Chapter 6 Financial Strategy

Objective and Goals

 Financials Objectives

o Appropriates measure is return on assets (ROA)

 Societal Objective

o Make the world a better place to live

o More difficult to measure

 Personal Objective

o Especially for small, independent business

o Self-gratification, status, respect

 Social Responsibility

o Achieving societal objectives is important to Blake Mycoskie, CEO and chief giving

officers of TOMS shoes,

Strategic Profit Model

 Strategic Profit Model – a method for summarizing the factors that affect a firm’s financial

performance, as measured by return on assets.

 Exhibit 6-1 Profit Margin Management Path

o Profit Margin management path: Net Profit Margin/Net Sales= Net Profit margin (in %)

o Assets turnover management path: Net Sales/ Total Assets= Assets turnover

o Both Equal to be the Return on Assets

 Net Profit Margin

o How much you profit a firm makes divided by net assets

 Assets Turnover
 o Retailers net sales divide by its assets

 ROA determined by multiplying these two things together

 Determining ROA

o Bakery is a low profit/ high turnover

o Jewelry high profit/ Low turnover

 Profit Margin management path

o Income statement (statement of operations)

o Profit and Loss (P&L) statement

o Component in the profit margin management path

 Net Sales

 Cost of Goods Sold (COGS)

 Gross Margin

 Gross Profit

 Slotting fee or allowance

 Chargeback fee

 Operating Expenses

 Selling, general, and administrative expenses (SG&A)

 Operating Profit Margin

 Net Profit margin

 Net income

 Analyzing Performance in the Profit Margin Management Path

 Gross Margin %

 Operating Expenses %

 Operating Profit margin %

 Asset Management Path

o Assets are economic resources (inventory, buildings, computers, fixtures) owned or

controlled by a firm

o Current Assets

 Cash and cash equivalents

 Merchandise inventory

 Accounts receivable

o Inventory Turnover

 Cost of Online Channels

o The retailer’s cost to sell a pair of jeans online is higher than in a store because of

shipping, handling, and returns.