Retail

FINANCIALS IN RETAIL
December 2005
 Why Financials?
Administrative Function – Early 1990’s
Majority of “Finance” function was Accounting. Mainly for reporting (Mandatory)

Globalization

Admin Function Strategic Function

Accounting Integration Financials Consolidation

Internal controls

Reporting Analysis

Statements Decision Making

Retail

Business Intelligence

Administrative Function Strategic Function

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 Overview

F in a n c e F u n c tio n

S tr a te g ic M a n a g e m e n t A c c o u n tin g F i n a n c ia l S u p p l y C h a in

P e r fo r m a n c e M a n a g e m e n t F in a n c ia l A c c o u n t in g C r e d it M a n a g e m e n t

P la n n in g M a n a g e m e n t A c c o u n t in g T re a s u ry M a n a g e m e n t

B u s i n e s s C o n s o li d a t i o n F in a n c ia l S t a t e m e n ts L iq u id it y M a n a g e m e n t
Retail

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 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
Retail

investors, community interests (eg. environmental

bodies, unions, etc)

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 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
Retail

•Adds Merchandise to the business assets

•Removes cash from the business assets

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 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
Retail

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

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 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).

Current Assets Non-Current

Cash Fixed Assets
Accounts Receivable Investments
Retail

Inventory Intangible (Goodwill)

Investments Receivables (Non current)

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 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).

Current Liability Non-Current

Accounts Payable Long term payables
Provisions Non-current provisions
Retail

Current Debt Non current debt

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 Owners’ Equity - extending the classification

There are different types of ownership – they have different rights

Owner’s Equity
Owner’s Contribution Reserves
Ordinary share Retained profits
Preference shares General reserves
Other forms of of Equity Other reserves (assets, currency)
Retail

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 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
Account Normal Increase Decrease
Asset Debit Debit Credit
Liability Credit Credit Debit
Owner's equity Credit Credit Debit
Retail

Drawings Debit Debit Credit

Revenue Credit Credit Debit
Expenses Debit Debit Credit

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 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)
2
28/2 Merchandise 250 0
Owner’s equity 2500
(Owner buys merchandise)

Cash at bank Owners’ equity

Retail

15000 15000
3
2500
17500
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 The Trial balance
• If total debit balances = total credit balances, the clerical
accuracy is established except for any compensating errors.

Account name Debit Credit

Cash 14850
Accounts Receivable 150
Equipment 3000
Computers 7000
Accounts Payable 2500
Loans 5000
Ow ner's equity 17500
Retail

TOTAL 25000 25000

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 Balance Sheet at 31.12.02

Current assets Current liabilities

Cash 14850 Accounts payable 2500
Accounts rec. 150 Loans 5000
Total current assets 15000 Total current liabilities 7500

Fixed assets Owner’s equity

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

TOTAL ASSETS 25000 TOTAL OE + LIABS 25000

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 Why the 'Balance' Sheet?

MUST
WHAT BALANCE WHAT
COMES WITH GOES
IN OUT
Retail

Sources - INS Uses - OUTS

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 Working Capital Cycle
Cash

Receivables Working Capital Cycle Payables

4 days 47 days

Inventory
Retail

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

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 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
Retail

has yet to pay the money to the

supplier.

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 Financial Analysis
L iq u id it y R a t io

C u r e n t R a t io A c id t e s t R a t io

C u r r e n t a s s e t s / c u r r e n t li a b il it ie s C A - I n v e n t o r ie s / C L

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

Retail

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 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

Retail

Days' Inventory indicates how long, on average, an inventory item sits on

the shelf until it is sold.

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 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
Retail

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

the firm on its assets

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 Comparative Analysis
Retail

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 Comparative Analysis
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 3097.8 2959.4 2594.9 2926.6 2918.5 3005.6

Liabilities

Net Current (509) (570) (249) 1097.2 1027.6 704.2

Assets (working
capital)
Retail

Microsoft Word
Document

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 Comparative Analysis … cont
Liquidity (In %)

Woolworths Limited Coles Myer Group

2003 2002 2001 2003 2002 2001

Current 0.83 0.80 0.90 1.38 1.35 1.23

Ratio
Acid Test .24 .22 .26 .41 .35 .26

Management Efficiency (In Days)

Woolworths Limited Coles Myer Group

2003 2002 2001 2003 2002 2001

Days Inventory 36 39 39 53 60 59

Days Debtors 4 2.5 3 13 11 7

Retail

Days Creditors 47 47 45 43 44 46

Days Leverage 7 5.5 3 (23) (27) (20)

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 Adobe Acrobat Adobe Acrobat
Document Document

[Link] [Link]

W orking Capital Leverage (In days)

30
20
of Days
Number

10
Retail

0
-10 2000 2001 2002 Microsoft Excel
Financial Year Worksheet

Woolworths C oles myer

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 Inventory Turnover

Why Is Inventory Turnover Important?

1. Measures Inventory investment

2. Directly affects cash flows / AR & AP Bottom line

3. Measures working capital efficiency

Example

Annual cost of Inventory Annual Inventory

Goods Sold Investment Turns
$ 10000 $ 10000 1
Retail

$ 10000 $ 5000 2
$ 10000 $ 2500 4

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 Inventory Turnover ….Cont

The Inventory Turnover Formula =

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

Important

1. Consider cost of goods which are from the warehouse Inventory ONLY– direct
shipment and non-stock items not to be included.
1. Average Inventory to be considered – monthly stock take / 12

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

Retail

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 Profitability Analysis
Gross Margin Vs Adjusted Margin
Gross Margin = Gross Profit / Total Sales

Gross Profit $ $5,000

Product Line "A" = 25% 4
Total Sales $20,000

Gross Profit $ $7,500

Product Line "B" = 25% 2.4
Total Sales $30,000

Product Line "A“ = $5000

Product Line “B“ = $12500 } Inventory Investment

Opportunity costs | Cost of carrying Inventory

Retail

?
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 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

Adjusted margin = Annual Gross Profit – Annual Carrying Cost

Annual Sales

$5,000 – $1,250 =
Product Line "A"
$20,000 18.75%
Retail

$7,500 – $3,125
Product Line "B" = 14.6%
$30,000

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 Financials Part 2

1. Demand forecasting
2. Financial Planning
Tax Planning
Cash Planning
Investment Planning
6. VAT (Brief)
7. Balanced Scorecard
8. Inventory Management – Part 2
9. Open-to-buy
[Link] Pricing
Retail

Integration – Chart of Accounts

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 Thanks!
Retail

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