Financial Analysis And Management

1. Financial Analysis And Management

2. Financial Records • Sales Records • Cash and charge sales • Department sales • Employee sales • Merchandise Inventory Records Gross margin: Net sales minus cost of goods sold. Gross margin position: The overall amount of gross margin achieved by the retail store. Cost of goods sold: The difference between the cost of total merchandise handled during a period ( beginning inventory plus purchases) and the cost of ending inventory.

3. Financial Records • Cash Outflow Records • Expense records Controllable expenses (direct expenses): Expenses that can be controlled by a store manager, a department manager or buyer, such as payroll or advertising. Uncontrollable expenses (indirect expenses): Expenses that continue for a time even if the store is closed or the department is eliminated. • Merchandising records • The Financial Position

4. Income Statement Gross Sales $19,000,000 Sales returns and allowances 1,000,000 Net Sales 18,000,000 100% COGS Inventory 15,000,000 Purchases 30,000,000 Total Merchandise Handled 45,000,000 Less End Inventory -35,000,000 Total COGS 10,000,000 55.56% Gross Margin 8,000,000 44.44% Operating Expenses Payroll 3,770,000 Rent 1,250,000 Advertising 600,000 Other 900,000 Total expenses 6,520,000 36.11% Net Profit BT 1,500,000 8.33% Income taxes (30%) 450,000 Net profit after taxes 1,050,000 5.83%

5. Balance Sheet Current assets Cash $ 300,000 Accounts receivable 1,500,000 Inventory 3,500,000 Fixed Assets Land 200,000 Fixtures & Equip (less depr.) 1,500,000 Building (less depr.) 4,100,000 Total Assets11,800,000 Current liabilities Accounts payable 1,500,000 Accrued payable 300,000 Notes payable 3,000,000 Long-term liabilities Long-term debt 7,200,000 Net worth2,500,000 Total liabilities and Net worth 11,800,000

6. Ratio Analysis • Strategic Profit Model:A model which lets the retailer calculate the return on net worth and evaluate the main areas of financial management. Return on net worth: Net profit divided by net worth, which allows a comparison with alternative investments.

7. Ratio Analysis cont’d. • Strategic Profit Model (cont.) • Profit analysis • Asset utilization • Financial leverage ratio:A business’s total assets divided by its net worth. It indicates the extent to which a retailer’s assets are funded by debt.

8. Ratio Analysis cont’d. • Strategic Profit Model (cont.) • Liquidity:A measure of the firm’s ability to meet its cash obligations as they become due. Insolvency: Exists when a firm cannot pay its bills on time. Current ratio: Current assets divided by current liabilities, which indicates the ability of the business to pay its current liabilities with its current asset. Most retailers aim for a current ratio of 2.0. • Quick ratio: Current assets minus inventories divided by current liabilities. This gives a better indication of the firm’s ability to cover its liabilities immediately if necessary. Most retailers try to maintain a quick ratio of at least 1.0. • Net working capital:Current assets minus current liabilities is a ratio which reflects the capital structure of the business. • Net worth position:Total debt divided by net worth which reflects the relationship between creditors and owners and the ability of a firm to finance its operations.

9. Gross Margin Analysis • Gross Margin Return on Investment:Gross margin dollars divided by average inventory at cost is a measure of how many gross margin dollars are returned for each dollar invested in inventory. • Gross Margin Return on Space:Gross margin dollars divided by selling space is a measure of the productivity of space. • Gross Margin Return on Labor:Gross margin dollars divided by employees payroll dollars is a measure of the productivity of labor which can assist management in allocating payroll dollars.

10. Gross Margin Analysis Gross margin % X net sales - gross margin $ Gross Margin $ = gross margin return on investment Average inventory costs GMROI Gross Margin $ = gross margin return on space Sq. ft of selling space GMROS Gross Margin $ = gross margin on labor Employee Payroll $ GMROL Measurement comparisons: GMROI: Industry, corporation, market, store, department, merchandise classification, SKU, vendor GMROS: Corporation, market, store, department, merchandise classification GMROL: Corporation, market, store, department

11. Strategic Profit Model Net Sales - Gross Margin COGS - Operating Profit Net Profit Margin Variable Expenses divided by Total Expenses + X Return on Assets Fixed Expenses Net Sales divided by Asset Turnover Inventory Fixed Assets Return on Net Worth + Total Assets X + Accounts Receivable Current Assets + Other Assets Total Assets minus Financial Leverage divided by Net Worth Accounts Payable + Notes Payable Current Liabilities Total Liabilities + + Other Liabilities Long-term Liabilities

12. Profit Margin Accelerators • Definition:A concept which forces merchants to make their analyses and decisions with regard to their potential impact on profitability. • Increase in Volume • Increase in Price • Decrease in COGS • Decrease in Expenses

13. Profit Margin Accelerators Increase Unit Volume 5% Increase Prices 5% Base Period Sales $1,000,000 $1,050,000 $1,050,000 COGS 700,000 735,000 700,000 Gross margin 300,000 315,000 350,000 Expenses 280,000 280,000 280,000 Profit 20,000 35,000 70,000 Profit increase $ X 15,000 50,000 Profit increase % X 75 % 250 %

14. Profit Margin Accelerators Decrease COGS 5% Decrease Expenses 5% Sales $1,000,000 $1,050,000 COGS 650,000 700,000 Gross margin 335,000 300,000 Expenses 280,000 266,000 Profit 55,000 34,000 Profit increase $ 35,000 14,000 Profit increase % 175 % 70 %