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Chapter 6 Essay

1512 words - 7 pages

Financial Strategy
Chapter 6

Objectives and Goals
* Financial – not necessarily profits, but return on investment (ROI) – primary focus.
* Societal – helping to improve the world around us.
* Personal – self-gratification, status, respect.

Components of Strategic Profit Model

Strategic Profit Model: An Overview
It is a method for summarizing the factors that affect the firm’s financial performance as measured by ROA. The model decomposes of two components:
1. Net Profit Margin – is simply how much profit (after tax) a firm makes divided by its net sales. It reflects the profits generated from each sales.
2. Asset Turnover – is the retailer’s net ...view middle of the document...

NET SALES – refers to the total revenue received by a retailer after all funds have been paid to customers for returned merchandise.
Net Sales = Gross Sales + Promotional Allowances – Customer Return
* Customer Return – represent the value of merchandise that the customers return and for which they receive a refund of cash or a credit.
* Promotional Allowances – are payments made by vendors to retailers in exchange for retailer promoting the vendor’s merchandise.
1. GROSS MARGIN – also called as gross profit, is the net sales minus the cost of good sold. It indicates how much profit the retailer is making on merchandise sales without considering the expenses associated with operating the store.
Gross Margin = Net Sales – Cost of Goods Sold
Gross margin is also expressed as a percentage of net sales so retailers can compare (1) the performances of various types of merchandise and (2) their own performance with other retailers with high or lower level of sales.

Gross Profit Margin for Federated and Costco

*Throughout the chapter, these dollar are expressed in millions

3. OPERATING EXPENSES – are costs incurred in the normal course of doing business, such as salaries, advertising, utilities, office supplies and rent.

4. NET PROFIT – it is the measure of overall performance with respect to the profit margin management path and can also be expressed before taxes.
Net Profit = Gross Margin – Expenses – Taxes

Asset Management Path
The information used to analyze a retailer’s asset management path primarily comes from the firm’s balance sheet. Whereas the income statement summarizes the financial performance over a period of time, the balance sheet summarizes a retailer’s financial position at a given point in time, typically at the end of its fiscal year.
Assets are economic resources owned and controlled by a firm. It can be:
1. Current Assets
2. Fixed Assets
1. CURRENT ASSET – are assets that can normally be converted to cash within one year. It is primarily cash, accounts receivable (are primarily monies owed to the retailer from selling merchandise on credit to customers) and merchandise inventory.
Current Assets = Cash + Account Receivable + Inventory + Other current assets
* Inventory Turnover – used to evaluate how effectively retailers utilize their investment in inventory and reflects the cost of goods sold from the income statement divided by the average inventory level from the balance sheet

2. FIXED ASSETS – are those assets that require more than a year to convert cash. It can be building, fixtures, equipment, and other long term investments.

* Asset Turnover – is an overall performance measure from the asset management component in the storage profit model.

Asset Information from Federated’s and Costco’s Balance Sheet

Asset Management Path for Federated and Costco

Return on Assets

Strategic Profit Model Ratios for Selected Retailers


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