Operations Management: Financial Dimensions Chapter 12 Operations Management: Financial Dimensions RETAIL MANAGEMENT: A STRATEGIC APPROACH, 9th Edition BERMAN EVANS

Chapter Objectives To define operations management To discuss profit planning To describe asset management, including the strategic profit model, other key business ratios, and financial trends in retailing To look at retail budgeting To examine resource allocation

Profit Planning Profit-and-loss (income) statement Summary of a retailer’s revenues and expenses over a given period of time Review of overall and specific revenues and costs for similar periods and profitability

Major Components of a Profit-and-Loss Statement Net Sales Cost of Goods Sold Gross Profit (Margin) Operating Expenses Taxes Net Profit After Taxes Net Sales $330,000 CGS $180,000 Gross Profit $150,000 Operating Expenses $ 95,250 Other Costs $ 20,000 Total Costs $115,250 Net Profit before Taxes $ 34,750 Taxes $ 15,500 Net Profit after Taxes $ 19,250

Asset Management The Balance Sheet Assets Liabilities Net Worth Net Profit Margin Asset Turnover Return on Assets Financial Leverage

Figure 12.1 The Strategic Profit Model

Other Key Business Ratios Quick Ratio Current Ratio Collection Period Accounts Payable to Net Sales Overall Gross Profit

Financial Trends in Retailing Slow growth in U.S. economy Funding sources Mergers, consolidations, spinoffs Bankruptcies and liquidations Questionable accounting and financial reporting practices

Funding Sources Mortgage refinance (due to low interest rates) REIT (retail-estate investment trust) to fund construction Company dedicated to owning and operating income-producing real estate Initial public offering (IPO)

Figure 12.2 Rebuilding Kmart

Budgeting Budgeting 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

Figure 12.3 The Retail Budgeting Process

Budget Benefits 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

Preliminary Budgeting Decisions Specify budgeting authority Define time frame Determine budgeting frequency Establish cost categories Set level of detail Prescribe budget flexibility

Cost Categories Capital expenditures Fixed costs Direct costs Natural account expenses

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

Resource Allocation Capital Expenditures Long-term investments in fixed assets Operating Expenditures Short-term selling and administrative costs in running a business

Enhancing Productivity 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.