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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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  2. 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 www.zensar.com

  3. Overview www.zensar.com

  4. 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) www.zensar.com

  5. 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 www.zensar.com

  6. 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) www.zensar.com

  7. 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). www.zensar.com

  8. 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). www.zensar.com

  9. Owners’ Equity - extending the classification There are different types of ownership – they have different rights www.zensar.com

  10. 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 www.zensar.com

  11. 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 www.zensar.com

  12. The Trial balance • If total debit balances = total credit balances, the clerical accuracy is established except for any compensating errors. www.zensar.com

  13. Balance Sheet at 31.12.02 Current assetsCurrent liabilities Cash 14850 Accounts payable 2500 Accounts rec. 150 Loans 5000Total current assets 15000 Total 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 www.zensar.com

  14. Why the 'Balance' Sheet? MUST BALANCE WITH WHAT COMES IN WHAT GOES OUT Sources - INS Uses - OUTS www.zensar.com

  15. Working Capital Cycle Cash Payables 47 days Receivables 4 days Working Capital Cycle Inventory 36 days Important elements: Cash Management, AR, AP, Inventory management www.zensar.com

  16. 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. www.zensar.com

  17. 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 www.zensar.com

  18. 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. www.zensar.com

  19. 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 www.zensar.com

  20. Comparative Analysis www.zensar.com

  21. 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 www.zensar.com

  22. 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 www.zensar.com

  23. http://www.woolworths.com.au/ http://www.colesmyer.com.au/ www.zensar.com

  24. Inventory Turnover Why Is Inventory Turnover Important? • Measures Inventory investment • Directly affects cash flows / AR & AP • Measures working capital efficiency Bottom line Example www.zensar.com

  25. 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. www.zensar.com

  26. 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 ? www.zensar.com

  27. 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 = www.zensar.com

  28. 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 www.zensar.com

  29. Thanks! www.zensar.com

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