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Chapter 6 Financial StrategyObjective and Goals

-Financial Objectives

-Societal Objectives

-Personal Objectives

Strategic Profit ModelProfit management pathAsset management pathNet profit margin after taxesNet SalesNet SalesTotal AssetsNet Profit Margin PercentAsset TurnoverReturn onAssetsThe retailers ROA is determined by multiplying the two components together:Net profit margin Asset turnover = Return on assets (ROA)

Net profit Net sales Net Profit________ _______ = _________Net sales total assets Total Assets

Components in the Profit Management Path

The four components in theprofit margin management path are net sales, cost of goods sold (COGS), gross margin, and operating profit margin.

Net sales are the total revenues received bya retailer that are related to selling merchandise during a given time period. The sources of revenue are sales to customers minus the credit and cash refunds customers received for returned merchandise.Sources of revenue that are not considered part of net sales are special charges to customers and credit card interest.

For example, warehouse clubs generate revenue from annual membership fees, and retailers with frequent shopper programsmay charge customers for enrolling in the program.

Components in the Asset Management Path

Assets are economic resources(e.g., inventory, buildings, computers, store fixtures) owned or controlledby a firm. There are two types of assets, current and fixed.

Current assets are assets that can normally be converted to cash within one year. Forretailers, current assets are primarily cash, accounts receivable, and merchandiseinventory.

Current assets =Cash + Accounts receivable + Merchandise inventory + Other current assetsFixed assets are assets that require more than a year to convert to cash.

in retailing, the principal fixed assets are buildings (if store property is owned by the retailer rather than leased), distribution centers, fixtures (e.g., display racks), andequipment (e.g., computers, delivery trucks).

Asset turnover is net sales divided by total assets. It is a measure assessing theperformance of the asset management component in the strategic profit model.