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Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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CHAPTER 2
CHAPTER 1
CHAPTER 1
CHAPTER 6
Financial Strategy CHAPTER 6
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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CHAPTER 2
CHAPTER 1
CHAPTER 1
CHAPTER 6
Retailing Strategy
Retail Market Strategy
Financial Strategy
Retail Locations
Retail Site Location
Human Resource Management
Information Systems and Supply Chain Management
Customer Relationship Management
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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CHAPTER 1
CHAPTER 1
CHAPTER 6
Questions
• How is a retail strategy reflected in retailers’ financial objectives?
• How do retailers need to evaluate their performance?
• What is the strategic profit model, and how is it used?
• What measures do retailers use to assess their performance?
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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CHAPTER 1
CHAPTER 1
CHAPTER 6
Objectives and Goals
• Financial – not necessarily profits, but return on investment (ROI) – primary focus
• Societal – helping to improve the world around us
• Personal – self-gratification, status, respect
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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CHAPTER 2
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CHAPTER 1
CHAPTER 6
Components of the Strategic Profit Model
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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The Strategic Profit Model: An Overview
Profit Margin x Asset turnover = Return on assets
Net profit x Net sales (crossed out) = Net profit
Net sales (crossed out) Total assets Total assets
Net Profit Margin: reflects the profits generated from each dollar of sales
Asset Turnover: assesses the productivity of a firm’s investment in its assets
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Profit Margin Management Path
• Net Sales = Gross Sales + Promotional Allowances - Return
• Cost of Good Sold (COGs)
• Gross Margin (GM) = Net Sales - COGs
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Profit Margin Management Path
• Operating Expense
• Variable (e.g.. sales commissions)
• Fixed (rent, depreciation, staff salaries)
• Selling, general, and administrative (SG&A) expenses
• Operating profit margin
• Operating profit margin = Gross margin - Operating expenses –Extraordinary (recurring) operating expenses
• Net profit margin = Operating profit margin - Taxes - Interest - Extraordinary nonrecurring expenses
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Profit Margin Management Path
• Gross margin percentage is gross margin divided by net sales.
• Retailers use to compare
• the performance of various types of merchandise
• their own performance with that of other retailers with higher or lower levels of sales.
Gross margin
Net sales = Gross margin %
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Profit Margin Management Path
• SG & A or operating expenses can be expressed as a percentage of net sales to facilitate comparisons across items, stores, and merchandise categories within and between firms.
Operating expenses
Net sales = Operating expenses %
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Profit Margin Management Path
• Net operating profit percentage is gross margin minus operating expenses divided by net sales
Gross margin - Operating expenses
Net sales = Net operating profit %
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Asset Management Path
• Assets:
• Economic Resources (e.g., inventory, buildings, computers, store fixtures) owned or controlled by a firm
• Current Asset and Fixed Asset
• Current Assets = Cash + Account Receivable + Inventory + Other current assets
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Asset Management Path
• Accounts receivable are primarily the monies owed to the retailer by customers that have bought merchandise on credit.
• Fixed Assets = Fixture, Stores (owned)
• Asset Turnover = Sales/Total Assets
• Inventory Turnover = COGS/Avg. Inventory (cost)
Net sales
Total assets = Asset turnover
Cost of goods sold
Average inventory at cost = Inventory turnover
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Inventory Turnover
• A Measure of the Productivity of Inventory:
• It is used to evaluate how effectively retailers utilize their investment in inventory
• Shows how many times, on average, inventory cycles through the store during a specific period of time (usually a year)
Inventory Turnover = COGS/avg inventory (cost)
Inventory Turnover = Sales/ avg inventory (retail)
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Analysis of Financial Strength
• Cash-Flow Analysis
• Debt-Equity Ratio
• Current Ratio
• Quick Ratio
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Setting and Measuring Performance Objectives
• Retailers will be better able to gauge performance if it has specific objectives in mind to compare performance.
• Should include:
• numerical index of performance desired
• time frame for performance
• necessary resources to achieve objectives
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Setting Objectives in Large Retail Organizations
Top-Down Planning
Corporate Developmental Strategy
Category, Departments
and sales associates
implement strategy
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Setting Objectives in Large Retail Organizations
Bottom-Up Planning
Buyers and Store
managers estimate
what they can
achieve
Corporate
Operation managers
must be involved in
objective setting
process
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Productivity Measures
Input Measures – assess the amount of resources or
money used by the retailer to achieve outputs such as
sales
Output measures – asses the results of a retailer’s
investment decisions
Productivity measure – determines how effectively
retailers use their resource – what return (e.g., profits)
they get on their investments (e.g., expenses)
Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.
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Outputs – Performance
• Sales
• Profits
• Cash flow
• Growth in sales, profits
• Same store sales growth
Inputs Used by Retailers
• Inventory ($)
• Real Estate (sq. ft.)
• Employees (#)
• Overhead (Corporate Staff and Expenses)
• Advertising
• Energy Costs
• MIS expenses
Financial Performance of Retailers
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Examples of Performance Measures Used by Retailers
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Assessing Performance
• Growth in Stockholder Value – Stock Price
• Accounting Measures – ROA (Risk adjusted)
• Benchmark
• Performance Over Time • Compare performance indicator for three years
• Performance Compared to Competitors • Compare performance indicators with major competitors for
one year, most recent