1. Operations Management: Financial Dimensions
Chapter 12
Operations Management: Financial Dimensions
Dr. Pointer’s notes

2. 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

3. Operations Management
Operations Management is the efficient and effective implementation of the policies and tasks necessary to satisfy the firm’s customers, employees, and management and stockholders.
Managers must be knowledgeable of the major financial ratios and statements which can help in planning and evaluating the success of a retail operations.

4. Profit Planning
One of the most important statement to understand is the P & L Statement
Profit-and-loss (income) statement
Summary of a retailer’s revenues and expenses over a given period of time, usually a year.
Review of overall and specific revenues and costs for similar periods and profitability

5. 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

6. Major Components of P & L Statements
Net Sales – revenues minuses returns, markdowns and employee discounts
Cost of Goods Sold- amount paid for merchandise, less discounts.
Gross profit (margin), the difference between net sales and cost of goods sold.
Operating expenses – the cost of running a retail business
Taxes – payments of federal, state and local government taxes
Net profits after taxes - - profit after all taxes and expenses have been paid

7. Asset Management
The Balance Sheet- itemizes a retailers assets, liabilities and network for specific time
Assets- total amount of item with monetary value
Current assets – cash on hand
Fixed assets – non liquid assets such as property, building, fixtures, equipment and etc
Liabilities – financial obligations owed by retailer
Net Worth- assets minus liabilities (value of business)
Net Profit Margin- performance measures –ratio Net profit/total revenue
Asset Turnover- performance measure that
Return on Assets- performance measure
Financial Leverage – performance measurer

8. Performance Measures Asset Turnover = Net sales Total assets
Return on Assets = Net profit margin X Asset Turnover
Financial Leverage = Total Assets
Net Worth

9. Assessment of Ratios
Asset Turnover - Best to have ratio greater than 2 because it shows that assets are being used more efficiently
Return on Assets - Ratios close to 1 are good because it shows that assets are properly being utilized
Financial Leverage Ratio – around 2 or less is better. High ratios indicate much higher debt. Need to compare ratio with industry average for good assessment

10. Figure 12.1 The Strategic Profit Model
Net profit
Margin
Asset
Turnover
Financial
Leverage
Return on
Net Worth = X X
Net profit Net Sales Total Assets = Net profit
Net Sales total Assets Net Worth Net Worth
Return on net worth model can help trouble shoot to determine where the major performance problem is.

11. Other Key Business Ratios
Quick Ratio- cash+ acct receivable/current liabilities ( > 1 is good)
Current Ratio – current assets/current liabilities (>2 is preferred)
Collection Period – accts receivable /net sales X by or above for a store with 30 day credit term is means slow turning receivables.
Accounts Payable to Net Sales- accounts receivable / net sales – ratio above industry average indicates that firm rely on suppliers to finance operations
Overall Gross Profit –net sales /cost of goods , then divided by net sales

12. Financial Trends in Retailing
Slow growth in U.S. economy is adversely affecting retailers ( this causes slow sales, then markdowns, cash flow problems which affects profits)
High number of retail lay offs among workers
Funding sources- 3 major types (next slide)
Mergers, consolidations, - many stronger retailers buying smaller retailers.
Spinoffs- some retailers spinoff divisions that no longer meet profit expectations to generate money to use in core businesses.
Bankruptcies and liquidations- safeguard against mounting debts some firms seek bankruptcy protection –Kmart other just sell assets to pay creditors
Questionable accounting and financial reporting practices

13. 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)- selling stock to finance expansions.

14. 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\
Successful retailers operate using budgets because they help achieve objectives.

15. Figure 12.3 The Retail Budgeting Process
-Who develops
budget
-Budget
time frame
-How often
are budgets
planned
-What are
the cost
categories
-What level
of detail is
needed
-How flexible
will budget be
Planned
Expenditures
Goals
Performance
Standards
Actual
Expenditures
Monitoring
Results
Adjustments

16. 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

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

18. Cost Categories
Capital expenditures are long term investments in lands, buildings, fixtures and equipments
Fixed costs remain constant for specified period. Variable costs will vary based on performance (cost of goods)
Direct costs- incurred by specific departments, product categories and etc.
Natural account expenses- reported by names of costs, such as salaries,
Functional account expenses – classified on the basis of the purpose of activity for which expenditures are made

19. Ongoing Budgeting Process
Set goals based on customer, employee and management needs
Specify performance standards ( usually related to sales forecast)
Plan expenditures in terms of performance goals: Zero based budgeting – new budget developed from scratch or incremental budgeting where past budget is used as a guide and adjusted
Make actual expenditures
Monitor results
Adjust budget s needed
Cash Flow – relates to the amount and timing of revenues received and expenditures made during a specific time.

20. Resource Allocation Capital Expenditures
Long-term investments in fixed assets
Operating Expenditures
Short-term selling and administrative costs in running a business
Must have a good estimate of capital and operating expenditures. Need to have the funds needed to run the operations. Must be flexible to take advantage of opportunities.
Opportunity costs – the possible benefits a retailer forgoes if it invests in one opportunity rather another

21. Enhancing Productivity
Productivity refers to efficiency with which a retail strategy is carried out.
Big question is how can sales and profitability be maintained and costs be decreased.
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.

22. Questions
Look for class assignment with problems.