Operations Management: Financial Dimensions

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• Operations Management Financial Dimensions

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Chapter Objectives

• To define operations management
• To discuss profit planning
• To describe asset management, including the
  strategic profit model, other key business
  ratios, and financial trends in retailing
• To look at retail budgeting
• To examine resource allocation

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Profit Planning

• Profit-and-loss (income) statement
• Summary of a retailers revenues and expenses
  over a given period of time
• Review of overall and specific revenues and costs
  for similar periods and profitability

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Major Components of a Profit-and-Loss Statement
Net Sales 330,000
CGS 180,000
Gross Profit 150,000
Operating Expenses 95,250
Other Costs 20,000
Total Costs 115,250
Net Profit before Taxes 34,750
Taxes 15,500
Net Profit after Taxes 19,250

• Net Sales
• Cost of Goods Sold
• Gross Profit (Margin)
• Operating Expenses
• Taxes
• Net Profit After Taxes

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Asset Management

• The Balance Sheet
• Assets
• Liabilities
• Net Worth
• Net Profit Margin
• Asset Turnover
• Return on Assets
• Financial Leverage

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Figure 12-1 The Strategic Profit Model
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Other Key Business Ratios

• Quick Ratio
• Current Ratio
• Collection Period
• Accounts Payable to Net Sales
• Overall Gross Profit

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Financial Trends in Retailing

• Slow growth in U.S. economy
• Funding sources
• Mergers, consolidations, spinoffs
• Bankruptcies and liquidations
• Questionable accounting and financial reporting
  practices

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Funding Sources

• Mortgage refinance (due to low interest rates)
• REIT (retail-estate investment trust) to fund
  construction
• Company dedicated to owning and operating
  income-producing real estate
• Initial public offering (IPO)

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Figure 12-2 Rebuilding Mervyns
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Budgeting

• Budgeting outlines a retailers planned
  expenditures for a given time based on expected
  performance
• Costs are linked to satisfying target market,
  employee, and management goals

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Figure 12-3 The Retail Budgeting Process
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Benefits of Budgeting

• Expenditures are related to expected performance
• Costs can be adjusted as goals are revised
• Resources are allocated to the right areas
• Spending is coordinated
• Planning is structured and integrated
• Cost standards are set
• Expenditures are monitored during a budget cycle
• Planned budgets versus actual budgets can be
  compared
• Costs/performance can be compared with industry
  averages

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Preliminary Budgeting Decisions

1. Specify budgeting authority
2. Define time frame
3. Determine budgeting frequency
4. Establish cost categories
5. Set level of detail
6. Prescribe budget flexibility

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Cost Categories

• Capital expenditures
• Fixed costs
• Direct costs
• Natural account expenses

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Ongoing Budgeting Process

• Set goals
• Specify performance standards
• Plan expenditures in terms of performance goals
• Make actual expenditures
• Monitor results
• Adjust budget

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Resource Allocation

• Capital Expenditures
• Long-term investments in fixed assets

• Operating Expenditures
• Short-term selling and administrative costs in
  running a business

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Enhancing Productivity

• A firm can improve employee performance, sales
  per foot of space, and other factors by upgrading
  training programs, increasing advertising, etc.
• It can reduce costs by automating, having
  suppliers do certain tasks, etc.