Operations Management: Financial Dimensions

1
Chapter 12

• Operations Management Financial Dimensions

RETAIL MANAGEMENT A STRATEGIC APPROACH, 10th
Edition
BERMAN EVANS
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

3
Profit Planning

• Profit-and-loss (income) statement
• Summary of a retailers revenues and expenses
  over a given period of time
• Review of overall and specific revenues and costs
  for similar periods and profitability

4
Major Components of a Profit-and-Loss Statement

• Net Sales
• Cost of Goods Sold
• Gross Profit (Margin)
• Operating Expenses
• Taxes
• Net Profit After Taxes

5
Asset Management

• The Balance Sheet
• Assets
• Liabilities
• Net Worth
• Net Profit Margin
• Asset Turnover
• Return on Assets
• Financial Leverage

6
Figure 12-1 The Strategic Profit Model
7
Other Key Business Ratios

• Quick Ratio
• Current Ratio
• Collection Period
• Accounts Payable to Net Sales
• Overall Gross Profit

8
Financial Trends in Retailing

• Slow growth in U.S. economy
• Funding sources
• Mergers, consolidations, spinoffs
• Bankruptcies and liquidations
• Questionable accounting and financial reporting
  practices

9
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)

10
Figure 12-2 Rebuilding Mervyns
11
Budgeting

• Budgeting outlines a retailers planned
  expenditures for a given time based on expected
  performance
• Costs are linked to satisfying target market,
  employee, and management goals

12
Figure 12-3 The Retail Budgeting Process
13
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

14
Preliminary Budgeting Decisions

• Specify budgeting authority
• Define time frame
• Determine budgeting frequency
• Establish cost categories
• Set level of detail
• Prescribe budget flexibility

15
Cost Categories

• Capital expenditures
• Fixed costs
• Direct costs
• Natural account expenses

16
Ongoing Budgeting Process

• Set goals
• Specify performance standards
• Plan expenditures in terms of performance goals
• Make actual expenditures
• Monitor results
• Adjust budget

17
Resource Allocation

• Capital Expenditures
• Long-term investments in fixed assets

• Operating Expenditures
• Short-term selling and administrative costs in
  running a business

18
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.