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Complex Model Applications for teaching Retail & Wholesale Management on the Commerce Specialization of BA Programme Csaba Sólyom senior lecturer Budapest.

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Presentation on theme: "Complex Model Applications for teaching Retail & Wholesale Management on the Commerce Specialization of BA Programme Csaba Sólyom senior lecturer Budapest."— Presentation transcript:

1 Complex Model Applications for teaching Retail & Wholesale Management on the Commerce Specialization of BA Programme Csaba Sólyom senior lecturer Budapest Business School, FCCT Department of Commerce 2009.

2 Education Goals and Learning Outcomes RWHM Improve students’ knowledge and skills in the management of retail and wholesale firms Learn how to analyze and control business activities of the firm focusing on profitability and cash management capability of the trading company Help students to recognize interrelationships among product assortment, stockturn efficiency, cash-cycle and capital needs of the company by problem based learning tools Develop students’ skills how to handle and solve company problems in a trade enterprise

3 Some Important Specialities of Trade Companies RWHM Return on Sales (ROS) figures are usually law (2-3%) Number of goods merchandised are high ( items) – still you must have control over assortment. Trade companies need to make high sales value by relative small own capital invested to run the firm profitable and to achieve the planned Return on Equity (ROE) (10-15%) You have to face high business risk in Commerce Efficiency of inventory control measured in stockturn time has a high influence on the payment capability of the firm Conclusion: Students should recognise and understand these relationships in practice

4 RWHM Goods inflow Average stockturn time (days) Goods sold Average terms of payment given to customers Cash inflow Terms of payment given by supplier Average cash-cycle time (days) (capital bounded in inventory) 0 day A day B day C day Cash outflow Cash inflow Goods- and Capital-stockturn Relationships

5 RWHM Average stockturn time (days) (STD) formula STD = IVPP * N / CGS WhereIVPP = average inventory on purchase prices N = number of days in the time interval CGS = cost of goods sold in the time interval Average cash cycle time (days) (CCD) formula CCD = STD – PPT + SPT Where PPT = average purchase payment terms (delay) SPT = average sales terms of payment (delay) CCD = average capital in stocks * N / CGS and average capital in stocks = CGS * (STD – PPT + SPT) / N

6 RWHM For recognizing interrelationships between PROFITABILITY and LIQUIDITY (Capability of paying liabilities) of the firm on annual basis you must compare income statement and annual cash-flow made in the next MS Excel spreadsheet

7 RWHM Income statement cost ratio1valueAnnual cash-flow items value (excl VAT)VATtotal Net sales 100,0% Sales value Inventory changes (final-initial)0 0 Purchase Cost of goods sold 72,0% cost of goods sold Gross profit 28,0% VAT of sales – purchase Energy costs2,0% Energy consumption Material stock change (final-initial)0 0 Material purchase Material costs2,5% Material consumption Labour costs + social insurance 10,5% Labour cost expenditures Depreciation costs 3,0% Other costs (subcontractors) 6,0% Other expenditures Financial earnings/losses 0Financial cash inflow/outflow0 0 0 Extraordinary earnings/losses 0Extraordinary cash inflow/outflow0 0 0 Earnings/losses (EBIT) 4,0% Annual cash flow of the entreprise Corporation tax Corporation tax Net income after corp tax 12,0% Gross cash-flow of company Annual VAT liability Annual net cash-flow produced

8 RWHM Income statement cost ratio1valueAnnual cash-flow items Value (excl VAT)VATtotal Net sales 100,0% Sales value Inventory changes (final-initial)0 0 Purchase Cost of goods sold 72,0% cost of goods sold Gross profit 28,0% VAT of sales - purchase Energy costs2,0% Energy consumption Material stock change (final-initial)0 0 Material purchase Material costs2,5% Material consumption Labour costs + social insurance 10,5% Labour cost expenditures Depreciation costs 3,0% Other costs (subcontractors) 6,0% Other expenditures Financial earnings/losses Financial cash inflow/outflow Extraordinary earnings/losses 0Extraordinary cash inflow/outflow0 0 0 Earnings/losses (EBIT) 3,6% Annual cash flow of the entreprise Corporation tax Corporation tax Net income after corp tax 10,9% Gross cash-flow of company Annual VAT liability Annual net cash-flow produced

9 RWHM Income statement Cost ratio1valueAnnual cash-flow items Value (excl VAT)VATtotal Net sales 100,0% Sales value Inventory changes (final-initial)0 0 Purchase Cost of goods sold 72,0% cost of goods sold Gross profit 28,0% VAT of sales - purchase Energy costs2,0% Energy consumption Material stock change (final-initial)0 0 Material purchase Material costs2,5% Material consumption Labour costs + social insurance 10,5% Labour cost expenditures Depreciation costs 3,0% Other costs (subcontractors) 6,0% Other expenditures Financial earnings/losses Financial cash inflow/outflow Extraordinary earnings/losses Extraordinary cash inflow/outflow Earnings/losses (EBIT) 4,3% Annual cash flow of the entreprise Corporation tax Corporation tax Net income after corp tax 12,8% Gross cash-flow of company Annual VAT liability Annual net cash-flow produced

10 RWHM Income statement Cost ratio1valueAnnual cash-flow items Value (excl VAT)VATtotal Net sales 100,0% Sales value Inventory changes (final-initial) Purchase Cost of goods sold 72,0% cost of goods sold Gross profit 28,0% VAT of sales - purchase Energy costs2,0% Energy consumption Material stock change (final-initial)0 0 Material purchase Material costs2,5% Material consumption Labour costs + social insurance 10,5% Labour cost expenditures Depreciation costs 3,0% Other costs (subcontractors) 6,0% Other expenditures Financial earnings/losses Financial cash inflow/outflow Extraordinary earnings/losses Extraordinary cash inflow/outflow Earnings/losses (EBIT) 4,3% Annual cash flow of the entreprise Corporation tax Corporation tax Net income after corp tax 12,8% Gross cash-flow of company Annual VAT liability Annual net cash-flow produced

11 RWHM Income statement cost ratio1valueAnnual cash-flow items value (excl VAT)VATtotal Net sales 100,0% Sales value Inventory changes (final-initial) Purchase Cost of goods sold 72,0% cost of goods sold Gross profit 28,0% VAT of sales - purchase Energy costs2,0% Energy consumption Material stock change (final-initial) Material purchase Material costs2,5% Material consumption Labour costs + social insurance 10,5% Labour cost expenditures Depreciation costs 3,0% Other costs (subcontractors) 6,0% Other expenditures Financial earnings/losses Financial cash inflow/outflow Extraordinary earnings/losses Extraordinary cash inflow/outflow Earnings/losses (EBIT) 4,3% Annual cash flow of the entreprise Corporation tax Corporation tax Net income after corp tax 12,8% Gross cash-flow of company Annual VAT liability Annual net cash-flow produced

12 RWHM The capability of paying liabilities on annual basis needs positive annual cash-flow, Depending on: Depreciation costs (higher depreciation increases cash-flow) Net profit achieved Inventory changes (final-initial stock, inv. stock-up reduces cash-flow) Financial earnings/losses => cash inflow/outflow Extraordinary earnings/losses => cash inflow/outflow (inflow/outflow may differ from earnings/losses) However: These requirements are only necessary but not sufficient conditions for maintaining permanent liquidity Let’s look on the financial budget of the trade firm via MS- Excel table:

13 RWHM PDecJanFebMarAprNovDecTotal NJNJ initial cash seasonal indexes of sales 40%50%80%130%180%140% 1200% sales value extraordinary sales (incomes) VAT duty after sales cash incomes cash sales value (monthly) cash of current m. invoices cash of prev. m. invoices cash of extraordinary sales other cash in/outflow (financial) taking loans VAT inflow (paid by customers) Total cash inflow

14 RWHM PDecJanFebMarAprNovDecTotal NJ cash expenditures 0 labour cost expenses costs of goods purchased purchasing for stock-up subcontractor services material + energy expenses other cost expenses extraordinary expenses loan repayments VAT paid to suppliers (re- embursing later) VAT payment to tax office corporation tax payment Total cash outflow Monthly cash-flow balan Final cash

15 RWHM

16 RWHM The actual capital needs of the firm depend on: Seasonality of sales (seasonal indexes), trigonometric seasonal changes increase capital need more than unique fallbacks in salesSeasonality of sales (seasonal indexes), trigonometric seasonal changes increase capital need more than unique fallbacks in sales Outsourcing activities if they are smoothing monthly overhead expenditure changes reduce capital needsOutsourcing activities if they are smoothing monthly overhead expenditure changes reduce capital needs Purchasing lead time (the advance time you have to order and buy the goods earlier) growth increase capital needs, but the JIT system implemented will reduce capital needs.Purchasing lead time (the advance time you have to order and buy the goods earlier) growth increase capital needs, but the JIT system implemented will reduce capital needs. Terms of payment given by suppliers – you can measure the impacts of payment terms changesTerms of payment given by suppliers – you can measure the impacts of payment terms changes Payment terms given to customers – you can prove how a cash&carry system will reduce the capital needs of the trading company.Payment terms given to customers – you can prove how a cash&carry system will reduce the capital needs of the trading company. Assortment changes may influence capital needs in two ways:Assortment changes may influence capital needs in two ways: –Balanced assortment with different high/low seasons may reduce capital needs. –Balanced assortment of high/ slow moving goods can reduce capital needs, if the ratio of fast moving goods is increasing within the assortment.

17 RWHM Possibilities and Problems of modell applications here: Data forecasting may be problematic in crisis situations, like now – however it would be more important to improve estimations.Data forecasting may be problematic in crisis situations, like now – however it would be more important to improve estimations. Data reliability can be inadequate, you must be careful by defining the model frame in time too.Data reliability can be inadequate, you must be careful by defining the model frame in time too. Accuracy might need more detailed model, however the handling of it will become more and more complicated, finally user might loose overviewAccuracy might need more detailed model, however the handling of it will become more and more complicated, finally user might loose overview

18 Thank you for your attention!


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