FINANCIAL MANAGEMENT

Why financial strategy

• PROFITS

• RETURN ON INVESTMENT

• OPERATIONAL EXCELENCE

• SURVIVAL
 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 Profit and loss
statement
• Net Sales
Net Sales $330,000
• Cost of Goods Sold
CGS $180,000
• Gross Profit (Margin)
Gross Profit $150,000
• Operating Expenses
Operating Expenses $ 95,250
• Taxes Other Costs $ 20,000
• Net Profit After Taxes Total Costs $115,250
Net Profit before $ 34,750
Taxes
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
A Retail balance sheet
The Strategic Profit Model
( RONW- Return on net worth)
 Other Key Business Ratios
Quick ratio—cash plus accounts receivable divided by total current liabilities
(due within one year).

Current ratio—total current assets divided by total current liabilities.

Collection period—accounts receivable divided by net sales and then

multiplied by 365.

Accounts payable to net sales—accounts payable divided by annual net

sales.

Overall gross profit—net sales minus the cost of goods sold and then divided
by net sales.
 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.
The Retail Budgeting Process
 Benefits of Budgeting
• 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
 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.