financial strategy in retai

8/12/2019 Financial Strategy in Retai

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Financial Strategy

Retailers have two paths available to achieve ahigh level of performance:

The Profit Path.

The Turnover Path. Different retailers, however, pursue different

strategies, resulting in different types of financialperformance.

The two paths are combined into the strategicprofit model

.


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Strategic Profit Model

Every retailer wants to be financial successful.

One important financial goal is to achieve a highreturn on assets.

For example, x invested Rs.1,74,000 in settingup his store and buying merchandise.

At the end of the year he earns Rs.33,000 inprofit, a 19% return on his

investment(33,000/1,74,000). This , net profit/total assets is called Return on

Assets.


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The Return on Assets can be divided into:

Profit Path (Measured by net profit margin)

&

The Turnover Path (Measured by assetturnover)

Net Profit Margin is simply how much profit (aftertax) a firm makes divided by its net sales.

Asset turnover is used to measure theproductivity of a firms investment in assets.

It is expressed as net profit/total assets.


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To understand how the strategic profit model works letus have a look at the following model of a bakery andJewelry stores:

net profit X Asset = Return on

margin Turnover AssetsBakery 1% 10% 10%

Jewelry 10% 1% 1%

Thus the Bakery is achieving 10% return on assets byhaving relatively high asset turnoverThe Turnover

Path. Jewelry stores on the other hand achieves its return on

assets with relatively high net profit margins-The ProfitPath.


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The information used to analyze a firms

profit path comes from the income

statement.

A income statement summarizes a firms

financial performance over a period of time

Therefore it is necessary at this stage to

understand the various items in the

income statement:


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The Profit Path

Net sale=gross sales-returnallowance.

Gross margin=net sales-cost of good

Gross Margin%= gross margin/net sales.

Types of retail operating expenses: Selling expenses, general expenses and

administrative expenses.

Net profit=gross margin-expenses.

Net Profit Margin% = Net profit/net sales.

Inventory turnover = net sales/avg. inventory.


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The Turnover Path

The information used to analyze a firmsturnover path primarily comes from thebalance sheet.

The income statement summarizes thefinancial performance over a period oftime.

The balance sheet summarizes theretailers financial position at a given pointin time, say the last day of the year.


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The Turnover Path

Current assets=Acct. receivable + cash+

merchandize inventory + other current assets.

Inventory Turnover = Net. sales/Average

inventory. Cash and other current assets.

Cash= on hand + demand and savings acs.+

marketable securities such treasury bills Other current assets= prepaid expenses


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The Turnover Path

Fixed Assets=Buildings + fixtures

+equipment + long term investments.

Asset Turnover: is an overall performance

measure from the asset side of the

balance sheet.

Asset Turnover=Net sales/total assets.


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The Turnover Path

Liabilities and Owners Equity:

Current liabilities= accounts payable + accrued

liabilities + long term liabilities +

Owners Equity also known as shareholdersequity, represents the amount of assets

belonging to the owners of the retail firm after all

obligations (liabilities). In accounting terms the

relationship can be expressed as:

Owners equity = Total assets-total liabilities.


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The Balance Sheet and the Income Statement are thecorporate measures of financial performance.

The Strategic Profit Model is a combination of both thesemeasures.

It combines the information provided by the balancesheet and the income statement into one comprehensivemodel and is based on three important financial ratios:

The Net Profit Marginnet profit/net sales. The Asset Turnover Rationet sales/total assets.

The Return on Assetsnet profit/total assets.


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FINANCIAL STRATEGY IN

RETAIL


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The strategic profit model is useful to the retailersbecause it combines two-decision making areas:

Margin management

Asset management

Facilitates examining relationships among them.

The strategic profit model uses return on assets as theprimary criterion for planning and evaluating a firmsfinancial performance.

The strategic profit can also be used to evaluate financialimplications of new strategies before they areimplemented.


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Setting Performance ObjectivesLevel of output input productivity

Organization (output/input)

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Corporate net sales Sq. ft. of store space Return on assets

net profits no. of employees asset turnover

growth/sales inventory sales/employee

profits advt. expenditure sales per sq.ft.

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Merchandize net sales inventory level GMROI

Management gross margin markdowns inventory T.O .growth in sales advt. expenses advt % sales

cost of merchandize markdown as %

of sales

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etting Performance Objectives

stores net sales sq.ft of selling net sales per sq.ft.

Operations gross margin areas net sales per SA.

growth in sales exp. for utilities or per selling hour

no of sales utility expenses as

associates a % of sales

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Measuring Merchandise Performance

GMROI (Gross Margin Return On

Investment: Tells a retailer, how many

times in a year, the stock investmentreturned, with a given margin.

GMROI = Gross Margin/Average Inventory


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Measuring Merchandize

Performance

The inventory turnover Ratio: Indicates the no.of times in a year, that the inventory is replaced.

Very important tool for comparison amongst

various segments of the industry. Important aspect of the overall profitability of thestore.

It varies across various retail segments.

Typically food retailers earn low margins, hencethey should operate on a high inventoryturnover.


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Measuring Merchandize

Performance

Indian retailers like food world, subhiksha, are

reported to be operating on a high inventory

turnover.

This may be as high as 20 times a year. Garment retailers may on the other hand have

an inventory turnover of 3 to 3.5 times.

Inventory Turnover = Net sales/averageinventory at retail price or

Cost of goods sold/average inventory at cost.


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Measuring Retail Store & Space

Performance GMROF: The concept of GMROI, when applied

to retail space in a store gives the Gross MarginReturn of Selling Space of Footage.

It is calculated by dividing the gross margin by

the retail selling space. The Gross Margin Return On Selling Space can

be increased either by increasing the grossmargin or by decreasing the selling space or

both. GMROF also allows the retailer to calculate themargin earned by various or by various productlines.


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Performance

Sales Per Square Foot: This is calculatedby dividing the total sales by the total sq.feet of selling area.

The Conversion Ratio:The number ofpeople who enter a retail store are termedas the walk-ins.

The no. of people who actually make apurchase from a store are termed asconversions.


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Performance

The conversions are calculated as:

Conversions = no. of customers whomake a purchase/no of customers entering

the storeX100 The ratio is always calculated for a period

of time.

It serves as a tool for evaluating theperformance of the store and themerchandise sold.



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Performance

Average Sales Per transaction/AverageTicket Size:

This is calculated by dividing the total

sales for the day, by the number of billsgenerated.

It is an indication of how much a customer

spends in the store, per transaction, andagain, varies depending on the type ofretailer.


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Measuring Employee Productivity

Sales Per Employee:

This is an indicator of the performance ofthe sales staff.

It also helps the retailer in gauging as towhether the store is adequately staffed.

Helps in determining the sales targets for

the frontline staff. It is calculated by dividing the total sales

by total number of employees in the store.


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Measuring Employee Productivity

Gross Margin Return On Labor (GMROL):

Extending the concept of GMROI, to the

number of employees in the store, we can

calculate the GMROL.

This is calculated by dividing the Gross

Margin by the total number of employees

in the store.


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financial strategy in retai

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