retail financial strategy

8/2/2019 Retail Financial Strategy

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RETAIL FINANCIAL

STRATEGY


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Financial objectives are an integral part of

a retailers market strategy. Retailers develop their strategy and build

a sustainable competitive advantage togenerate a continuing stream of profits.

Can be used to monitor the retailersperformance, assess the reasons itsperformance is above or below

expectations, and provide insight intoappropriate actions that can be taken ifperformance falls short of thoseexpectations.


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Retail strategy specifies aboutdevising objectives and scope ofactivities an organization plans to

undertaken

Financial objectives

Societal objectives

Personal objectives


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Financial objectives

Profit is not the appropriate measure

Return on investment is the appropriatemeasure

Ex: if an organization set a financialobjective of making profit of at least$100000 a year, then they need toconsider how much she needs to invest tomake the $100000, the profit they desiresfrom the investment.


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Financial objectives (Contd.)

A commonly used measure is returnon assets (ROA), i.e. the profit returnon all the assets possessed by the

firm.


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Societal objectives

Related to much broader issuesabout providing benefits to society

Retailer might be concerned aboutproviding employment opportunitiesfor people in a particular area

Societal objectives might includeoffering unique merchandise such asenvironmentally sensitive products


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Personal objectives

Like self-gratification, status andrespect

Ex: The owner of a book store mayfind it rewarding to interact withothers who like reading and authorsthat visit the store for book-signing

promotions.


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Strategic profit Model

Developed by Dupont to analyze thefactors affecting the financialperformance of a firm.

Method for summarizing the factorsthat affect a firms financialperformance as measured by ROA.

Two components:Net profit marginAsset turnover


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Net profit margin is how muchprofit a firm makes divided by its netsales.

Asset turnoveris the retailers netsales divided by its assets.

assesses the productivity of a firms

investment in its assets and indicateshow many sales rupees are generatedby each rupee of assets.


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Net Profit margin*Asset Turnover=Returnon Assets

Net profit Net Sales = Net profitNet sales * Total Assets Total Assets


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The two components, i.e. Net profitand Total Assets of strategic profit modelillustrate that ROA is determined by two

sets of activities,profit margin management and

asset management


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Different approaches for achieving

ROA

Netprofit

margin

AssetTurnover

Returnon

AssetsABC 1% 10 times 10%

XYZ 10% 1 time 10%


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Profit Margin Management Path

Information used to examine theprofit margin management pathcomes from the retailers income

statement, which summarizes afirms financial performance over aperiod of time


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Profit Margin Management Path

(Contd.)

Variables to be considered under ProfitMargin Management Path

Net Sales = Gross amount of sales+

promotional allowances customer returns Gross margin =Net sales Cost of goods sold

Operating expenses = incurred in normalcourse of doing business

Operating expenses% = Operating expenses Net Sales


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Net profit = Gross margin Expenses-Taxes

Net profit% = Net profit

Net Sales


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Asset management path

Information used to analyse aretailers asset management pathprimarily comes from the firms

balance sheet.

Summarizes a retailers financialposition.


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Asset management path (Contd.)

Components to be considered

Assets

Current Assets

Fixed Assets

Asset turnover

Net sales = Fixed Asset Turnover

Fixed Assets


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Return on assets = Net profitmargin* Asset turnover


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Issues to be considered

Retailers and investors need toconsider both net profit margin andasset turnover when evaluating their

performance

Retailer need to consider theimplications of strategic decisions on

both components of the strategicprofit model

retail financial strategy

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