Financials in retail
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FINANCIALS IN RETAIL. Why Financials?. Administrative Function – Early 1990’s. Majority of “Finance” function was Accounting. Mainly for reporting (Mandatory). Admin Function Accounting Reporting Statements. Strategic Function Internal controls Analysis Decision Making.

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Financials in retail

FINANCIALS IN RETAIL


Why financials

Why Financials?

Administrative Function – Early 1990’s

Majority of “Finance” function was Accounting. Mainly for reporting (Mandatory)

Admin Function

Accounting

Reporting

Statements

Strategic Function

Internal controls

Analysis

Decision Making

Strategic Function

Administrative Function

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Financials in retail

Overview

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Financials in retail

Purpose of Accounting

To create three basic accounting documents i.e.

1] Balance Sheet (Statement of Financial Position)

2] Profit & Loss Statement (Statement of Financial performance)

3] Cash Flows Statement

To provide reliable financial information to

1] Internal stakeholders - managers, employees, owners

2] External stakeholders - government agencies, providers of finance, suppliers, bankers, potential equity investors, community interests (eg. environmental bodies, unions, etc)

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Financials in retail

The Accounting Equation

The whole accounting framework is based on a simple equation

Assets = Liabilities + Owners’ equity

  • Equation rules:

  • Rule 1: The equation must be balanced at all times

  • Rule 2:Every transaction must have a double impact on the Equation

  • Eg. Purchase of Merchandise

  • Adds Merchandise to the business assets

  • Removes cash from the business assets

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Financials in retail

Assets

For an asset to be on the business’s Balance Sheet it must have future economic benefit for the business, and be controlled by that business.

Liabilities

These are the debts of the business – should be open as an obligation to pay at any given point (FY)

Owner’s Equity

OE = (Revenue - Expenses) + (Capital invested - Drawings from the business)

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Financials in retail

Current Vs Non-current Assets

  • Current assets are expected to be traded, or turned into cash, or used up, in the next operating cycle of the business, or in the next twelve months (whichever is the longer)

  • Non-current assets will still have value to the business beyond the 12 months cut-off (or operating cycle).

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Financials in retail

Current Vs Non-current Liabilities

  • Current liabilities are expected to be extinguished, or paid out, in the next operating cycle of the business, or in the next twelve months (whichever is the longer)

  • Non-current liabilities will still be a source of business funding beyond the 12 months cut-off (or operating cycle).

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Financials in retail

Owners’ Equity - extending the classification

There are different types of ownership – they have different rights

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Financials in retail

About Debits and Credits

  • There is no intrinsic meaning or value in the names ‘debit’ and ‘credit’

  • Understand debit and credit as being algebraic operators

The Rules of Debit and Credit

  • The basic rule is that sources of funds are recorded as CREDITS, and uses of funds are recorded as DEBITS

  • Remember, debits and credits are opposite types of algebraic operators

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Financials in retail

Journal Entries and Ledger Posting

1

Date Name of account Ref Debit Credit

12/2 Cash at bank 15000

Owner’s equity 15000

(Owner puts cash into business)

28/2 Merchandise 250 0

Owner’s equity 2500

(Owner buys merchandise)

2

Cash at bank

15000

Owners’ equity

15000

2500

3

17500

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The trial balance

The Trial balance

  • If total debit balances = total credit balances, the clerical accuracy is established except for any compensating errors.

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Financials in retail

Balance Sheet at 31.12.02

Current assetsCurrent liabilities Cash14850 Accounts payable 2500 Accounts rec. 150 Loans 5000Total current assets 15000Total current liabilities 7500

Fixed assetsOwner’s equity Office equip’t 3000 Owner’s equity 17500 Computers 7000Total fixed assets 10000

TOTAL ASSETS 25000 TOTAL OE + LIABS 25000

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Why the balance sheet

Why the 'Balance' Sheet?

MUST BALANCE WITH

WHAT COMES IN

WHAT GOES OUT

Sources - INS

Uses - OUTS

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Financials in retail

Working Capital Cycle

Cash

Payables

47 days

Receivables

4 days

Working Capital Cycle

Inventory

36 days

Important elements: Cash Management, AR, AP, Inventory management

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Financials in retail

Accounts Receivable - AR

Money that is owed by customers

Having receivables means that the company has made the sale but has yet to collect the money from the purchaser.

Accounts Payable - AP

Money that is owed to suppliers.

Having payables means that the company has made the purchase but has yet to pay the money to the supplier.

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Financials in retail

Financial Analysis

The appropriate value for these ratio depends on the characteristics of the firm's industry and the composition of its Current Assets. However, at a minimum, the Liquidity Ratio should be greater than one.

Liquidity Ratio = > 1

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Financials in retail

Turnover Ratios

Receivables Turnover = Sales / Accounts Receivable

Assess the firm's management of its Accounts Receivables and, thus, its credit policy.

Days' Receivables = 365 / Receivables Turnover

Days' Receivables indicates how long, on average, it takes for the firm to collect on its sales to customers on credit

Inventory Turnover = COGS / Inventory

Measure the firm's management of its Inventory.

Days' Inventory = 365 / Inventory Turnover

Days' Inventory indicates how long, on average, an inventory item sits on the shelf until it is sold.

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Financials in retail

Profitability Ratios

Profitability Ratios attempt to measure the firm's success in generating income.

Profit Margin = Net Income

-----------------

Sales

The Profit Margin indicates the dollars in income that the firm earns on each dollar of sales. This ratio is calculated by dividing Net Income by Sales.

Return on Assets (ROA)= Net Income

----------------

Total Assets

The Return on Assets Ratio indicates the dollars in income earned by the firm on its assets

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Financials in retail

Comparative Analysis

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Financials in retail

Net working Capital (In Millions)

Woolworths Limited

Coles Myer Group

Particulars

2003

2002

2001

2003

2002

2001

Current Assets

2588.0

2388.5

2345.1

4023.8

3946.1

3709.8

Current Liabilities

3097.8

2959.4

2594.9

2926.6

2918.5

3005.6

Net Current Assets (working capital)

(509)

(570)

(249)

1097.2

1027.6

704.2

Comparative Analysis

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Financials in retail

Liquidity (In %)

Management Efficiency (In Days)

Woolworths Limited

Woolworths Limited

Coles Myer Group

Coles Myer Group

2003

2003

2002

2002

2001

2001

2003

2003

2002

2002

2001

2001

Days Inventory

Current Ratio

0.83

36

0.80

39

0.90

39

1.38

53

1.35

60

1.23

59

Acid Test

Days Debtors

.24

4

.22

2.5

.26

3

.41

13

.35

11

.26

7

Days Creditors

47

47

45

43

44

46

Days Leverage

7

5.5

3

(23)

(27)

(20)

Comparative Analysis … cont

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Financials in retail

http://www.woolworths.com.au/

http://www.colesmyer.com.au/

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Financials in retail

Inventory Turnover

Why Is Inventory Turnover Important?

  • Measures Inventory investment

  • Directly affects cash flows / AR & AP

  • Measures working capital efficiency

Bottom line

Example

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Financials in retail

Inventory Turnover ….Cont

The Inventory Turnover Formula =

Cost of Goods Sold from Stock Sales during the Past 12 MonthsAverage Inventory Investment during the Past 12 Months

Important

  • Consider cost of goods which are from the warehouse Inventory ONLY– direct shipment and non-stock items not to be included.

  • Average Inventory to be considered – monthly stock take / 12

  • If Inventory turnover is 6 does not mean stock turns 6 times.

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Financials in retail

Product Line "A"

Gross Profit $

 $5,000 

= 25%

Total Sales

$20,000

Product Line "B"

Gross Profit $

 $7,500 

= 25%

Total Sales

$30,000

Profitability Analysis

Gross Margin Vs Adjusted Margin

Gross Margin = Gross Profit / Total Sales

4

2.4

}

Product Line "A“ = $5000

Inventory Investment

Product Line “B“ = $12500

Opportunity costs | Cost of carrying Inventory

?

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Financials in retail

Product Line "A"

$5,000 – $1,250

= 18.75%

$20,000

Product Line "B"

$7,500 – $3,125

= 14.6%

$30,000

Gross Margin Vs Adjusted Margin…cont

A conservative annual carrying inventory is 25% of the average inventory investment.

Annual carrying cost for A is $5,000 * 25% = $1,250

Annual carrying cost for B is $12,500 * 25% = $3,125

Annual Gross Profit – Annual Carrying Cost Annual Sales

Adjusted margin =

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Financials in retail

Financials Part 2

  • Demand forecasting

  • Financial Planning

  • Tax Planning

  • Cash Planning

  • Investment Planning

  • VAT (Brief)

  • Balanced Scorecard

  • Inventory Management – Part 2

  • Open-to-buy

  • Transfer Pricing

Integration – Chart of Accounts

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Financials in retail

Thanks!

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