Retailing Midterm

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CHAPTER 06 - Financial Strategy
* Objectives and Goals
* Financial – not necessarily profits, but return on investment (ROI) – primary focus * Performance measure by return on assets (ROA) – the profit generated by the assets possessed by the firm. * Societal (more difficult) – helping to improve the world around us * Personal – self-gratification, status, respect

* Profit Margin Management Path
* Measured by the retailer’s income statement (statement of operations) * Net Sales = Gross Sales + Promotional Allowances - Return * Cost of Goods Sold (COGs) is the amount a retailer pays to vendors for the merchandise the retailer sells. * Gross Margin (GM) or Gross Profit= Net Sales – COGs * Indicates how much profit the retailer is making on merchandise sold, without the considering the expenses associate with operating the store and corporate overhead expenses. * Profit Margin Management Path

* Operating Expense
* Variable (e.g.. sales commissions)
* Fixed (rent, depreciation, staff salaries)
* Selling, general, and administrative (SG&A) expenses * Operating profit margin
* Operating profit margin = Gross margin - Operating expenses - Extraordinary (recurring) operating expenses * Net profit margin = Operating profit margin - Taxes - Interest - Extraordinary nonrecurring expenses * Gross margin percentage is gross margin divided by net sales * Retailers use this ratio to compare (1) the performance of various type of merchandise and (2) their own performance with the other retailers with higher or lower levels of sales. * Net Operating profit margin percentage is gross margin minus operating expenses divided by net sales *

* SG&A percentage is expressed as a percentage of net sales to facilitate comparisons across items, stores, and merchandise categories within and between firms. *

* Asset Management Path
* Assets:
* Economic Resources (e.g., inventory, buildings, computers, store fixtures) owned or controlled by a firm * Current Asset and Fixed Asset
* Current Assets = Cash + Account Receivable + Inventory + Other current assets * Accounts receivable are primarily the monies owed to the retailer by customers that have bought merchandise on credit. * Fixed Assets are assets that require more than a year to convert to cash. (Buildings, Distribution Centers, & Fixture) * Asset Turnover = Sales/Total Assets

* Inventory Turnover is COGS during a time period, typically a year, divided by the average level of inventory cost during the time period * Measure the average inventory level, retailers determine the inventory value of each day of the year and divide by 365. * Inventory Turnover = COGS/Avg. Inventory (cost)

* Merchandise inventory is a critical asset providing a benefit to customers. It enables customers to get the right merchandise at the right time and place. Stocking more merchandise increases sales because it increases the chances that customers will find something they want. As with accounts receivable, increasing the level of inventory increases the amount that retailers need to invest in this asset. * Inventory Turnover

* A Measure of the Productivity of Inventory:
* It is used to evaluate how effectively retailers utilize their investment in inventory * Shows how many times, on average, inventory cycles through the store during a specific period of time (usually a year) * Analysis of Financial Strength

* Cash-Flow Analysis
* Retailers need cash to meet their obligations — i.e., salary, rent, vendors, etc. * Cash flow is calculated by making adjustments to net profit involving adding or subtracting differences in revenue and expenses that occur from one period to the next. *...
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