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
12-2
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
12-3
Major Components of a
Profit-and-Loss Statement
• Net Sales
• Cost of Goods Sold
• Gross Profit
(Margin)
• Operating Expenses
• Taxes
• Net Profit After
Taxes
12-4
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
12-5
Figure 12.1
The Strategic Profit Model
12-6
Other Key Business Ratios
Quick Ratio
Current Ratio
Collection Period
Accounts Payable to Net Sales
Overall Gross Profit
12-7
Financial Trends in Retailing
Slow growth in U.S. economy
Funding sources
Mergers, consolidations, spinoffs
Bankruptcies and liquidations
Questionable accounting and financial
reporting practices
12-8
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)
12-9
Figure 12.2 Rebuilding Kmart
12-10
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
12-11
Figure 12.3 The Retail
Budgeting Process
12-12
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
12-13
Preliminary Budgeting Decisions
1)
2)
3)
4)
5)
6)
12-14
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
12-15
Ongoing Budgeting Process
Set goals
Specify performance standards
Plan expenditures in terms of performance
goals
Make actual expenditures
Monitor results
Adjust budget
12-16
Resource Allocation
• Capital
Expenditures
– Long-term
investments in
fixed assets
12-17
• 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.
12-18
12-19