Chapter - 6
FINNANCIAL PLANNING FOR RETAIL
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INTRODUCTION
A retailer’s financial objectives directs its overall
strategy. When a retail store or chain is established
the capital requirements are projected. The major
investments are analyzed, costs and stocks are
estimated.
Having projected the capital requirements, the
retailer has to identify the source of funding and
establish operations.
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FINANCIAL STRATEGY
Financial analysis helps to evaluate a retailer’s
business model and marketing strategy. This analysis
provides insights for developing strategies, expansion
plans, and globalizing retail operations.
Financial analysis is necessary before deciding on the
retail model, including the merchandising strategy,
the store positioning, store location, promotion
strategy, etc.
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FUNDING RETAIL VENTURES AND
RAISING CAPITAL
Once the retailer has finalized the business model, it has
to raise funds. The promoter has to raise the initial
capital when setting up the retail operation. A retailer has
various options such as the following for raising funds:
Approaching finance companies or banks
Private equity funding
Franchising
Supplier credit
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PROFIT PLANNING
The reason for existence of any business, including
retail, is to make profits. The survival of the business
depends on certain factors :
Increase in net profit margin
Higher turnover of investments
Improvement in profit
Increase sales revenue
Increase promotional activity
Improve customer services
Adding product lines
Change in price
Control on expenses :
Advertising cost reduction
Other cost reduction
Wage reduction
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BUDGETING
Budget is an attempt to forecast income and expenses of
the firm. In other words, budget is a statement of likely
income and estimated expenses. The management can
identify any deviations in income and expenditure.
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ADVANTAGES OF BUDGETING
Budgeting tends to improve the quality of planning.
Budgeting places definite goals and fixes responsibilities
of individuals.
Budget replaces guesswork, to a large
extent, by facts.
A comparison of actual cost can lead to overall efficiency
and improvement.
It permits ‘control by exception’ so that only variances
from the forecast need be brought to the management’s
attention.
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DISADVANTAGES OF BUDGETING
Budgeting can become meaningless and an unduly
expensive exercise if it is not implemented for continual
improvements.
Too much of reliance on budget can destroy innovations
and flexibility of actions.
Reports and sophisticated management tools may clutter
the common sense and may result in over or under
budgeting.
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TYPES OF BUDGETS
In retailing, normally three main types of budgets are
prepared:
Operating budget
Sales budget
Merchandise budget
Expense budget
Cash budget
Cash inflow statements
Cash outflow statements
Capital budget
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FINANCIAL STATEMENTS
Retailing has to maintain accounting records as per
statutory requirements. They are required for:
Records are to be maintained if bills and taxes are paid
on time, pay rolls met, and customers billed correctly.
Evaluating performance of the firm depends on these
statements.
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ESSENTIALS
Creditors require before granting loans
Various local government agencies require reports on
taxable income, sales tax collected, etc.
Stockholders also require if the firm is publicly owned.
auditors
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TYPES
Balance sheet:
It shows the financial position of the firm where the
assets are equal to the liabilities.
Income statement (P & L Account):
It shows the organization’s operating performance
reflected as profitability over a given period.
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FINANCIAL ANALYSIS
Financial analysis helps in planning, coordinating,
controlling and monitoring retail operations. The
retail uses:
Breakeven analysis:
The study of the level of sales at which the retailer
exactly covers the costs and neither makes profit nor
loss.
Ratio analysis:
The relationship between two variables that shows
the profitability and liquidity position of retails.
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TOOLS OF RATIO ANALYSIS
Return of Capital Employed (ROCE)
ROCE = pre-tax profit/(shareholder’s equity +
reserves)
Current ratio = current assets/current
liabilities
Quick ratios = current assets – stocks/ current
liabilities
Comparative balance sheets
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MERCHANDISE TURNOVER
Number of times the average stock is sold during a given
period, usually a year.
Importance:
Comparison with the past performance
Comparing present performance with competing stores
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EVALUATING RETAIL
PERFORMANCE
Evaluation of retail store performance is necessary for
further improvement. It can be done by:
Comparison with other retailers
Comparison within the store
Comparison within a retail chain
Other measures:
Sales per square feet or meter
Profit per square feet or meter
Sales per linear feet
Sales per assistant
Sales per checkout
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