Professional Documents
Culture Documents
Unit-2 (Part 3) Financial Dimensions
Unit-2 (Part 3) Financial Dimensions
Unit-2 (Part 3) Financial Dimensions
FINANCIAL DIMENSIONS
m mm m
M MM
Assets are any item a retailer owns with a
monetary value.
Liabilities are financial obligations a retailer incurs
in operating a business.
Retailer·s net worth is computed as assets minus
liabilities.
In operation management , the retailer·s goal is to
use its assets in the manner providing the best
result possible. There are three basic ways to
measure those results : net profit margin, assets
turnover and financial leverage.
Net profit margin:
It is performance measure based on a retailer·s net
profit and net sales.
Net profit margin = Net profit after tax / Net sales
To enhance its net profit margin, a retailer must
either raise gross profit as a percentage of sales or
reduce expenses as a percentage of sales.
Ways to increase gross profits
Selling
exclusive product, avoiding price competition
through excellent service, adding items with higher
margin.
Ways to reduce expenses
Stressing
on self service, lowering labor cost, refining the
mortgage, cutting energy costs etc.
Asset turnover:
It is a performance measure based on retailer·s net
sales and total assets:
Asset turnover = Net sales / Total Assets
to improve the asset turnover ratio, a firm must
generate increased sales from the same level of
assets or keep the same sales with fewer assets.
Ways to increase sales
Longer
working hours, accepting web orders, training
employees, stocking better known brands.
Ways to decrease assets
Moving to smaller store, simplifying fixtures, keeping
smaller inventory, etc.
Financial leverage
It is a performance measure based on the
relationship between a retailer·s total assets and
net worth.
Financial leverage = Total Assets / Net Worth
A retailer with a high financial leverage ratio has
substantial debts, while a ratio of 1 means it has no
debts.
Ways to decrease leverage:
Excessive focus on cost cutting, short term sales etc.
If leverage is too low it means retailer is limiting its
capability to enter in new market, or to expand.
M
udgeting 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
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
M
M
º Capital expenditures
º Fixed costs
º Direct costs
º Natural account expenses
Set goals
Specify performance standards
Plan expenditures in terms of
performance goals
Make actual expenditures
Monitor results
Adjust budget
M
M