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 Accounting

Strategic Function Integration

Financials

Consolidation

Internal controls Analysis

Statements

Decision Making

Retail

Reporting

Business Intelligence

Strategic Function

Administrative Function

 Copyright Zensar 2004

www.zensar.com

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

S tr a te g ic M a n a g e m e n t

 Copyright Zensar 2004

www.zensar.com

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

Retail

2] External stakeholders - government agencies, providers of finance, suppliers, bankers, potential equity investors, community interests (eg. environmental bodies, unions, etc)

 Copyright Zensar 2004

www.zensar.com

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

Retail

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

 Copyright Zensar 2004

www.zensar.com

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)

Retail

Owner’s Equity OE = (Revenue - Expenses) + (Capital invested - Drawings from the business)

 Copyright Zensar 2004

www.zensar.com

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).

Retail

Current Assets

Non-Current

Cash

Fixed Assets

Accounts Receivable

Investments

Inventory

Intangible (Goodwill)

Investments

Receivables (Non current)

 Copyright Zensar 2004

www.zensar.com

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).

Retail

Current Liability

Non-Current

Accounts Payable

Long term payables

Provisions

Non-current provisions

Current Debt

Non current debt

 Copyright Zensar 2004

www.zensar.com

Owners’ Equity - extending the classification There are different types of ownership – they have different rights

Owner’s Equity Owner’s Contribution

Reserves Retained profits

Preference shares

General reserves

Other forms of of Equity

Other reserves (assets, currency)

Retail

Ordinary share

 Copyright Zensar 2004

www.zensar.com

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

Retail

•Remember, debits and credits are opposite types of algebraic operators Account Asset Liability Owner's equity Drawings Revenue Expenses

 Copyright Zensar 2004

Normal Debit Credit Credit Debit Credit Debit

Increase Debit Credit Credit Debit Credit Debit

www.zensar.com

Decrease Credit Debit Debit Credit Debit Credit

Journal Entries and Ledger Posting

1 Date 12/2

28/2

Name of account Cash at bank Owner’s equity (Owner puts cash into business)

Ref

Merchandise Owner’s equity (Owner buys merchandise)

Retail

Credit 15000

2 250 0 2500

Cash at bank 15000

Debit 15000

Owners’ equity 3

15000 2500 17500

 Copyright Zensar 2004

www.zensar.com

The Trial balance

Retail

•

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 TOTAL 25000 25000

 Copyright Zensar 2004

www.zensar.com

Balance Sheet at 31.12.02

Retail

Current assets Current liabilities Cash 14850 Accounts payable Accounts rec. 150 Loans Total current assets 15000 Total current liabilities Fixed assets Office equip’t Computers Total fixed assets

Owner’s equity 3000 Owner’s equity 7000 10000

TOTAL ASSETS

25000 TOTAL OE + LIABS

 Copyright Zensar 2004

www.zensar.com

2500 5000 7500

17500

25000

Why the 'Balance' Sheet?

Retail

WHAT COMES IN

MUST BALANCE WITH

Sources - INS

 Copyright Zensar 2004

WHAT GOES OUT

Uses - OUTS

www.zensar.com

Working Capital Cycle Cash

Retail

Receivables 4 days

Working Capital Cycle

Payables 47 days

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

 Copyright Zensar 2004

www.zensar.com

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

Retail

Money that is owed to suppliers.

 Copyright Zensar 2004

Having payables means that the company has made the purchase but has yet to pay the money to the supplier.

www.zensar.com

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

Retail

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.

 Copyright Zensar 2004

Liquidity Ratio = > 1

www.zensar.com

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

Retail

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.

 Copyright Zensar 2004

www.zensar.com

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.

Retail

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

 Copyright Zensar 2004

www.zensar.com

Retail

Comparative Analysis

 Copyright Zensar 2004

www.zensar.com

Comparative Analysis Net working Capital (In Millions) Woolworths Limited

Coles Myer Group

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

Retail

Particulars

 Copyright Zensar 2004

Microsoft Word Document

www.zensar.com

Comparative Analysis … cont Liquidity (In %) Woolworths Limited

Current Ratio Acid Test

Coles Myer Group

2003

2002

2001

2003

2002

2001

0.83

0.80

0.90

1.38

1.35

1.23

.24

.22

.26

.41

.35

.26

Management Efficiency (In Days)

Retail

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

Days Creditors

47

47

45

43

44

46

Days Leverage

7

5.5

3

(23)

(27)

(20)

 Copyright Zensar 2004

www.zensar.com

Adobe Acrobat Document

Adobe Acrobat Document

http://www.woolworths.com.au/

http://www.colesmyer.com.au/

W orking Capital Leverage (In days) 30

 Copyright Zensar 2004

Number of Days

Retail

20 10 0 -10

2000

2001 Financial Year Woolworths

C oles myer

www.zensar.com

2002

Microsoft Excel Worksheet

Inventory Turnover Why Is Inventory Turnover Important? 1. Measures Inventory investment Bottom line

2. Directly affects cash flows / AR & AP 3. Measures working capital efficiency Example

Retail

Annual cost of Goods Sold

Inventory Investment

Annual Inventory Turns

$ 10000

$ 10000

1

$ 10000

$ 5000

2

$ 10000

$ 2500

4

 Copyright Zensar 2004

www.zensar.com

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

Retail

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

 Copyright Zensar 2004

www.zensar.com

Profitability Analysis Gross Margin Vs Adjusted Margin Gross Margin = Gross Profit / Total Sales Product Line "A"

Product Line "B"

Gross Profit $

$5,000

Total Sales

$20,000

Gross Profit $

$7,500

Total Sales

$30,000

Product Line "A“ = $5000

Retail

Product Line “B“ = $12500

}

= 25%

4

= 25%

2.4

Inventory Investment

Opportunity costs | Cost of carrying Inventory

 Copyright Zensar 2004

? www.zensar.com

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 =

Retail

Product Line "A"

Product Line "B"

 Copyright Zensar 2004

Annual Gross Profit – Annual Carrying Cost Annual Sales $5,000 – $1,250 $20,000 $7,500 – $3,125 $30,000

www.zensar.com

= 18.75%

= 14.6%

Financials Part 2

Retail

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

Integration – Chart of Accounts

 Copyright Zensar 2004

www.zensar.com

Retail

Thanks!

 Copyright Zensar 2004

www.zensar.com