Managing Finance – Retail Finance Fundamentals Within this paper I aim to explain the purpose of the following accounting terms, and how they are calculated, giving example calculations to illustrate these terms using 2012 accounts from J Sainsbury’s Plc & Wm Morrison Supermarkets PLC. For the purpose of the
Accounting Term Like for Like Sales Sales Per Square Foot Profit Margin Return on Capital Employed Asset Turnover Stock Turnover Creditor Payment Period Quick Ratio Gearing Ratio Price Earnings Ratio
Type Trading Performance Measures Profitability Ratios Efficiency & Effectiveness Ratios Liquidity Ratio Gearing Ratios Investors Ratios
Like for Like Sales (LFL): When looking at accounts you are unable to gain a real perspective on gains and losses within a company. Especially if the retailer you are look at has grown its overall headline sales over the past year, this can hide poor performance areas within their existing portfolio skewing the perception of a company’s success. For example Morrison turnover grew by 3.9% vs. 2011 which against a market only growing at 3.78% (IGD, UK Grocery Retailing) shows a strong performance in line with the market where actually like for like stores where only quoted as 1.8% of the growth. Using Like for Like sales allows you to understand how the core business is preforming by only looking at year on year sales for the same base (same stores’) There are two calculations for calculating Like for like which are below, one provides a percentage to reflect growth or decline and the other will just return the cash value of growth or decline:
Using the Morrison’s example from earlier I have calculated the LFL sales. (Morrison, Annual report, pg.5) which represents a like for like growth of 1.3% worth £175m ( )
LFL sales can give you a perspective of the trading floor performance and support a wider understand of what is going on within the retailers business outside of headline sales and profit figures. There are not set standards or guidelines on how these should be calculated and reported. The below example from the J Sainsbury Accounts on LFL is calculated for you and is not truly representative of LFL as this includes a number of extended stores.
(J Sainsbury’s Annual Report 2012, pg 28)
Sales per Square Foot: As in the example of the LFL sales, Sales per Square foot is also a metric with no standard guidelines and predominantly used within the retail and restaurant trade to establish an effective method to identify if retail space is effectively utilised. The equation can then be divided by the number of weeks or months etc. to establish the value you are looking for. For the purpose of this paper I will be looking at weekly values.
J Sainsbury’s Weekly £ per Square Foot: ( )
J Sainsbury’s has seen a year on year decline in Sales per square foot since 2010. While sales have seen a growth the company has also continued to increase its Square footage with the additions to its convenience store portfolio. This expansion can result in a decrease due to the nature of smaller basket spend and less footfall. Note: The figure achieved in the example calculation differs from the account stated figure due to the calculation excluding fuel.
Morrison’s state a sales per square foot of £20.74 against a previous year of £20.80 which indicates a small decline but looking at like for like stores they are driving better value in the existing stores year on year which is against their started KPI’s
Profit Margin: Margin can be calculated at a number of levels to understand the profitability of a company. The gross profit margin is calculated to understand the profit through the till after subtracting cost of sales. This is used highly within the sales arena between retailer and supply. The next level is net profit which takes into account the operating costs to give you a true output of what profit is made after all input. Gross Profit Calculation: ( )
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