-fill specific customer orders. Computer companies, such as Dell, are

incorporating the push-pull system, where raw materials and goods are pre-ordered and

stored, but the actual computer is not assembled until the customer makes an order.

The Disadvantages of the Continuous Inventory System

The continuous inventory system, also known as the perpetual inventory system, is used in

businesses that want to automatically update their accounting records after each

transaction. This is in contrast to the periodic inventory system, where businesses choose to

manually update their inventory records at certain intervals. Before deciding to implement

the continuous inventory system, businesses should first consider the disadvantages.

High Cost of Implementation


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Unlike the periodic inventory system, the continuous inventory system cannot be

maintained manually. Therefore, in order to use the continuous inventory system, a

business must first install specialized equipment and software. This typically results in a

much higher cost of implementation, especially in large businesses with multiple different

locations. Even after the necessary equipment and programming is installed, periodic

maintenance and upgrades will still be necessary on an ongoing basis, which will cost

businesses even more.

Recorded Inventory May Not Reflect Actual Inventory

In a continuous inventory system, transactions are recorded as soon as they take place. For

the most part, this is a good thing. However, it can also be a disadvantage because the

recorded inventory may not reflect the actual inventory over time. This is mainly due to the

fact that physical inventory counts aren't used in a continuous inventory system. Therefore,

whenever errors are entered into the system, items are stolen, or merchandise isn't

properly scanned, the recorded figures will not match with the actual inventory.

Greater Complexity

Another disadvantage of using the continuous inventory system is that it requires

businesses to offer additional training to each of their employees because of the complexity

of the system. For example, employees will need to be trained on how to use the company's

specific software programs and also be trained to use special equipment, such as scanners.

With a greater number of people entering transactions into the system, the company

assumes a much greater risk of mistakes being made due to human error.

More Time-Consuming

When using the periodic inventory system, businesses allocate a certain time when

inventories are recorded. Depending on the business, inventories could be done weekly,

monthly or even annually. This makes the periodic inventory system much less time-

consuming than the continuous inventory system. With the continuous system, each

transaction must be recorded immediately, auditors must review transactions to make sure

they're correct and physical inventories must still be completed to cross-reference and find

discrepancies in the figures.

How to Calculate Inventory Turnover Ratio Using Sales & Inventory

The inventory turnover ratio measures the number of times each year that a company goes

through its entire inventory. When determining the company's inventory, you use the

average of the inventory totals taken throughout the year. The higher the resulting ratio,

the shorter the average amount of time that goods sit either in the company warehouses or

on store shelves. A higher turnover ratio means less money spent on holding on to

inventory, but also a greater risk that the company could run out of supplies if demand

spikes.

Step 1


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Add the inventory totals your company tracks during the year. For example, if your company

reports its inventory totals each month, add the 12 monthly totals.

Step 2

Divide the totals by the number of times per year your company takes inventory to calculatethe average inventory for your company. For example, if the monthly inventory counts total

$480,000, divide $480,000 by 12 to find the average inventory equals $40,000.


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Step 3

Divide your company's costs of goods sold during the year by the average inventory to find

the inventory turnover ratio. In this example, if your company sold goods costing the

company $320,000 during the year, divide $320,000 by $40,000 to find that inventory turns

over eight times per year.

The Limitation of Inventory Turnover Ratios in the Retail Sector

The inventory turnover ratio is widely used to analyse financial performance of not only

retailers but also manufacturers. Since more inventory means more money tied up in

merchandise, analysts like to see a high inventory turnover ratio. The higher the ratio, the

less inventory the firm is keeping in relation to its sales. When used in isolation, however,

the inventory turnover ratio will leave a lot of questions unanswered.

DefinitionThe inventory turnover ratio is calculated by dividing the firm's annual sales by inventory

levels. It is ideal to use weekly or monthly data to calculate average inventory levels

throughout the year. If you have access to weekly data for instance, you need to add up all

the end-of-week inventory levels and divide the total by 52 to arrive at an average. Monthly

data is almost as helpful. In the absence of such detailed figures, you can simply use the

inventory level captured at the balance sheet as of the end of the fiscal year. The resulting

number will tell you how many times the average inventory has been turned over during the

most recent year. A ratio of 24, for example, implies that the firms sells the amount of

product sitting on its shelves 24 times over the course of the year. In other words, the

inventories are depleted twice a month, on average.

Static Data

A serious limitation of the inventory turnover ratio is that analysts often have to calculate it

based on year-end inventory levels found on the balance sheet, as most firms do not release

average weekly or monthly inventory levels. Quarterly figures are a little better, though not

ideal. As a result, the figure can be skewed due to unusually low or high inventories at the

time the inventory numbers were captured. The problem is compounded for retailers who

use year-end data in their balance sheets. Inventory levels tend to be particularly low on the

last day of the year, following Christmas sales, even if the firm spent a great deal of the year

with bloated inventory levels.

Inventory Management

One reason analysts like to see low inventories in relation to sales is that items sitting on

shelves may spoil or go out of fashion. A supermarket may be more prone to the first issue,

whereas a clothing retailer may instead get stuck with out-of-season merchandise. These

problems, however, do not only result from excess inventories but also due to

mismanagement of the stocked items. A supermarket can carry a great deal of inventory yet

do an excellent job of keeping all its items fresh, for instance. The inventory turnover ratio

fails to capture how well the inventories have been taken care of.


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Lost Sales

Another issue is that low inventory levels can result in lost sales. A clothing store that carries

too few heavy coats, boots and gloves will likely lose a lot of sales following an unexpected

blizzard as it will run out of stock relatively quickly. The inventory turnover ratio cannot tell

the analyst whether the firm could have sold more if stocks were higher.


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8.Impact of Seasonal CycleRetail Seasonality

Introduction

For many independent retailers, the largest asset on the balance sheet is inventory.

Inventory is the active asset, which generates the businesses sales and profits. But without

careful planning, inventory can easily get out of line, resulting in heavy markdowns due to

overstocks and ultimately, serious cash flow problems.

For retailers whose businesses are subject to seasonal fluctuations, the challenge of

managing inventory levels is magnified. Seasonal fluctuations in sales levels require that

inventory levels anticipate both the seasonal peaks in sales as well as the seasonal ebbs.

The way to manage these seasonal fluctuations, and maintain positive cash flowsthroughout the year, is to develop detailed sales and inventory plans before the season

begins, use those plans to guide your merchandise purchases, and as benchmarks in-season

to guide your progress.

Planning takes time, time you may not think you have, but invariably those independent

retailers that take the time to carefully plan their sales and inventory are far more profitable

than those that dont.

Getting Started

Before you begin the planning process, you will need to know what youve sold in the past,and how much inventory you had on-hand to generate those sales. While effective planning

goes far beyond merely what you did last year, this information is an important reference

point. You will need to extract that data from your POS system, by category and month.

Unfortunately, many POS systems do not maintain a history of monthly inventory levels, so

all you may be able to extract is sales data.

Second, you will need to determine the unit of measure that you will plan with. The two

primary options are to plan in units or in retail dollar value. In almost all instances, I

recommend planning in retail dollars. If you are going to do your planning in units, be clear

in your own mind why units are the way to go in your particular business, and planning inretail dollars is inappropriate.

Step 1: Plan sales

The planning process begins with building a sales plan. For independent retailers, most sales

plans are broken out by category and month (although in some cases, especially highly

seasonal businesses or categories, it may be more appropriate to plan sales by the week).

The question to ask is a very basic one: What is the most likely level of sales from stock

(excluding special orders) by month (or week) Note that the question is whats the most

likely level of sales, not whats the most you could possibly sell. Its easy to get in trouble byplanning what you might be able to sell, which has a relatively low probability of occurring,


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rather than planning for the most likely level of sales, which has the highest probability of

occurring.

Start by reviewing the prior years sales histories, and make adjustments for unusual events,

such as weather, out of stocks, one-time promotions, etc. Then factor in the appropriate

increase or decrease based on your current sales trend and your reading of the salespotential of the category for the upcoming season. For larger categories, it may make sense

to break the sales plan down further, by sub-categories, styles or vendors.

Step 2: Plan inventories

Once a sales plan has been developed, the next piece of the planning process is to build an

inventory plan. The question to ask is this: How much inventory do I need at the end of

each month to support the next months sales (in some cases the ending inventory may

need to support more than just one month of future sales), as well as maintain effective

merchandise displays?

It makes little sense to bring in more inventory at any given time than you need to set your

displays, support your planned sales until the next vendor delivery, and provide a safety

stock in the event of an unexpected sales spike or a late delivery. Committing to inventory

too far in advance, and then bringing it in all in one shot is one of the surest ways to find

yourself over-stocked down the road.

Step 3: Plan discounts

There are two primary types of discounts a retailer might take, promotional discounts

during the season, and clearance markdowns as the season winds down. Planning these

discounts goes hand in hand with planning sales and inventories if you are using retail value

as your unit of measure. A discount, just like a sale, decreases the retail value of your

inventory on hand.

Planning clearance markdowns are particularly critical to protecting gross margins, and cash

flow. If you plan the date of the first seasonal markdown before the season even begins, you

can plan the inventory you want to have on hand at that point in time, and thus your

markdown percentage.

Step 4: Plan inventory receipts

If youve planned sales by month, ending inventories by month and discounts by month, its

easy to calculate how much inventory to bring in each month, by category. You need to

bring in enough to cover that months planned sales, planned discounts and planned ending

inventory, less the prior months planned ending inventory. In this way, for example, a buyer

can know before a season begins how much inventory to plan on bringing in each month of

the season.


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Step 5: Plan pre-season commit percentages

Once inventory receipts have been planned, the next step is to plan how to execute those

receipt plans. The question to ask is, How much of my receipt plan do I want to commit to

buying now, before the season begins?

The pre-season commit percentage is the percentage of the seasons receipt plan that you

commit to before the season begins. Its the bets you place before the season has even

opened up. Every seasonal retailer has to place these bets. A seasonal retailer has to

commit to enough inventory to set displays and cover early sales, sales which are a critical

early indicator of the season to come. Similarly, a retailer frequently has to commit up front

to merchandise scheduled for delivery later in the season to assure theyll have core stocks

of key items and categories at that critical time.

This is a critical step that is too often overlooked. Too frequently, once a receipt plan has

been set, buyers spend it. But that is fraught with danger. The greater the pre-seasoncommit percentage the greater the risk associated with those commitments. The best way

to think of this is in terms of the calendar. The higher the pre-season commit percentage,

the further out into the selling season those commitments will cover, before any sales have

been made to indicate which way the season will go. Will I run an increase or a decrease?

Will the styles or colours Ive bought be the hot sellers? The further out the commitments

go the greater the risk that overall sales volume may not be as high as planned, or that the

fashion trend may develop in a different direction than anticipated.

Step 6: Plan continually throughout the season

The process doesnt end with preseason planning. In-season planning is even more

important. As each week goes by, and sales trends begin to develop, adjust your sales plans

accordingly, and adjust inventory plans for those updated sales plans. If sales are exceeding

plan, you want to be sure you have the inventory to keep the momentum going. Conversely,

if sales are coming up short of plan, the sooner you adjust your inventory plans, and thus

your scheduled receipts, the less likely you are to end up with excess inventory that needs

to be marked down at seasons end.

Every time you are about to place a reorder, or a new order on new merchandise, update

your sales plans. A buying opportunity may look very attractive and seem like an easydecision, but if you are already bought up or sales are not tracking to the plan you could be

unintentionally increasing your markdown exposure.

Step 7: Take markdowns expeditiously

When sales start to fall behind plan, its very tempting to think that youll make up the sales

later in the season. But when sales fall behind plan, inventories begin to back up as well.

When inventories back up, pressure builds on prices, which if not addressed can lead to

steep markdowns that decimate margins. The first thing to do is adjust future receipts to get

inventories back in line, but it usually doesnt end there.


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When sales are soft, the weakest of your items or categories will usually suffer

disproportionately. They simply arent as desirable at their full retail price. Mark them down

as soon as you identify them. A 25% markdown, for instance, taken immediately, will

accelerate their rate of sale and get you out of that inventory. If you wait until clearance

time, when everything is marked down, it may take 50% to 75% to clear the inventory.

Seasonality Challenges

All retailers and vendors want for Christmas is supply chain success. Using logistics

technology, savvy shipping strategies, and better planning, many will get their wish.

Parents won't score any points telling their children they aren't getting this year's must-have

holiday gift because of aging U.S. infrastructure, port congestion, a lack of truckload

capacity, and faulty demand planning. Likewise, vendors don't stand much chance using

these excuses with retailers.

The holiday shopping season is makeorbreak time for suppliers and retailers

economic, geopolitical, and technology issues notwithstanding. Getting the right products to

the right place at the right time is never more criticalor more expectedthan in the

months leading up to the frenzied holiday rush.

Suppliers and retailers must gear up to optimize their supply chains and distribution

networks to deliver high volumes of product in record time.

During last year's peak season, for example, consumer electronics giant Hewlett-Packard

shipped 10.5 million products to U.S. retailers in the first 25 days of November alone. The

company provides the retail channel with 60 percent more printers and PCs, and twice as

many cameras, during the holiday season versus other times of the year, according to HP

spokesperson Laura Wandke.

Holiday stress is felt all along the supply chainfrom manufacturers and retailers to third-

party logistics providers (3PLs), transportation carriers, and infrastructure outposts.

U.S. ports, for instance, handled a record 1.37 million TEUs last October, traditionally the

busiest shipping month of the holiday season. That number will jump 6.5 percent to 1.46

million TEUs this October, predicts the National Retail Federation.

"The holiday season puts great pressure on all U.S. supply chains because everyone peaks at

the same time," explains Larry Ravinett, senior vice president of logistics and supply chain

solutions for National Retail Systems (NRS), a Secaucus, N.J.-based 3PL specializing in retail

logistics.

"Forty percent to 50 percent of revenue for the year is earned in this very short time

period," he adds.

Because manufacturers depend on the holiday season to post large revenue numbers, they

don't want to be "the one whose merchandise is not on the shelves," says Brooks Bentz, a

partner with consulting firm Accenture's supply chain practice.


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Adding to the stress for suppliers is the fact that amid these heightened holiday

conditionswhich are piled on top of the already challenging transportation market

characterized by infrastructure woes, tight capacity, rising fuel prices, and a driver

shortageretail stores are particularly demanding about maintaining on-time deliveries.

Retailers hire additional seasonal labor, and "they don't want those workers standingaround waiting for shipments to arrive," says Ravinett.

A NEW APPROACH

Surprisingly, many vendors are not as spooked by seasonality pressure as they have been in

the past. Traditionally, the peak season cocktail of lax pre-planning, mixed with poor supply

chain visibility and expensive, last-minute shipments, meant missed sales opportunities and

a killer post-holiday revenue hangover.

Over the last several years, after enduring record port congestion, an ongoing driver

shortage, and a 10-day West Coast port shutdown that backlogged more than 300,000

ocean containers, the industry has better prepared to deal effectively with seasonality

challenges.

The ghost of these Christmases past has haunted supply chain professionals into accepting

pre- and contingency planning as a way of life during the peak season. The industry as a

whole is making a conscious move toward employing proactive strategies and technologies

to overcome capacity challenges and achieve the velocity needed for holiday season

success.

"Becaus

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Financial Management Issues in Retail Business