Lecture #6: Retailing and Finance

These lecture notes are provided as a study aid in preparation for examinations. Students should review their class notes, and compare to the outline presented below. To assist in reviewing for exams, students are advised to rewrite their notes in accordance with the outline.

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An understanding of the Strategic Profit Model is critical for the financial success of retailers. The bottom line is that there needs to be a good return on investment (ROI). This can be accomplished, of course, in a variety of different ways.

A key factor to remember is that Return on Assets (ROA) can be the same for two or more firms, but it can be derived in a variety of different ways. This is because the profit margins and asset turnover rates will vary considerably between product types, industries, and store types.

Some products have a very high turnover rate, such as perishables, while other durable or infrequently purchased items may have a low turnover rate. Conversely, the profit margin tends to be lower on high turnover items, and higher for low turnover items.

The income statement summarizes the firm's financial performance over a specified period of time (monthly, quarterly, annually, etc.). The components of the income statement are as follows:

• Net Sales--the total number of dollars received from customers, minus refunds
• Gross Margin--this is the "raw" profit being earned by the retailer, before operating expenses are considered. It is the difference between Net Sales and Cost Of Goods Sold.
• Expenses--normal operating expenses incurred during the period (utilities, salaries, interest, etc.)
• Net Profit--equals Gross Margin minus Expenses. It is what is left over after everything has been accounted for. It is better to state Net Profit after taxes have been deducted, so that the final number has more meaning