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 (1000-60000 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% 80 000 000Sales value 80 000 00016 000 000 96 000 000 0 Inventory changes (final-initial)0 0 Purchase 57 600 00011 520 000 69 120 000 Cost of goods sold 72,0% 57 600 000 cost of goods sold57 600 000 Gross profit 28,0% 22 400 000VAT of sales – purchase 04 480 000 26 880 000 Energy costs2,0% 1 600 000Energy consumption 1 600 000320 000 1 920 000 0 Material stock change (final-initial)0 0 Material purchase 2 000 000400 000 2 400 000 Material costs2,5% 2 000 000 Material consumption2 000 000 Labour costs + social insurance 10,5% 8 400 000Labour cost expenditures 8 400 000 Depreciation costs 3,0% 2 400 000 0 0 Other costs (subcontractors) 6,0% 4 800 000Other expenditures 4 800 000960 000 5 760 000 Financial earnings/losses 0Financial cash inflow/outflow0 0 0 Extraordinary earnings/losses 0Extraordinary cash inflow/outflow0 0 0 Earnings/losses (EBIT) 4,0% 3 200 000 Annual cash flow of the entreprise0 2 800 000 8 400 000 Corporation tax 512 000Corporation tax 00 512 000 Net income after corp tax 12,0% 2 688 000Gross cash-flow of company 00 7 888 000 Annual VAT liability 2 800 000 Annual net cash-flow produced 5 088 000

8. RWHM Income statement cost ratio1valueAnnual cash-flow items Value (excl VAT)VATtotal Net sales 100,0% 80 000 000Sales value 80 000 00016 000 000 96 000 000 0 Inventory changes (final-initial)0 0 Purchase 57 600 00011 520 000 69 120 000 Cost of goods sold 72,0% 57 600 000 cost of goods sold57 600 000 Gross profit 28,0% 22 400 000VAT of sales - purchase 04 480 000 26 880 000 Energy costs2,0% 1 600 000Energy consumption 1 600 000320 000 1 920 000 0 Material stock change (final-initial)0 0 Material purchase 2 000 000400 000 2 400 000 Material costs2,5% 2 000 000 Material consumption2 000 000 Labour costs + social insurance 10,5% 8 400 000Labour cost expenditures 8 400 000 Depreciation costs 3,0% 2 400 000 0 0 Other costs (subcontractors) 6,0% 4 800 000Other expenditures 4 800 000960 000 5 760 000 Financial earnings/losses -300 000Financial cash inflow/outflow-300 000 0 Extraordinary earnings/losses 0Extraordinary cash inflow/outflow0 0 0 Earnings/losses (EBIT) 3,6% 2 900 000 Annual cash flow of the entreprise0 2 800 000 8 100 000 Corporation tax 464 000Corporation tax 00 464 000 Net income after corp tax 10,9% 2 436 000Gross cash-flow of company 00 7 636 000 Annual VAT liability 2 800 000 Annual net cash-flow produced 0 4 836 000

9. RWHM Income statement Cost ratio1valueAnnual cash-flow items Value (excl VAT)VATtotal Net sales 100,0% 80 000 000Sales value 80 000 00016 000 000 96 000 000 0 Inventory changes (final-initial)0 0 Purchase 57 600 00011 520 000 69 120 000 Cost of goods sold 72,0% 57 600 000 cost of goods sold57 600 000 Gross profit 28,0% 22 400 000VAT of sales - purchase 04 480 000 26 880 000 Energy costs2,0% 1 600 000Energy consumption 1 600 000320 000 1 920 000 0 Material stock change (final-initial)0 0 Material purchase 2 000 000400 000 2 400 000 Material costs2,5% 2 000 000 Material consumption2 000 000 Labour costs + social insurance 10,5% 8 400 000Labour cost expenditures 8 400 000 Depreciation costs 3,0% 2 400 000 0 0 Other costs (subcontractors) 6,0% 4 800 000Other expenditures 4 800 000960 000 5 760 000 Financial earnings/losses -300 000Financial cash inflow/outflow-300 000 0 Extraordinary earnings/losses 500 000Extraordinary cash inflow/outflow600 000 120 000 720 000 Earnings/losses (EBIT) 4,3% 3 400 000 Annual cash flow of the entreprise0 2 920 000 8 820 000 Corporation tax 544 000Corporation tax 00 544 000 Net income after corp tax 12,8% 2 856 000Gross cash-flow of company 00 8 276 000 Annual VAT liability 2 920 000 Annual net cash-flow produced 0 5 356 000

10. RWHM Income statement Cost ratio1valueAnnual cash-flow items Value (excl VAT)VATtotal Net sales 100,0% 80 000 000Sales value 80 000 00016 000 000 96 000 000 0 Inventory changes (final-initial)2 400 000 0 Purchase 60 000 00012 000 000 72 000 000 Cost of goods sold 72,0% 57 600 000 cost of goods sold57 600 000 Gross profit 28,0% 22 400 000VAT of sales - purchase 04 000 000 24 000 000 Energy costs2,0% 1 600 000Energy consumption 1 600 000320 000 1 920 000 0 Material stock change (final-initial)0 0 Material purchase 2 000 000400 000 2 400 000 Material costs2,5% 2 000 000 Material consumption2 000 000 Labour costs + social insurance 10,5% 8 400 000Labour cost expenditures 8 400 000 Depreciation costs 3,0% 2 400 000 0 0 Other costs (subcontractors) 6,0% 4 800 000Other expenditures 4 800 000960 000 5 760 000 Financial earnings/losses -300 000Financial cash inflow/outflow-300 000 0 Extraordinary earnings/losses 500 000Extraordinary cash inflow/outflow600 000 120 000 720 000 Earnings/losses (EBIT) 4,3% 3 400 000 Annual cash flow of the entreprise0 2 440 000 5 940 000 Corporation tax 544 000Corporation tax 00 544 000 Net income after corp tax 12,8% 2 856 000Gross cash-flow of company 00 5 396 000 Annual VAT liability 2 440 000 Annual net cash-flow produced 0 2 956 000

11. RWHM Income statement cost ratio1valueAnnual cash-flow items value (excl VAT)VATtotal Net sales 100,0% 80 000 000Sales value 80 000 00016 000 000 96 000 000 0 Inventory changes (final-initial)2 400 000 0 Purchase 60 000 00012 000 000 72 000 000 Cost of goods sold 72,0% 57 600 000 cost of goods sold57 600 000 Gross profit 28,0% 22 400 000VAT of sales - purchase 04 000 000 24 000 000 Energy costs2,0% 1 600 000Energy consumption 1 600 000320 000 1 920 000 0 Material stock change (final-initial)-600 000 0 Material purchase 1 400 000280 000 1 680 000 Material costs2,5% 2 000 000 Material consumption2 000 000 Labour costs + social insurance 10,5% 8 400 000Labour cost expenditures 8 400 000 Depreciation costs 3,0% 2 400 000 0 0 Other costs (subcontractors) 6,0% 4 800 000Other expenditures 4 800 000960 000 5 760 000 Financial earnings/losses -300 000Financial cash inflow/outflow-300 000 0 Extraordinary earnings/losses 500 000Extraordinary cash inflow/outflow600 000 120 000 720 000 Earnings/losses (EBIT) 4,3% 3 400 000 Annual cash flow of the entreprise0 2 560 0006 660 000 Corporation tax 544 000Corporation tax 00 544 000 Net income after corp tax 12,8% 2 856 000Gross cash-flow of company 00 6 116 000 Annual VAT liability 2 560 000 Annual net cash-flow produced 0 3 556 000

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 4 0002 0442 0153 1034 4689 338 seasonal indexes of sales 40%50%80%130%180%140% 1200% sales value 04 0005 0008 00013 00018 00014 000 120 000 extraordinary sales (incomes) 0000000 1 200 VAT duty after sales 08001 0001 6002 6003 6002 800 24 240 cash incomes cash sales value (monthly) 3 6004 5007 20011 70016 20012 600 108 000 cash of current m. invoices 4005008001 3001 8001 400 12 000 cash of prev. m. invoices 000000 0 0 cash of extraordinary sales 00001 2000 other cash in/outflow (financial) 000-2 10000 -300 taking loans 000000 0 VAT inflow (paid by customers) 8001 0001 6002 6003 8402 800 24 240 0 Total cash inflow 4 8006 0009 60013 50023 04016 800145 140 0

14. RWHM PDecJanFebMarAprNovDecTotal NJ cash expenditures 0 labour cost expenses 4205258401 3651 8901 470 12 600 costs of goods purchased 2 8803 6005 7609 36012 96010 080 86 400 0 purchasing for stock-up 60000 00 2 400 subcontractor services 1 20000 00 4 800 material + energy expenses 400 4 800 other cost expenses 200 2 400 extraordinary expenses 06000000 loan repayments 000000 0 VAT paid to suppliers (re- embursing later) 1 0569601 2722 3522 7122 136 20 280 0 VAT payment to tax office 0-256403288888 3 296 664 corporation tax payment 0002000 800 Total cash outflow 6 7566 0298 51216 00518 17015 374138 376 664 Monthly cash-flow balan. -1 956-291 088-2 5054 8701 4266 7646 100 Final cash 2 0442 0153 1035989 33810 764

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!