You are on page 1of 30

Financial Strategy

Retailers have two paths available to achieve a


high level of performance:
The Profit Path.
The Turnover Path.
Different retailers, however, pursue different
strategies, resulting in different types of financial
performance.
The two paths are combined into the strategic
profit model
.
Strategic Profit Model
Every retailer wants to be financial successful.
One important financial goal is to achieve a high
return on assets.
For example, x invested Rs.1,74,000 in setting
up his store and buying merchandise.
At the end of the year he earns Rs.33,000 in
profit, a 19% return on his
investment(33,000/1,74,000).
This , net profit/total assets is called Return on
Assets.
Strategic Profit Model
The Return on Assets can be divided into:
Profit Path (Measured by net profit margin)
&
The Turnover Path (Measured by asset
turnover)
Net Profit Margin is simply how much profit (after
tax) a firm makes divided by its net sales.
Asset turnover is used to measure the
productivity of a firms investment in assets.
It is expressed as net profit/total assets.
Strategic Profit Model
To understand how the strategic profit model works let
us have a look at the following model of a bakery and
Jewelry stores:
net profit X Asset = Return on
margin Turnover Assets
Bakery 1% 10% 10%
Jewelry 10% 1% 1%
Thus the Bakery is achieving 10% return on assets by
having relatively high asset turnoverThe Turnover
Path.
Jewelry stores on the other hand achieves its return on
assets with relatively high net profit margins-The Profit
Path.

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:
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.

The Turnover Path
The information used to analyze a firms
turnover path primarily comes from the
balance sheet.
The income statement summarizes the
financial performance over a period of
time.
The balance sheet summarizes the
retailers financial position at a given point
in time, say the last day of the year.


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

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.
The Turnover Path

Liabilities and Owners Equity:
Current liabilities= accounts payable + accrued
liabilities + long term liabilities +
Owners Equity also known as shareholders
equity, 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.


Strategic Profit Model
The Balance Sheet and the Income Statement are the
corporate measures of financial performance.
The Strategic Profit Model is a combination of both these
measures.
It combines the information provided by the balance
sheet and the income statement into one comprehensive
model and is based on three important financial ratios:

The Net Profit Margin net profit/net sales.
The Asset Turnover Ratio net sales/total assets.
The Return on Assets net profit/total assets.

FINANCIAL STRATEGY IN
RETAIL

Strategic Profit Model
The strategic profit model is useful to the retailers
because it combines two-decision making areas:
Margin management
Asset management
Facilitates examining relationships among them.
The strategic profit model uses return on assets as the
primary criterion for planning and evaluating a firms
financial performance.
The strategic profit can also be used to evaluate financial
implications of new strategies before they are
implemented.
Setting Performance Objectives
Level of output input productivity
Organization (output/input)
---------------------------------------------------------------------------------------------------------
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.
---------------------------------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------------------
Setting 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
---------------------------------------------------------------------------------------------------------------
-





Measuring Merchandise Performance
GMROI (Gross Margin Return On
Investment: Tells a retailer, how many
times in a year, the stock investment
returned, with a given margin.

GMROI = Gross Margin/Average Inventory


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 the
store.
It varies across various retail segments.
Typically food retailers earn low margins, hence
they should operate on a high inventory
turnover.
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/average
inventory at retail price or
Cost of goods sold/average inventory at cost.
Measuring Retail Store & Space
Performance
GMROF: The concept of GMROI, when applied
to retail space in a store gives the Gross Margin
Return 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 gross
margin or by decreasing the selling space or
both.
GMROF also allows the retailer to calculate the
margin earned by various or by various product
lines.
Measuring Retail Store & Space
Performance
Sales Per Square Foot: This is calculated
by dividing the total sales by the total sq.
feet of selling area.
The Conversion Ratio: The number of
people who enter a retail store are termed
as the walk-ins.
The no. of people who actually make a
purchase from a store are termed as
conversions.
Measuring Retail Store & Space
Performance
The conversions are calculated as:
Conversions = no. of customers who
make 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 the
performance of the store and the
merchandise sold.
Measuring Retail Store & Space
Performance

Average Sales Per transaction/Average
Ticket Size:
This is calculated by dividing the total
sales for the day, by the number of bills
generated.
It is an indication of how much a customer
spends in the store, per transaction, and
again, varies depending on the type of
retailer.
Measuring Employee Productivity
Sales Per Employee:
This is an indicator of the performance of
the sales staff.
It also helps the retailer in gauging as to
whether 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.
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.

You might also like