march 7th lecture notes

Chapter Overview

• Retailing Management Lecture 9: Financial Management by Dr. Deborah Leung.

• Focus on evaluating retailer performance and financial objectives.

Learning Objectives

• Ability to:

  1. Explore why retailers need to evaluate performance.

  2. Identify the measures used for performance assessment.

  3. Examine the strategic profit model.

  4. Understand the reflection of retail strategy in financial objectives.

Financial Decisions in Retail

• Integral to every aspect of retailer strategy.

• Interconnection between financial decisions and overall strategy.

• Importance of financial decisions related to examples in practice.

Strategic Planning Process

• First Step: Articulating the retailer’s strategy and scope of activities.

• Three Types of Objectives:

  1. Financial Objectives:

     • Focus on ROI and ROA over profits.

     • Key for managers of publicly held retailers.

  2. Societal Objectives:

     • Benefits provided to society, e.g., employment for handicapped.

     • Hard to quantify (e.g., percentage of profits donated).

  3. Personal Objectives:

     • Self-gratification, status, and respect (e.g., Elon Musk’s projects).

Ratio Analysis Overview

• Financial statements analysis requires knowledge of ratio analysis.

• Definition of Ratio: Numerator divided by denominator.

• Types of Ratios:

  1. Percentages

  2. Multipliers

  3. Days

• Types of Ratio Comparisons:

  1. Cross-sectional Analysis: Comparison within the industry.

  2. Time Series Analysis: Performance evaluation over time.

  3. Combination Analysis: Combines both methods for comprehensive evaluation.

Strategic Profit Model (SPM)

• Purpose: Summarizes factors from income and balance sheets affecting ROA.

• Components:

  1. Net Profit Margin: Profit per sales dollar.

  2. Asset Turnover: Productivity measure of asset investment.

• Mathematical Representation:

  • Net profit margin * Asset turnover = Return on assets.

Profit Path Analysis

• Income Statement Summary:

  • Breakdown of revenue and costs (e.g., Walmart vs. Birks).

• Example Analysis: How to construct income statements and determine profit/loss.

Profit Margin Models

• Definitions:

  • Net Sales: Total received after returns.

  • Promotional Allowances: Payments for vendor promotions.

  • Customer Returns: Value of returns granted refunds.

• Cost of Goods Sold: Reflects total expenditure on inventory management.

Expenses in Retail

• Operating Expenses: All costs excluding goods sold (salaries, utilities).

• Categories:

  • Selling Expenses

  • General Expenses

  • Administrative Expenses

• Interest Expenses: Costs of financing inventory and store purchases.

Net Operating Income & Profit Measures

• Net Profit Measure: Overall performance before taxes and extraordinary expenses.

• Expression: Typically expressed after taxes.

  • Importance for reinvesting, dividends, and debt repayment.

Skeletal Statement Analysis

• Purpose: Analyzes key categories of operating statements to reveal relationships among variables like sales volume and expenses.

• Example Structure:

  • Net Sales, COGS, Gross Profit, Operating Expenses, Net Income.

The Turnover Path Analysis

• Balance Sheet Function: Summarizes financial position at a given time.

• Assets vs. Liabilities:

  • Assets are economic resources.

  • Liabilities are obligations to pay.

Types of Assets and Their Management

• Current vs. Fixed Assets:

  • Current: cash, receivables, inventories.

  • Fixed: long-term assets subject to depreciation.

Accounts Receivable Management

• Definition: Monies owed from credit sales.

• Implications: Considerations for credit acceptance vs. financial implications.

Merchandise Inventory Importance

• Role in Retailing: Represents critical resource for sales generation.

• Inventory Turnover: Measures effectiveness in stock management.

Calculating Inventory Turnover

• Definition: Number of times inventory is sold and replaced.

• Higher Ratios Indicate: Effective inventory management.

Situation Analysis of Inventory Turnover

• Understanding Impacts: Discussion of scenarios reflecting inventory turnover ratios.

Advantages and Disadvantages of Inventory Turnover

• Advantages: Increased sales volume, reduced operating costs.

• Disadvantages: Risks of lost sales and increased costs if turnover is excessively high.

Cash and Current Assets Management

• Importance of Cash Access: Critical for operational sustainability.

Fixed Assets and Depreciation

• Concept of Depreciation: Reducing value of fixed assets over time.

Liabilities and Owner's Equity

• Types of Liabilities: Current and Long-term, implications for retailer stability.

• Owner’s Equity: Represents owner investment remaining after liabilities are settled.

Performance Objectives and Measures

• Components of Performance Objectives: Measurable goals, time frames, necessary resources.

• Types of Measures: Input, Output, Productivity.

Benchmarking in Performance Assessment

• Importance of Benchmarks: To enhance accuracy in performance evaluation.

  • Types include Time-Series and Cross-Sectional analysis.

Summary of Chapter Insights

• Provides foundational understanding of how retail strategy interacts with financial performance.

• Introduces and exemplifies the strategic profit model for assessing retail performance effectiveness.