1. 12 Chapter 12 Operations Management: Financial Dimensions U.S. Retail Sales Growth Forecast Year over Year Change in Retail Sales, Percent. Not Seasonally Adjusted. Updated Saturday, October 13, 2007 from www.forecasts.org/m3.htm

2. Chapter Objectives  To discuss profit planning  To describe asset management, including the strategic profit model (aka the “Dupont Model”)  To look at retail budgeting  To examine retail financial and stock analysis*

3. Major Components of a Profit-and-Loss Statement Net Sales Cost of Goods Sold Gross Profit (Margin) Operating Expenses Taxes Net Profit After Taxes Net Sales$330,000 CGS$180,000 Gross Profit$150,000 Operating Expenses $ 95,250 Other Costs$ 20,000 Total Costs$115,250 Net Profit before Taxes $ 34,750 Taxes$ 15,500 Net Profit after Taxes $ 19,250 Profit Planning  Profit-and-loss (income) statement –Summary of a retailer’s revenues and expenses over a given period of time –Review of overall and specific revenues and costs for similar periods and profitability

4. Asset Management  The Balance Sheet Assets –Liabilities –Net Worth –Net Profit Margin –Asset Turnover –Return on Assets –Financial Leverage  Resource Allocation Capital Expenditures –Long-term investments in fixed assets Operating Expenditures –Short-term selling and administrative costs in running a business

5. Figure 12-1: The Strategic Profit Model Net profit Total Assets Return on Assets -Standards, goals for each component* -Historical performance (Note Table 12-3)

6. Implications for Budgeting Net profit Total Assets Return on Assets  Budgeting 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 Budget should be targeted to reach goals 1. Critical Profit Variables*-NS, COGS, Wages, Advg., Rent, A/R, Inv. 2. Action Programs* (to make budget), e.g., ”Enhancing Productivity” - A firm can improve employee performance, sales per foot of space, and other factors by upgrading training programs, increasing advertising, etc. - It can reduce costs by automating, having suppliers do certain tasks, etc 3. Control Procedures (to monitor action programs)* - e.g., Productivity Measures

7. Figure 12-3: The Retail Budgeting Process Benefits of Budgeting Preliminary Budgeting Decisions  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 1)Specify budgeting authority 2)Define time frame 3)Determine budgeting frequency 4)Establish cost categories 5)Set level of detail 6)Prescribe budget flexibility

8. Key Business Ratios (See Table 12-4)  Current Ratio (Current Assets/Current Liabilities)  Quick Ratio (Cur. Assets-Inv./Current Liabilities)  Acid-Test Ratio (Cash/Current Liabilities)  Growth (especially same store year over year)  Overall Gross Profit (Sales - COGS) Retail Financial and Stock Analysis Financial Trends in Retailing  Slow growth in U.S. economy  Funding sources  Mergers, consolidations, spinoffs  Bankruptcies and liquidations  Questionable accounting and financial reporting Retail Stocks General Stock Analysis Specific retail stocks- see Ameritrade Chapter 12 Discussion Questions: 2, 3, 4, 12