Operations
Management:
Financial
Dimensions
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
–
–
–
–
–
–
–
12-5
Assets
Liabilities
Net Worth
Net Profit Margin
Asset Turnover
Return on Assets
Financial Leverage
Figure 12-1:
The Strategic Profit Model
12-6
Other Key Business Ratios





12-7
Quick Ratio
Current Ratio
Collection Period
Accounts Payable to Net Sales
Overall Gross Profit
Financial Trends in Retailing





12-8
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)
12-9
Figure 12-2: Rebuilding
Mervyn’s
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
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
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




12-15
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
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