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Strategic profit model combines the two decision making areas: Margin management and asset
management. The SPM uses return on assets as the primary criterion for planning and evaluating
a firm's financial performance
According to SPM
Net Profit x asset turnover = return on assets (8.21% in case of wal-mart and 10.74 for Tiffany)
Thus return on Assets can be improved by: profit path or turnover path.
Profit Path: It is ascertained from income statement.
Net Sales: Total number of rupees received by a retailer after all refunds have been paid to the
customer for returned merchandise.
Net Sales = Gross Amount of Sales - Customers returns - Customer allowances
Customer Returns: Value of merchandise that customers return because it is damaged, does'nt
fit and so forth.
Customer Allowances:Any additional price reduction given to the customers
Gross Margin:It gives the retailer how much profit it is making on merchandise sales without
considering the expenses associated with operating the stores.
Selling Expenses: Sales' staff salaries + commission + Benefits
General Expenses: Rent + Utilities + Miscellaneous Expenses
Administrative expenses: Salaries of all employees other than sales people + operation of
buying offices + other administrative expenses
Account Receivables
are monies due to retailer from selling merchandise on credit
Cash
Monies on hand + demand and savings accounts in banks to which a retailer has immediate
access+ marketable securities such as Treasury Bill
Other Current Assets
Prepaid Expenses + Supplies
Fixed Assets:Assets that require more than a year to convert to cash
Fixed Assets = Buildings( if owned) + Fixtures(display racks) + equipment ( such as computer and
delivery trucks) + long term investment such as real estate or stock in other firms
Measure of a Merchandise Manager's Performance
GMROI: Gross Margin Return on Inventory Investment
It measures how many gross margins rupees are earned at every rupee of inventory investment
GMROI= Gross margin % x sales to stock ratio
GMROI= (gross margin/ net sales) x (net sales/ average inventory at cost)
remember: Average inventory in GMROI is measured at cost.
Range of GMROI for apparels is 235% and for furniture is about 90%
it is no wonder that many stores are placing so much emphasis on apparels and some have even
discontinued furniture.
However some stores continue to carry low GMROI products, because traditioanlly consumer is
attracted to the store becasue of it. The retailer hopes that these consumers will purchase high
GMROI items.
The strategic profit model, another name for the DuPont Equation, provides one method for
calculating the return on equity. Return on equity refers to a businesss profit relative to
shareholder equity or, put another way -- the effectiveness of the business at turning assets and
investments into profit. The strategic profit model employs three key components: profit margin,
asset turnover and leverage.
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Other Considerations
The strategic profit model lends itself to a visual format, making it an excellent tool for
demonstrating how changes in profit margins, leverage or asset turnover impact the business. It
also provides a simple way to see and evaluate changes over time. The strategic business model
suffers from the problem that the results only prove as reliable as the original data. If your
business does not maintain accurate records, the numbers you get from the calculations provide
little value.