Retail Profit Model

8/15/2019 Retail Profit Model

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RETAIL PROFIT MODEL


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Objectives andGoals

First step in the strategic planning process involves

articulating the retailer’s objectives and the scope ofactivities it plans to undertake.

These objectives guide the development of the retailer’sStrategy.

Three types of objectives retailer might have are:1) Financial objectives2) Societal objectives3) Personal Objectives


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FinancialObjectives

Most people focus on profit to assess the financial

performance and this is not RIGHT!!!

It is not profits it is RETURN ON INVESTMENT (ROI)

Aiming for prot Amo!nt of mone"

Invested

ROI Performanc

eRs 1! Rs "! 2# $%cellent

Rs 1! Rs 2!! "# Poor

A common used measure of !I is RETURN On ASSESTS (ROA


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#ocietalObjectives

Societal objectives are related to broader issues about

providing benefits to society"Making the #orld betterplace to live.

Examples: retailers migt e "on"erne# ao$t

pro%i#ing emplo&ment opport$nities et"'

erorman"e *it respe"t to so"ietal o+e"ti%es is

more #ii"$lt to meas$re tan inan"ial o+e"ti%es'

$e rely on percentages for e%ample percentage of *omenEmplo&e# in the retailer &usiness.


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Personal

Objectives

Many retailers especially o#ners of small businesshave personal objectives such as self"gratification'

status' and respect


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#trategic ProtModel

The strategic profit model is a method for summari(ing the factors that affect a firm’s

financial performance by !A.

The model decomposes !A into t#o components),) Net proit margin and-) Asset t$rno%er

The net profit margin is simply ho# much profit *after ta%+ a firmMakes divided by its net sales.

It reflects the profits generated from each upees of sales .


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#trategic ProtModel

Asset turnover is the retailer’s net sales divided by its assets.

Tis inan"ial meas$re assesses te pro#$"ti%it& o a irm.s

In%estment in its assets an# in#i"ates o* man& sales

r$pees are generate# & ea" r$pee o assets'

omponen s o e ra eg c ro


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,"-

omponen s o e ra eg c ro(oel


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,"-,

The Strategic Pro't (oel:Pro't (anagement

$et ProtMargin

#ales

$et Prot

GrossMargin

Total

E%penses

#ales

&ost of

Goods#old

'()

'(

*+

'++

,+

'++ -(

*

*


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,"-/

+ncome Statement

,et Sales: refers to the total reven-e receive bya retailer after all ref-ns have been pai toc-stomers for a ret-rne merchanise.

Sales are an important meas-re of performancebeca-se they inicate the activity level of themerchanising f-nction.


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,"-0

The Strategic Pro't (oel:/sset (anagement

AssetT!rnover

Total Assets

#ales

&!rrentAssets

Fi%edAssets

Inventor"

Acco!ntsReceivabl

e

-.(

'++

'+

(

*

*+

/+

0 0

0

Ot0er&!rrentAssets

'


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,"-1

2et

Sales

3ross Margin3ross Margin

3ross Sales4ess eturns

4esscustomerallo#ances

5!3S

&omponents of ross (argin


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Operating $%penses

!perating 8%penses 9 !perating 8%penses : 2et sales


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,"6;

Types of RetailOperating $%penses

#elling e%penses 1 #ales sta2 salaries 3&ommissions 3 4enets

General e%penses 1 Rent 3 5tilities 3Miscellaneo!s e%penses

Administrative e%penses 1 #alaries of all emplo"ees

ot0er t0an salespeople 3 Operations of

b!"ing o6ces 3 Ot0eradministrative e%penses


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,"6-

,et Pro't

2et


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+nventory T-rnover

5ost of 3oods 9 Inventory Turnover Average inventory


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,"6=

/sset T-rnover

2et Sales 9 Asset Turnover Total Assets


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,"6

Ret-rn on /ssets

2et


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,"6/

Operating $%pense Percent

!perating 8%penses 9 !perating 8%penses : 2et Sales

Stores) >-7'777 9 6./: >/77'777

3iftsto3o.com) >;7'777 6=.;: >==7'777


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,et Pro't Percentage

2et ='77 9 ;7.6: >==7'777


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roit Management

Asset Management

The Strategic Pro't (oel

$et #ales

&ost ofgoods sold

7ariable

e%penses

Fi%ede%penses

Grossmargin

Totale%penses

$et prot

$et #ales

$et protmargin

Assett!rnover

Ret!rn onassets

8

8

3

Inventor"

Acco!ntsreceivable

Ot0er c!rrentassets

Totalc!rrentassets

Fi%ed assets

$et sales

Total assets

3

3 3

%


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,"=7

Setting an (eas-ring PerformanceObjectives

etailers #ill be better able to gauge performance if it hasspecific objectives in mind to compare performance.

Should include)• numerical inde% of performance desired• time frame for performance• necessary resources to achieve objectives

Setting Objectives in arge Retail


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,"=;

Setting Objectives in arge RetailOrganiations

Top ?o#n


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,"=-

Setting Objectives in arge RetailOrganiations

&ottom @p


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,"=6

Financial Performance ofRetailers

O!tp!ts 8Performance

#ales

Prots &as0 9o:

Gro:t0 in sales;prots < #amestore sales gro:t0

Inp!ts 5sed b"Retailers

• Inventor" =Rs.>•

Real Estate =s?.ft.>

• Emplo"ees =@>•

Over0ead=&orporate #ta2and E%penses>

• Advertising•

Energ" &osts•


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,"==

Performance Objectives an(eas-res 4se by Retailers


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,"=

5enchmar6s

Performance of retailer over time 7 retailer cancompare its recent performance to its performancein the preceing months! 8-arters or years.

Performance of a retailer compare to itscompetitors


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TA$B CO5

Retail Profit Model

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