Financials

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
 Copyright Zensar 2004 www.zensar.com

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

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
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investors, community interests (eg. environmental

bodies, unions, etc)

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

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)

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
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Inventory Intangible (Goodwill)

Investments Receivables (Non current)

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

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

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
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Drawings Debit Debit Credit

Revenue Credit Credit Debit
Expenses Debit Debit Credit

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
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
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TOTAL 25000 25000

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
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TOTAL ASSETS 25000 TOTAL OE + LIABS 25000

Why the 'Balance' Sheet?
MUST
WHAT BALANCE WHAT
COMES WITH GOES
IN OUT
Retail
Sources - INS Uses - OUTS

Working Capital Cycle
Cash
Receivables Working Capital Cycle Payables

4 days 47 days
Inventory
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36 days
Important elements: Cash Management, AR, AP, Inventory management

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
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has yet to pay the money to the

supplier.

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

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.

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

Comparative Analysis
Retail

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)
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Microsoft Word
Document

Comparative Analysis … cont
Liquidity (In %)
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)

2003 2002 2001 2003 2002 2001

Days Inventory 36 39 39 53 60 59
Days Debtors 4 2.5 3 13 11 7

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Days Creditors 47 47 45 43 44 46
Days Leverage 7 5.5 3 (23) (27) (20)

Adobe Acrobat Adobe Acrobat
Document Document
http://www.woolworths.com.au/ http://www.colesmyer.com.au/
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

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
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$ 10000 $ 5000 2
$ 10000 $ 2500 4

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

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

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
10.Transfer Pricing
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Integration – Chart of Accounts

Thanks!
Retail

Financials

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Retail

Admin Function Strategic Function

Accounting Integration Financials Consolidation

Statements Decision Making

Administrative Function Strategic Function

 Copyright Zensar 2004 www.zensar.com

 Copyright Zensar 2004 www.zensar.com

1] Balance Sheet (Statement of Financial Position)

To provide reliable financial information to

1] Internal stakeholders - managers, employees, owners

2] External stakeholders - government agencies,

investors, community interests (eg. environmental

 Copyright Zensar 2004 www.zensar.com

The whole accounting framework is based on a simple equation

Assets = Liabilities + Owners’ equity

Rule 2:Every transaction must have a double impact

•Adds Merchandise to the business assets

 Copyright Zensar 2004 www.zensar.com

For an asset to be on the business’s Balance Sheet it must have

These are the debts of the business – should be open as an

 Copyright Zensar 2004 www.zensar.com

–Current assets are expected to be traded, or turned into cash, or

Current Assets Non-Current

Inventory Intangible (Goodwill)

 Copyright Zensar 2004 www.zensar.com

–Current liabilities are expected to be extinguished, or paid out, in

Current Liability Non-Current

Current Debt Non current debt

 Copyright Zensar 2004 www.zensar.com

There are different types of ownership – they have different rights

 Copyright Zensar 2004 www.zensar.com

Drawings Debit Debit Credit

 Copyright Zensar 2004 www.zensar.com

Date Name of account Ref Debit Credit

Cash at bank Owners’ equity

Account name Debit Credit

TOTAL 25000 25000

 Copyright Zensar 2004 www.zensar.com

Current assets Current liabilities

Fixed assets Owner’s equity

TOTAL ASSETS 25000 TOTAL OE + LIABS 25000

 Copyright Zensar 2004 www.zensar.com

Sources - INS Uses - OUTS

 Copyright Zensar 2004 www.zensar.com

Receivables Working Capital Cycle Payables

 Copyright Zensar 2004 www.zensar.com

Money that is owed by customers

Money that is owed to suppliers.

has yet to pay the money to the

 Copyright Zensar 2004 www.zensar.com

Liquidity Ratio = > 1

 Copyright Zensar 2004 www.zensar.com

Receivables Turnover = Sales / Accounts Receivable

Days' Receivables = 365 / Receivables Turnover

Days' Inventory = 365 / Inventory Turnover

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

 Copyright Zensar 2004 www.zensar.com

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

Profit Margin = Net Income

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

 Copyright Zensar 2004 www.zensar.com

 Copyright Zensar 2004 www.zensar.com

Woolworths Limited Coles Myer Group