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Day 8 Financial Strategy

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Chris Jackson

on 8 February 2013

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Transcript of Day 8 Financial Strategy

Financial Strategy Net Profit Margin Asset Turnover Outlines Tradeoff Between
Margin Management
Asset (Inventory Management) Strategic Profit Model:Financial Tradeoff Made by Retailers to Increase ROI Net Profit after Taxes Net Sales Net Sales Total Assets Net Profit Margin Asset Turnover ROA Overview of the Strategic Profit Model Profit Margin Asset Turnover ROA Net Profit Margin: reflects the profits generated for each dollar of sales Asset Turnover: assesses the productivity of a firm's investment in its assets X Components of the Strategic Profit Model Net Profit
Margin
15% Net Profit
15 Sales
100 Gross Margin
40 Total Expenses
25 Sales
100 Cost of Goods Sold
60 The Strategic Profit Model:
Profit Management Objectives and Goals Financial Societal Personal Financial Objectives What is the return on the money that has been invested? Societal Objectives Tougher to measure Environment Better Personal Health Donations to Charities % of women vs men More Specific Personal Objectives Self gratification Status Respect Identity Setting and Measuring Performance Objectives Top Down Deductive Reasoning Accountability Overall strategy =
assortment
variety of merchandise
store size
location
level of customer service Top Down vs Bottom Up People should be held accountable for only what they can control Sales not responsible for product Sales not responsible for pricing Sales not responsible for gross margin Performance Objectives and Measures Input and Output Merchandise Management Measures Store Operations Measures Use of Store Space
Management of Store Employees Ways to Increase Margins Pay a lower price to a vendor
Charge customers a higher price
Reduce price competition
Exclusive Merchandise
Offer different brands than competition
Reduce Retailer Costs
Floor ready merchandise
Vendor source tagging
Packaging-shipping, display Gross Margin Comparison Macy's Leaders made sure a germ of an idea was seeded in the employees.
Then they left the trees grow by nourishing them from time to time. Organic Growth How is a retail strategy reflected in retailers’ financial objectives?
How do retailers need to evaluate their performance?
What is the strategic profit model, and how is it used?
What measures do retailers use to assess their performance? Questions Net Sales = Gross Sales + Promotional Allowances - Return
Cost of Good Sold (COGs)
Gross Margin (GM) = Net Sales - COGs
Expense
Variable (e.g.. sales commissions)
Fixed (rent, depreciation, staff salaries)
Net Profit = Net Sales – COGS - Expenses Margin Management Financial Implications of Strategies Used By a Bakery and Jewelry Store Financial – not necessarily profits, but return on investment (ROI) – primary focus

Societal – helping to improve the world around us

Personal – self-gratification, status, respect Retailer Objectives How is a retail strategy reflected in retailers’ financial objectives?
How do retailers need to evaluate their performance?
What is the strategic profit model, and how is it used?
What measures do retailers use to assess their performance? Questions Inventory turnover rate differs by
Industry
Product categories

Most retailers that are having problems achieving adequate profits have a poor Inventory Turnover Rate.

Example: Kmart vs. Wal-mart Importance of stock turnover rate Inventory Turnover = COGS/avg inventory (cost)
Inventory Turnover = Sales/ avg inventory (retail) A Measure of the Productivity of Inventory:
It is used to evaluate how effectively retailers utilize their investment in inventory
Shows how many times, on average, inventory cycles through the store during a specific period of time (usually a year) Inventory Turnover Inventory Turnover Asset Management Path for
Macy’s and Costco Asset Information from
Macy’s and Costco’s Balance Sheet Assets:
Economic Resources (e.g., inventory, buildings, computers, store fixtures) owned or controlled by a firm
Current Asset and Fixed Asset
Current Assets =
Inventory + Cash + Account Receivable
Fixed Assets = Fixture, Stores (owned)
Asset Turnover = Sales/Total Assets
Inventory Turnover = COGS/Avg. Inventory (cost) Asset Management Pay a Lower Price to Vendor
Charge Customers a Higher Price
Reduce Price Competition
Exclusive Merchandise
Brand Variants
Reduce Retailer Costs -- Direct Product Profitability (DPP), Activity Based Costing
Floor Ready Merchandise, Vendor Source Tagging
Packaging -- Shipping, Display Maintaining/Increasing Margins Profit Management Path for
Macy’s and Costco Components of the Strategic Profit Model Financial Strategy Chapter 6 Net Profit = Gross Margin – Operating Expenses – Net Interest - Taxes Net profit after taxes = Net Profit % after taxes
Net sales

Macy’s: $995 = 3.70%
$26,970

Costco: $1,103 = 1.83%
$60,151 Net Profit (after taxes) Why does Macy’s have higher margins than Costco?
Does the higher margins mean Macy’s is more profitable? Gross Margin = Gross Margin %
Net Sales

Macy’s: $ 10,773 = 39.9%
$15,630

Costco: $ 7,406 = 12.3%
$60,151 Gross Margin for Macy’s and Costco Income Statements for Macy’s and Costco Net Profit Margin: reflects the profits generated from each dollar of sales
Asset Turnover: assesses the productivity of a firm’s investment in its assets Profit Margin x Asset turnover = Return on assets
Net profit x Net sales (crossed out) = Net profit
Net sales (crossed out) Total assets Total assets The Strategic Profit Model: An Overview Gross Margin – Operating Expenses = Net Operating Income %
Net Sales

Macy’s: $10,773 – 8,937 = 6.81%
$26,970

Costco: $7,406 - $5,781 = 2.70%
$60,151 Before interest expenses/income, taxes, and extraordinary expenses
A commonly used overall profit measure due to the lack of control over taxes, interest, and extraordinary expenses
Allows for a comparison of financial performance across companies or divisions within companies Net Operating Income = Selling, general and administrative expenses (SG&A) + depreciation + amortization of assets

Includes costs other than the cost of merchandise Operating Expenses = Operating Expenses %
Net Sales

Macy’s: $8,937 = 33.1%
$26,970

Costco: $5,781 = 9.6%
$60,151 Operating Expenses Outlines Tradeoff Between
Margin Management
Asset (Inventory Management) Net Profit Margin Asset Turnover Strategic Profit Model:
Financial Tradeoff Made by Retailers to Increase ROI Selling expenses = Sales staff salaries + Commissions + Benefits

General expenses = Rent + Utilities + Miscellaneous expenses
Administrative expenses = Salaries of all employees other than salespeople + Operations of buying offices + Other administrative expenses Types of Retail Operating Expenses Information and Distribution Systems Chapter 10 Customer Relationship Management Chapter 11 Human Resource
Management
Chapter 9 Retail Locations
Chapters 7,8 Retail Market Strategy
Chapter 5
Financial Strategy
Chapter 6 Retailing Strategy 1 Other Current Assets + + + 30 40 4 5 10 100 2.5 Accounts Receivable Inventory Fixed Assets Current Assets Sales Total Assets Asset Turnover The Strategic Profit Model: Asset Management - - 25 100 60 100 40 15 15% Cost of Goods Sold Sales Total Expenses Gross Margin Net Profit Sales Net Profit Margin The Strategic Profit Model: Profit Management Gross Margin (Gross Profit) : profit made on merchandise sales without considering the operating expenses and corporate overhead expenses. Components of Gross Margin COGS
Plus Promotional Allowances Less Returns Gross Sales Gross Margin Gross Margin Net Sales Asset Management Profit Management The Strategic Profit Model: Return on Assets ) ( Net Profit
Total Assets ) ( Net Profit
Net Sales ) ( Net Sales
Total Assets Net Profit Net Profit Net Sales
Total Assets = Net Sales x Total Assets Times 37.5% Return on
Assets 1 Other Current Assets + + + 30 40 4 5 10 100 2.5 A/R Inventory Fixed Assets Current Assets Sales Total Assets Asset Turnover - - 25 100 60 100 40 15 15% Cost Goods Sold Sales Total Exp. Gross Mar Net Profit Sales Net Profit Margin Asset Management Profit Management The Strategic Profit Model: Return on Assets ) ( Net Profit
Total Assets ) ( Net Profit
Net Sales ) ( Net Sales
Total Assets Net Profit Net Profit Net Sales
Total Assets = Net Sales x Total Assets Times 37.5% Return on
Assets 1 Other Current Assets + + + 30 40 4 5 10 100 2.5 A/R Inventory Fixed Assets Current Assets Sales Total Assets Asset Turnover - - 25 100 60 100 40 15 15% Cost Goods Sold Sales Total Exp. Gross Mar Net Profit Sales Net Profit Margin Income Statements for Macy’s and Costco Financial Implications of Strategies Used By a Bakery and Jewelry Store Gross Margin (Gross Profit) : profit made on merchandise sales without considering the operating expenses and corporate overhead expenses. Components of Gross Margin COGS
Plus Promotional Allowances Less Returns Gross Sales Gross Margin Gross Margin Net Sales Gross Margin (Gross Profit) : profit made on merchandise sales without considering the operating expenses and corporate overhead expenses. Components of Gross Margin COGS
Plus Promotional Allowances Less Returns Gross Sales Gross Margin Gross Margin Net Sales Inputs=
Inventory
Store Space
Employees Outputs=
Sales
Profits Corporate Performance Productivity Ratio Inputs=inventory/store space/employees Outputs=sales/profits TO Productivity Measures:
asset and inventory turnover
sales per square foot
sales per employee
same store sales growth ROA: overall productivity measure combining profit margin % and asset turnover Inputs: Merchandise Inventory Set Initial Prices
Lower prices
Negotiate with vendors
Manage inventory turn
Gross margin performance Sales per Square Foot
Sales per Employee
Theft
Store Maintenance
Energy costs Our Starbucks Mission Statement

Our mission: to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.

Here are the principles of how we live that every day:
Our Coffee

It has always been, and will always be, about quality. We’re passionate about ethically sourcing the finest coffee beans, roasting them with great care, and improving the lives of people who grow them. We care deeply about all of this; our work is never done.
Our Partners

We’re called partners, because it’s not just a job, it’s our passion. Together, we embrace diversity to create a place where each of us can be ourselves. We always treat each other with respect and dignity. And we hold each other to that standard.
Our Customers

When we are fully engaged, we connect with, laugh with, and uplift the lives of our customers – even if just for a few moments. Sure, it starts with the promise of a perfectly made beverage, but our work goes far beyond that. It’s really about human connection.
Our Stores

When our customers feel this sense of belonging, our stores become a haven, a break from the worries outside, a place where you can meet with friends. It’s about enjoyment at the speed of life – sometimes slow and savored, sometimes faster. Always full of humanity.
Our Neighborhood

Every store is part of a community, and we take our responsibility to be good neighbors seriously. We want to be invited in wherever we do business. We can be a force for positive action – bringing together our partners, customers, and the community to contribute every day. Now we see that our responsibility – and our potential for good – is even larger. The world is looking to Starbucks to set the new standard, yet again. We will lead.
Our Shareholders

We know that as we deliver in each of these areas, we enjoy the kind of success that rewards our shareholders. We are fully accountable to get each of these elements right so that Starbucks – and everyone it touches – can endure and thrive.

"Our goal is to be a retailer with the ability to see opportunity on the horizon and have a clear path for capitalizing on it. To do so, we are moving faster than ever before, employing more technology and concentrating our resources on those elements most important to our core customers. " Amazon's mission statement is:



Our vision is to be earth's most customer centric company; to build a place where people can come to find and discover anything they might want to buy online.

The mission statement of Zappos.com has nothing to do with what it sells on its Internet shopping website and everything to do with who is buying the Zappos.com products - the customers.

"To provide the best customer service possible." "Sears Holdings is committed to improving the lives of our customers by providing quality services, products and solutions that earn their trust and build lifetime relationships." Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings. To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time. The other extreme is marked by failures like HP where the top management was unable to make their employees buy into their change strategies. "top-down" logic, is the process of reasoning from one or more general statements (premises) to reach a logically certain conclusion. Bottom-Up Approach Top-Down Approach Deductive Reasoning Both approaches are Complimentary They should be used judiciously to support each other Top Down Bottom Up "If you cannot trust the people working for you to make good decisions, you need to hire different people. Period."
From "Maverick" by Richardo Selmer Commitments are frequently made and contracts signed without input from other Departments verifying it will work well with our systems or affiliates getting much of a say. Forced Compliance Allow other departments and affiliates to have a say-research and compare several vendors.
Present pros and cons.
Have a core group decide. Change to Bottom Up TOP DOWN EXAMPLE
Corporate project form. Before anything can happen, it must be approved.
People are given the responsibility to carry things out and never allowed the authority to make adjustments and make things happen. There is a lot of "mother, may I ?" Rulemaker TOP DOWN EXAMPLE Give individuals responsible for making things happen the authority to make deadlines
Do things properly,
Give incentives for good work
Create an environment for success. Change to Bottom Up TOP DOWN EXAMPLE Circumvent people who have the info and authority to say yes or no and ask people that will give you the desired response. Those that scream the loudest are taken before others. Intimidate by Confusion Stop the I'm telling Mom/Dad mentality.
Have intelligent discussions on why things can or cannot be done
We have to set priorities and do what is best for everyone first. Change to Top Down Things decided on by management and given to employees for implementation without prior knowledge gathering from employees who have the know-how.

Change to Bottom Up
Find employees who are passionate about the subject matter and wish to be stakeholders.
Give them meaningful responsibility for shaping the course of the action.
Allow other employees to review for further insight. Exclusionary TOP DOWN EXAMPLE We are a risk adverse company in a risk adverse industry. In current times, this is akin to paralysis and could be fatal. Commonplace Allow employees to take intiative and make their ideas come to life.
Many times employees have fabulous ideas
These initiatives are squashed by other "important" projects. Change to Top Down TOP DOWN EXAMPLE There is always another fire to be put out and it needs to be put out now. When everything becomes a high priority, we no longer have a high priority, we now have a new median. Allow time for planning.
Understand that people cannot operate at 110% capacity constantly.
Understand that a project might take X hours, but when meetings, documentation and other items are added in, they really take X+Y+Z+1. Change to Bottom UP Reactionary-Crisis Management TOP DOWN EXAMPLE
People from various departments who know how things work discuss what would work and what wouldn't .

When they run into an issue, they consult with co-workers to come up with a variety of solution options and determine which is the best option. Bottom UP Example Collaborative-based Culture of Contagious Cooperation Responsive (Satisfying target customer)
Bridge the communication gap and with across departments to address concerns. Routinely Identify Strengths/Weaknesses:
The report cards for each department address some of these issues. Inclusionary (Stakeholder Ownership. Invitation to get involved) Educated (Eager to be exposed to new ideas and methods): Development trainings. Conciliatory (Open to sharing) Macy's compared to Costco You have to know where you are going and how you are going to get there!!! Input and Output Today we will discuss....... The mission statement
Objectives and goals
The Strategic Profit Model
Setting and measuring goals
Accountability
Top-down vs bottom-up On Wednesday in class we will
Review for
the upcoming Exam "To provide economy and quality minded travelers with a premier, moderate priced lodging facility which is consistently perceived as clean, comfortable, well-maintained, and attractive, staffed by friendly, attentive and efficient people"[citation needed]

Key Market: economy and quality minded travelers
Contribution: moderate priced lodging
Distinction: consistently perceived as clean, comfortable, well-maintained, and attractive, staffed by friendly, attentive and efficient people Question: How can retailers increase Gross Margin? A statement of purpose Two Types of Management Styles TOP-DOWN BOTTOM-UP
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