RETAIL MANAGEMENT MINI PROJECT -1

A MINI PROJECT ON FINANCIAL STRATEGY

Finance is the backbone of any successful business. Be it manufacturing,

whole selling or even retailing, without finance no business can survive for
long. The retail business that makes consistent profits can survive in the long
run and continue to offer products and services to the consumers. A retail
firm requires finance to run their business and meet day to day
requirements.
For the success of a business, there should be continuous movements of
funds in and outside the firm. Once a retailer has finalized its organizational
structure, it concentrates on operations management. Operations
management plays a vital role in a company growth and profitability.
The financial aspects of a retail business (operations Management) cover
budgeting, forecasting, profit planning, leverage management, asset
management, and optimum resource allocation.
Retail Cash Flow Management:

Retail cash flow management is the procedure of monitoring, analyzing, and

adjusting the cash flow that comes through selling merchandise. For retail
business, the most important part of cash flow management is to avoid
extensive cash shortages due to increased gap between cash inflows and
outflows. The larger the gap, the more the chances the store will be out of
competition. Therefore, effective cash flow management is imperative in
planning and in the competent functioning of all aspects of retail operations.
Making money and increasing cash base is not the only part of efficient cash
flow management. When a retail store is not able to maintain the optimum
balance between cash inflows (the money received through selling the
merchandise) and cash outflows (the money paid to vendors and for store
expenses), it may not be able to pay the salary to its employees and
suppliers bills.
Consequently, the retail organization may be profitable one as per financial
statements but in actual it is unable to pay the bills on time. Further, in case
of credit facility, if customers do not pay their due bills or pay very gradually
in installments, the retail organization may still find unable to pay the
employees salary.
Therefore, organization should manage its funds effectively otherwise
shortage of cash will result in increased costs, such as late fines if electric,
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water bills are not paid to government. Further, if loans are not paid to bank
or other private lenders, again the organization should be ready to pay hefty
penalties.

Who is Responsible for Effective Cash Flow Management?

Each retailer has funds to manage and liabilities to control. But question
arises being responsible for stores day to day operations, is he the only
person who should be made accountable for cash flow management. When
this is the duty of finance department, why finance personnel should not be
made accountable if the gap between cash inflows and cash outflows is
continuously unpleasant.
Actually retail business like other businesses, depends on team efforts.
Therefore, ideally, all employees, management, and supervisors including
finance personnel of finance department should develop cash flow
awareness.
Every employee, be it at floor level staff or at supervisory level can improve
organizational cash flow by understanding the pertinent issues. For example,
floor staff should always suggest the best selling merchandise to be
purchased by the organization. Bill section staff can motivate the customers
for cash payment. Customer care staff can play its vital role in building store
image. When retail store staff lacks clear cash flow understanding and
related guidelines or do not follow policies laid down, will result in negative
cash flow.
Besides this, managerial staff and board members should understand their
respective roles in effective cash flow management. Experience has shown
that floor staff and management at every stage can be more committed in
tackling adverse cash flow situation if cash flow issues are frequently
attended during organizational meetings.
Creating an environment for spreading awareness, queries, and follow up can
make certain that each employee is working toward the common objective of
stores cash flow enhancement.
Budget and Budgetary Control:

Modern retailing is full of competition, uncertainty and exposed to different

types of risks. The complexity of retailing business has led to the
development of various managerial tools, techniques and procedures useful
for retailers in managing their business successfully.
Budgeting is the most popular financial device to control the various
activities of retailing business. The budgeting outlines a retailers planned
expenditures for a certain period of time. The budgetary control has now
become an essential tool of the management for controlling various costs
and increasing profit base.

Retail Budget:
A retail budget is a financial plan or blue print of overall financial
transactions that shows how the resources will be acquired and used over a
period of time.
Budgetary Control:
It is the use of budgets as a means of controlling financial activities.
Budgeting:
Budgeting refers to the managements action of formulating budgets to
facilitate various departments to operate efficiently and economically. In
short, a plan showing how resources will be required and used over a
specified time interval is called Budget. The act of preparing a budget is
called budgeting and the use of budgets as a means of regulating financial
operations is Budgetary Control. Budgetary control starts with the budgeting
and ends with control.
Types of Budgets:
In retailing business normally budgets are prepared on two bases:
1. On the basis of expenditure:
It can further be divided into two heads:
(i) Capital expenditure budget
(ii) Operating budget
2. On the basis of activity:
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(i) Fixed budget, and

(ii) Flexible budget
Forecast and Budget:
In the world of retailing, forecast is mainly concerned with probable events
on the other hand budget is concerned with planned events.
(i) Forecast may be done for longer time but budget is always prepared for
shorter periods.
(ii) Forecast is usually a tentative estimate and can be revised as per
management requirements and the need of the time while budget remains
unchanged for the budget period.
(iii) Forecast is usually applied where there is no control over the events such
as forecast of FDI in retailing in the years to come while a budget is endeavor
to control the events.
(iv) In short, forecast is the foundation on which a budget is built.
Income Statement:
A profit and loss account or a Income Statement is the statement of the
profit earned or loss incurred during an accounting year, usually a month, a
quarter, or a year. This represents a summary of a retailers revenues and
expenses over a particular period of time. Such as April 1, 2010 to March 31,
2011 versus April 1, 2011 to March 31, 2012, in order to analyze the
profitability. Continuous exercise of preparing income statements can help a
retailer in knowing how a firm is performing towards the achievement of
companys goals and objectives.
Net Sales:
The term Net sales refer to the total revenues received by a retailer after
deducting consumer refunds, discounts and all markdowns during a
particular period of time, normally one year.
Cost of Goods Sold:
This is the amount paid by a retailer to acquire the merchandise sold during
a financial year. It is calculated by purchase prices plus freight charges (if
any) less all commissions and discounts like (trade discount, cash discount,
etc.)
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Gross Margin:
This is also known as Gross profit and gives the retailer a measure of how
much profit it is making on merchandise sales without considering operating
expenses.
Gross Margins = Net sales Cost of goods sold
In other words, it consists of operating expenses plus net profit.
Operating Expenses:
These are incurred on running a retail business in the normal course of
business.
Net Profit:
It is the measure of a retail firm. It is expressed either before or after taxes.
Generally the firms overall performance reflects when it is calculated after
taxes.
Net Profit = Gross Margin Expenses

Asset Management:
Each retailer has assets to manage and liabilities to control. It is the retailer
ability and efficiency how effectively he manages the inputs and outputs. The
proper way to find out the financial soundness of a going business at certain
moment is to prepare balance sheet. Balance sheet is a statement that
reports the values owned by the retail firm and the claims of the creditors
and owners against these properties.
Each retailer is expected to know all these principles listed below:
(a) Business entity concept
(b) Monetary unit concept
(c) Going concern concept
(d) Conservatism concept
(e) Cost concept
(f) Accounting equation concept
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1. Current Liabilities:
Current liabilities of a retailer include such obligations or charges that are
payable either on demand or in the coming year. All short-term obligations
generally due and payable within one year are termed as current liabilities.
These include:
(a) Taxes
(b) Short-term loans
(c) Accounts payable
(d) Bank overdraft
(e) Unclaimed dividends
(f) Short-term public deposits
(g) Outstanding or accruals
2. Non-current Liabilities:
These are generally the debts of a retailer and are paid over a longer period
of time, as after one year. These liabilities are also popularly known as longterm liabilities.
These include:
(a) Loan or mortgage
(b) Loans from banks and/or financial institutions
(c) Bonds or debentures
3. Net Worth:
Net worth is the excess of the firms assets over its liabilities. It shows the
financial interests of a retailer and is also known as retailers equity.
Sometimes, net worth is also called by the names of net assets, retailers
equity, shareholders fund, net employed capital etc.
Asset Turnover Ratio:

Asset turnover ratio is a retailers performance measure with regard to its net
sales and total assets. The ratio measures the overall performance and
activity of a retail organization.
It is computed as under:
Asset Turnover = Net Sales/Total Assets

Financial Leverage:
Leverage indicates how effectively a retail company uses its borrowed funds
to increase the retailers return on equity. It measures the contribution of
financing by retailers creditors. Financial leverage is a performance measure
based on relationship between a retailers total assets and net worth. High
financial leverage indicates that the retailer has substantial debt while a ratio
of 1 indicates no use of debt by retailer i.e. assets are equal to net worth.
This ratio is expressed as under:
Financial leverage = Total assets/Net worth

Retailers Strategic Profit Model:

The strategic profit model in actual is nothing but a numerical relationship
among retailers net profit margin, asset turnover and financial leverage. It
indicates the retailers return on net worth. A retailer applies strategic profit
model in planning or controlling assets.
This model numerically expressed as under:
Return on net worth = Net Profit x Asset Turnover x Financial Leverage

This ratio is used to know the retailers ability to pay to its suppliers for the
volume transacted. This is computed by accounts payable divided by Net
Sales. Then this figure is usually compared to industry average to know how
much a retailer is financially dependent on suppliers.
Due to erratic sales, increasing competition, rising human costs, and other
resources, retailers are giving stress on improving stores productivity.
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Productivity refers to the retail stores output relative to its inputs. In simple
terms productivity refers to the goods and services sold with the resources
used.
Productivity in the field of retailing is calculated as:

It is very clear from above equation that in productivity there are two
variables the amount of sale and the amount of resources used.
Productivity varies with the amount of sale relative to the amount of
resources used.
(iii) Some stores like Tuesday Morning in US operates only in 225 days in a
year to save operating and administrative costs.