UNIT-2 (PART 3)

FINANCIAL DIMENSIONS

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‘ Assets are any item a retailer owns with a
monetary value.
‘ Liabilities are financial obligations a retailer incurs
in operating a business.
‘ Retailer·s net worth is computed as assets minus
liabilities.
‘ In operation management , the retailer·s goal is to
use its assets in the manner providing the best
result possible. There are three basic ways to
measure those results : net profit margin, assets
turnover and financial leverage.
‘ Net profit margin:
It is performance measure based on a retailer·s net
profit and net sales.

Net profit margin = Net profit after tax / Net sales
To enhance its net profit margin, a retailer must
either raise gross profit as a percentage of sales or
reduce expenses as a percentage of sales.
Ways to increase gross profits

Selling
exclusive product, avoiding price competition
through excellent service, adding items with higher
margin.
Ways to reduce expenses

Stressing
on self service, lowering labor cost, refining the
mortgage, cutting energy costs etc.
‘ Asset turnover:
It is a performance measure based on retailer·s net
sales and total assets:

Asset turnover = Net sales / Total Assets
to improve the asset turnover ratio, a firm must
generate increased sales from the same level of
assets or keep the same sales with fewer assets.
Ways to increase sales

Longer
working hours, accepting web orders, training
employees, stocking better known brands.
Ways to decrease assets

Moving to smaller store, simplifying fixtures, keeping
smaller inventory, etc.
‘ Financial leverage
It is a performance measure based on the
relationship between a retailer·s total assets and
net worth.
Financial leverage = Total Assets / Net Worth
A retailer with a high financial leverage ratio has
substantial debts, while a ratio of 1 means it has no
debts.
Ways to decrease leverage:

Excessive focus on cost cutting, short term sales etc.
If leverage is too low it means retailer is limiting its
capability to enter in new market, or to expand.

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‘ udgeting 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


   
 
‘ 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


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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

 
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º Capital expenditures
º Fixed costs
º Direct costs
º Natural account expenses
  
 

‘ Set goals
‘ Specify performance standards
‘ Plan expenditures in terms of
performance goals
‘ Make actual expenditures
‘ Monitor results
‘ Adjust budget

 

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‘ Capital Expenditures ‘ Operating Expenditures

Long-term Short-term selling and
investments in fixed administrative costs
assets in running a business

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‘ 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.