RETAIL FINANCIAL STRATEGY

Financial objectives are an integral part of a retailers market strategy. Retailers develop their strategy and build a sustainable competitive advantage to generate a continuing stream of profits. Can be used to monitor the retailers performance, assess the reasons its performance is above or below expectations, and provide insight into appropriate actions that can be taken if performance falls short of those expectations.

 Retail

strategy specifies about devising objectives and scope of activities an organization plans to undertaken
Financial objectives Societal objectives Personal objectives

Financial objectives
Profit is not the appropriate measure Return on investment is the appropriate measure Ex: if an organization set a financial objective of making profit of at least $100000 a year, then they need to consider how much she needs to invest to make the $100000, the profit they desires from the investment.

Financial objectives (Contd.)

A

commonly used measure is return on assets (ROA), i.e. the profit return on all the assets possessed by the firm.

Societal objectives
Related

to much broader issues about providing benefits to society Retailer might be concerned about providing employment opportunities for people in a particular area Societal objectives might include offering unique merchandise such as environmentally sensitive products

Personal objectives
Like

self-gratification, status and respect Ex: The owner of a book store may find it rewarding to interact with others who like reading and authors that visit the store for book-signing promotions.

Strategic profit Model

Developed

by Dupont to analyze the factors affecting the financial performance of a firm. Method for summarizing the factors that affect a firms financial performance as measured by ROA. Two components:
Net profit margin Asset turnover

 Net

profit margin is how much profit a firm makes divided by its net sales. Asset turnover is the retailers net sales divided by its assets.
assesses the productivity of a firms investment in its assets and indicates how many sales rupees are generated by each rupee of assets.

Net Profit margin*Asset Turnover=Return on Assets

Net profit Net sales Net Sales = Net profit Total Assets Total Assets

 The

and Total Assets of strategic profit model illustrate that ROA is determined by two sets of activities, profit margin management and asset management

two components, i.e. Net profit

Different approaches for achieving ROA

Net profit margin 1%
10%

ABC
XYZ

Asset Return Turnover on Assets 10 times 10%

1 time 10%

Profit Margin Management Path

Information

used to examine the profit margin management path comes from the retailers income statement, which summarizes a firms financial performance over a period of time

Profit Margin Management Path (Contd.)

Variables to be considered under Profit Margin Management Path

Net Sales = Gross amount of sales+ promotional allowances customer returns Gross margin =Net sales Cost of goods sold Operating expenses = incurred in normal course of doing business Operating expenses% = Operating expenses Net Sales

 Net

profit = Gross margin Expenses-Taxes Net profit% = Net profit Net Sales

Asset management path

Information

used to analyse a retailers asset management path primarily comes from the firms balance sheet. Summarizes a retailers financial position.

Asset management path (Contd.)

Components

to be considered

Assets

Current Assets Fixed Assets

Asset

turnover

Net sales = Fixed Asset Turnover Fixed Assets

 Return

on assets = Net profit margin* Asset turnover

Issues to be considered
Retailers

and investors need to consider both net profit margin and asset turnover when evaluating their performance Retailer need to consider the implications of strategic decisions on both components of the strategic profit model