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
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