Chapter 1212Operations Management:

Financial Dimensions

U.S. Retail Sales Growth ForecastYear over Year Change in Retail Sales, Percent. Not Seasonally Adjusted.

Updated Saturday, October 13, 2007from www.forecasts.org/m3.htm

Chapter Objectives

To discuss profit planning

To describe asset management, including the strategic profit model (aka the “Dupont Model”)

To look at retail budgeting

To examine retail financial and stock analysis*

Major Components of a Profit-and-Loss Statement

• Net Sales• Cost of Goods Sold• Gross Profit (Margin)• Operating Expenses• Taxes• Net Profit After Taxes

Net Sales $330,000

CGS $180,000

Gross Profit $150,000

Operating Expenses

$ 95,250

Other Costs $ 20,000

Total Costs $115,250

Net Profit before Taxes

$ 34,750

Taxes $ 15,500

Net Profit after Taxes

$ 19,250

Profit Planning Profit-and-loss (income) statement

– Summary of a retailer’s revenues and expenses over a given period of time– Review of overall and specific revenues and costs for similar periods and

profitability

Asset ManagementThe Balance Sheet

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

Resource Allocation Capital Expenditures

– Long-term investments in fixed assets

Operating Expenditures– Short-term selling and

administrative costs in running a business

Figure 12-1: The Strategic Profit Model

Net profitTotal Assets

Return on Assets

-Standards, goals for each component*-Historical performance (Note Table 12-3)

Implications for Budgeting

Net profitTotal Assets

Return on Assets

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

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

Budget should be targeted to reach goals

1. Critical Profit Variables*-NS, COGS, Wages, Advg., Rent, A/R, Inv.

2. Action Programs* (to make budget), e.g., ”Enhancing Productivity”- A firm can improve employee performance, sales per foot of space, and other factors by upgrading training programs, increasing advertising, etc.- It can reduce costs by automating, having suppliers do certain tasks, etc

3. Control Procedures (to monitor action programs)*- e.g., Productivity Measures

Figure 12-3: The Retail Budgeting Process

Benefits of Budgeting Preliminary Budgeting Decisions Expenditures are related to expected performance

Costs can be adjusted as goals are revised Resources are allocated to the right areas Spending is coordinated Planning is structured and integrated Cost standards are set Expenditures are monitored during a budget cycle Planned budgets versus actual budgets can be compared Costs/performance can be compared with industry

averages

1) Specify budgeting authority

2) Define time frame

3) Determine budgeting frequency

4) Establish cost categories

5) Set level of detail

6) Prescribe budget flexibility

Key Business Ratios (See Table 12-4) Current Ratio (Current Assets/Current Liabilities) Quick Ratio (Cur. Assets-Inv./Current Liabilities) Acid-Test Ratio (Cash/Current Liabilities) Growth (especially same store year over year) Overall Gross Profit (Sales - COGS)

Retail Financial and Stock AnalysisFinancial Trends in Retailing Slow growth in U.S. economy Funding sources Mergers, consolidations, spinoffs Bankruptcies and liquidations Questionable accounting and financial reporting

Retail Stocks General Stock Analysis

Specific retail stocks- see Ameritrade

Chapter 12 Discussion Questions: 2, 3, 4, 12