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.