Operations Management: Financial Dimensions

Operations Management

  • Definition: Involves the implementation of policies and tasks to satisfy customers, employees, management, and stockholders in a firm.
  • Impact: Major influence on sales and profits.

Profit Planning

  • Profit-and-loss Statement: A financial document summarizing revenues and expenses over a specific time.
    • Time Frames: Can be analyzed yearly, quarterly, or monthly.
    • Comparison Periods: Often compared to similar periods (e.g., This Year vs. Last Year).

Major Components of a Profit-and-Loss Statement

  • Net Sales: Revenues after returns, markdowns, and discounts.
  • Cost of Goods Sold (COGS): Cost incurred to acquire sold merchandise.
  • Gross Profit (Margin): ext{Gross Profit} = ext{Net Sales} - ext{Cost of Goods Sold}
  • Operating Expenses: Costs associated with running the business.
  • Net Profit After Taxes: Profit remaining after all expenses and taxes, calculated as ext{Net Profit After Taxes} = ext{Net Profit Before Taxes} - ext{Taxes} .

Example Profit-and-Loss Statement

  • Net Sales: $330,000
  • Cost of Goods Sold: $180,000
  • Gross Profit: $150,000
  • Operating Expenses: $95,250
  • Other Costs: $20,000
  • Total Costs & Expenses: $115,250
  • Net Profit Before Taxes: $34,750
  • Net Profit After Taxes: $19,250.

Asset Management

  • Definition: Management of a retailer's assets and liabilities.
  • Balance Sheet Formula: ext{Assets} = ext{Liabilities} + ext{Net Worth}

Types of Assets

  • Current Assets: Cash, inventory, and accounts receivable.
  • Fixed Assets: Property, buildings, and equipment.

Types of Liabilities

  • Current Liabilities: Short-term obligations due within a year (e.g., payroll expenses, accounts payable).
  • Fixed Liabilities: Long-term obligations (e.g., mortgages and long-term loans).

Budgeting

  • Purpose: Outlines planned expenditures based on expected performance and sets structured financial goals.
  • Benefits:
    • Performance-based expenditures.
    • Adjustability as goals change.
    • Efficient resource allocation.
    • Structured and integrated planning.

Retail Budgeting Process

  • Preliminary Decisions: Include budgeting authority, time frame, frequency, cost categories, level of detail, and budget flexibility.

Cash Flow Management

  • Definition: Relates to timing of revenues received versus expenditures.
  • Objective: Ensure revenues are received before expenditures are made.
  • Tools for Management: May require short-term loans if cash flow is weak.

Resource Allocation

  • Types:
    • Capital Expenditures: Long-term investments in assets.
    • Operating Expenditures: Short-term running costs.
    • Opportunity Costs: Benefits forfeited by choosing one opportunity over another.

Productivity Measurement

  • Key Performance Indicators:
    • Sales per square foot.
    • Inventory turnover.
    • Costs/Sales ratio.
  • Improvement Strategies: Increase sales via better performance and reduce costs through automation.

Funding Sources

  • Mortgages: Refinancing can lessen monthly payments.
  • REITs: Used for funding construction by investing in income-generating real estate.
  • IPOs: Raise capital through stock sales for expansions.

Bankruptcy & Liquidations

  • Bankruptcy Advantages: Protection against debts, and ability to renegotiate obligations.
  • Liquidations: Result in permanent closure of the business.

Operational Decisions

  • Factors Considered: Operating guidelines, store formats, inventory management, and personnel alignment with customer traffic.

Store Maintenance**

  • Areas Included:
    • Exterior Maintenance: Parking, signage, and entry points.
    • Interior Maintenance: Floors, lighting, fixtures, etc.

Inventory Management

  • Goal: Maintain proper merchandise assortment efficiently.
  • Decisions: Include coordination with suppliers, inventory levels on sales floors vs. storerooms, acceptable breakage rates, etc.

Store Security

  • Basic Issues: Personal and merchandise security for both employees and customers.

Insurance Management**

  • Key Considerations: Rising premiums and the importance of safety measures in retail environments.

Credit Management Decisions

  • Considerations:
    • Acceptability of payment forms.
    • Administration of credit plans.
    • Handling of late payments.

Outsourcing

  • Definition: Engaging outside parties for operational functions to reduce costs and save employee time.

Crisis Management

  • Importance: Establishing contingency plans for various crisis situations and effective communication during a crisis.