1. Operations Management: Financial Dimensions
Chapter 12
Operations Management: Financial Dimensions
RETAIL
MANAGEMENT:
A STRATEGIC
APPROACH
11th Edition
BERMAN EVANS
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

2. Chapter Objectives To define operations management
To discuss profit planning
To describe asset management, including the strategic profit model, other key business ratios, and financial trends in retailing
To look at retail budgeting
To examine resource allocation
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

3. Operations Management
Operations management involves the efficient and effective implementation of the policies and tasks necessary to satisfy the firm’s customers, employees, and management (and stockholders, if a public company). This has a major impact on both sales and profits.
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

4. 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
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

5. 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
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

6. Asset Management The Balance Sheet Assets Liabilities Net Worth
Net Profit Margin
Asset Turnover
Return on Assets
Financial Leverage
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7. Retail Mgt. 11e (c) 2010 Pearson Education, Inc
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8. Figure 12-1: The Strategic Profit Model
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9. Other Key Business Ratios
Quick ratio—cash plus accounts receivable divided by total current liabilities (due within one year).
Current ratio—total current assets divided by total current liabilities.
Collection period—accounts receivable divided by net sales and then multiplied by 365.
Accounts payable to net sales—accounts payable divided by annual net sales.
Overall gross profit—net sales minus the cost of goods sold and then divided by net sales.
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

10. Financial Trends in Retailing
Slow growth in U.S. economy
Funding sources
Mergers, consolidations, spinoffs
Bankruptcies and liquidations
Questionable accounting and financial reporting practices
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

11. Funding Sources Mortgage refinance (due to low interest rates)
REIT (retail-estate investment trust) to fund construction
Company dedicated to owning and operating income-producing real estate
Initial public offering (IPO)
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

12. Figure 12-2: The Demise of Linens ‘n Things
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13. Budgeting
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.
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

14. Figure 12-3: The Retail Budgeting Process
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15. Benefits of Budgeting
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.
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16. Preliminary Budgeting Decisions
Specify budgeting authority
Define time frame
Determine budgeting frequency
Establish cost categories
Set level of detail
Prescribe budget flexibility
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17. Cost Categories Capital expenditures Fixed costs Direct costs
Natural account expenses
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18. Ongoing Budgeting Process
Set goals
Specify performance standards
Plan expenditures in terms of performance goals
Make actual expenditures
Monitor results
Adjust budget
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

19. Cash Flow
Cash flow relates the amount and timing of revenues received to the amount and timing of expenditures for a specific time.
In cash flow management, the usual intention is to make sure revenues are received before expenditures are made.
If cash flow is weak, short-term loans may be needed or profits may be tied up in inventory and other expenses.
For seasonal retailers, erratic cash flow may be unavoidable.
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20. Table 12-6: The Effects of Cash Flow
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21. Resource Allocation Capital Expenditures
Long-term investments in fixed assets
Operating Expenditures
Short-term selling and administrative costs in running a business
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22. 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.
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

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