ch6

MKT 3210 Ch. 6 Financial Strategy

Financial Strategy

MKT 3210

Retailing Management

The Strategic Profit Model: An Overview

Net profit margin (%)  Asset turnover = Return on assets

Net profit margin x 100  Net sales = Net profit Net sales Total assets Total assets

MKT 3210 Ch. 6 Financial Strategy

Financial Tradeoff Made by Retailers to Increase Return on Assets (ROA)

Net Profit Margin

Asset Turnover

Profit Margin Management Path  Net sales = total revenues – returns – discounts – credits

for damaged merchandise  Gross margin/profit = net sales – COGS (cost of goods

sold)  Gross margin (%) = gross margin x 100

net sales  Operating profit margin = gross margin – operating

expenses  Net profit margin = operating profit margin – other income

or expenses – interest – taxes  Net profit margin (%) = net profit margin x 100

net sales

MKT 3210 Ch. 6 Financial Strategy

Types of Expenses  Operating expenses

 Operation expenses (%)

= operating expenses x 100 net sales

Selling expenses = Sales staff salaries + Commissions + Benefits + advertising

General expenses = Rent + Utilities + Miscellaneous expenses

Administrative expenses = Salaries of all employees other than salespeople + Operations of buying offices + Other administrative expenses

Gross Margins for Walmart and Tiffany

Gross margin x 100 = Gross margin % Net sales

Walmart: $48,250 x 100 = 21.95% $219,812

Tiffany: $944 x 100 = 58.75% $1,607

Q1) Why does Tiffany have higher margins than Walmart?

Q2) Does the higher gross margin mean that Tiffany is more profitable?

MKT 3210 Ch. 6 Financial Strategy

Operating Expenses Percentages for Walmart and Tiffany

Oper. expenses x 100 = Operating expenses (%) Net sales

Walmart: $37,499 x 100 = 17.06% $219,812

Tiffany: $653 x 100 = 40.65% $1,607

Q) Why does Tiffany have higher expenses than Walmart?

Asset Turnover Management Path

 Total assets = current assets + noncurrent assets

 Current assets = cash + cash equivalents + merchandise inventory + accounts receivable + other current assets

 Noncurrent assets = fixed assets + intangible assets

 Fixed assets = buildings + distribution centers + fixtures + equipment

 Intangible assets = nonphysical assets (e.g., patents and goodwill)

 Asset turnover = net sales total assets

MKT 3210 Ch. 6 Financial Strategy

Inventory Turnover

Cost of good sold = Inventory turnover Avg. inventory at cost

Walmart: $171,562 = 7.59 Tiffany: $663 = 1.08 $22,614 $612

Average inventory is expressed at cost.

Inventory turnover = how many times the inventory cycles through the store during a specific period of time.

Asset Turnover for Walmart and Tiffany

Net sales = Asset turnover Total assets

Walmart: $219,812 = 2.63 $83,451

Tiffany: $1,607 = 0.99 $1,630

MKT 3210 Ch. 6 Financial Strategy

Return on Assets

Return on assets = Net profit margin (%) X Asset turnover

= (Net profit margin x 100) X Net sales Net sales Total assets

Walmart: 3.12% x 2.63 = 8.21%

Tiffany: 10.89% x 0.99 = 10.78%

Performance Measures

 Use multiple measures to see the whole picture.

 Measures to be used depend on (1) the level of the organization and (2) the resources the manager controls.

 Types of measures  Input measures

 Output measures

 Productivity measures  Useful for comparing different business units.