Operations Management:

Financial Dimensions
• Chapter Objectives
• 1. To define operations management
• 2. To discuss profit planning
• 3. To describe asset management, including the strategic profit
model, other key business ratios, and financial trends in retailing
• 4. To look at retail budgeting
• 5. To examine resource allocation
• PROFIT PLANNING
• A profit-and-loss (income) statement is a summary of a retailer’s revenues and expenses
over a given period of time, usually a month, quarter, or year. It lets the firm review overall
and specific revenues and costs for similar periods (such as January 1, 2016, to December
31, 2016, versus January 1, 2015, to December 31, 2015) and analyze profits. With frequent
statements, a firm can monitor progress on goals, update performance estimates, and
revise strategies and tactics.
• In comparing profit-and-loss performance over time, it is crucial that the same time periods
be used (such as the third quarter of 2016 compared with the third quarter of 2015) due to
sea- sonality. Some fiscal years may have an unequal number of weeks (53 weeks one year
versus 51 weeks another). Retailers that open new stores or expand existing stores between
accounting periods should also take into account the larger facilities. Yearly results should
ref lect total revenue growth and the rise in same-store sales.
• A profit-and-loss statement consists of several major components:
• ▶▶  Net sales The revenues received by a retailer during a given period after deducting
customer returns, markdowns, and employee discounts.
• ▶▶  Cost of goods sold The amount a retailer pays to acquire the merchandise sold
during a given time period. It is based on purchase prices and freight charges, less all
discounts (such as quantity, cash, and promotion).
• ▶▶  Gross profit (margin) The difference between net sales and the cost of goods sold. It
consists of operating expenses plus net profit.
• ▶▶  Operating expenses The cost of running a retail business.
• ▶▶  Taxes The portion of revenues turned over to the federal, state, and/or local
government.
• ▶▶  Net profit after taxes The profit earned after all costs and taxes have been deducted.
• ASSET MANAGEMENT
• Each retailer has assets to manage and liabilities to control. This section covers the balance sheet, the strategic profit
model, and other ratios. A balance sheet itemizes a retailer’s assets, liabilities, and net worth at a specific time—based on
the principle that Assets = Liabilities + Net worth. Table 12-2 has a balance sheet for Donna’s Gift Shop.
• Assets are any items a retailer owns with a monetary value. Current assets are cash on hand (or in the bank) and items
readily converted to cash, such as inventory on hand and accounts receivable (amounts owed to the firm). Fixed assets
are property, buildings (a store, warehouse, etc.), fixtures, and equipment such as cash registers and trucks; these are
used for a long period. The major fixed asset for many retailers is real-estate. Unlike current assets, which are recorded at
cost, fixed assets are recorded at cost less accumulated depreciation. Thus, records may not reflect the true value of these
assets. Many retailing analysts use the term hidden assets to describe depreciated assets, such as buildings and
warehouses, that are noted on a retail balance sheet at low values relative to their actual worth.
• Liabilities are financial obligations a retailer incurs in operating a business. Current liabili- ties are payroll expenses
payable, taxes payable, accounts payable (amounts owed to suppliers), and short-term loans; these must be paid in the
coming year. Fixed liabilities comprise mort- gages and long-term loans; these are generally repaid over several years.
• A retailer’s net worth is computed as assets minus liabilities. It is also called owner’s equity and represents the value of a
business after deducting all financial obligations.
• The Strategic Profit Model
• The relationship among net profit margin, asset turnover, and financial
leverage is expressed by the strategic profit model, which reflects a
performance measure known as return on net worth (RONW). See
Figure 12-1. The strategic profit model can be used to plan and/or
control assets. Thus, a retailer could learn the major cause of its poor
return on net worth is weak asset turnover or financial leverage that is
too low. A firm can raise its return on net worth by lifting the net profit
margin, asset turnover, or financial leverage. Because these measures
are multiplied to determine return on net worth, doubling any of them
would double the return on net worth.