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operations is a challenging andsensitive task. It requires integration among various retail Store Operations and
Management
transactions within the stores. Such as store space managment, visual merchandising,
products display, management of human resources, financial management etc. However,
in his unit we shall study the issues relating to financial management in retailing,
performance measures and auditing process in a retail organization which helps for a
smooth and profitable functionality of a retail setup. Moreover, we will learn the importance
of relation ship marketing and "(lustomer Relationship Management"and its importance
in detail. We will also deal with the establishment of Loyalty programme and their
importance. We then conclude the unit with different financial instruments involved in
measuring the profitability of a retail setup and the process involved in monitoring the
performance in retail operations.

6.2 ROLE OF FINANCIAL MANAGEMENT IN

RETAILING
Role of financial management in retailing is very critical and we will understand its
implicationin this unit.
Retailing involves a lot of investment in terms of merchandise, real estate, infrastructure
building investments and human resources. All this needs to be managed and optimized
for better operational efficiency a?d a healthy ROI (Return on Investment). Therefore,
it becomes important to understand the various dimensions of finance management in
the retail scenario.
Thus, managing finance in a retail store decides the most critical aspects of business plan
like:
1) Budget planning
2) Performance measure
3) Resource allocation
4) Future business estimation
5) Analyzing present business

6.3 KEY ISSUES IN FINANCIAL MANAGEMENT

6.3.1 Budget Planning
Financial planning is the core of the retail planning and is divided into two broad sub
categories, financial accounting and management accounting. It is imperative to
understand that the success of any retailing business model, is the most critical aspect in
financial planning. It is, thus, critical for the promoters of a retail company to begin their
planning process with the following:
Detailed assessment of financial resources available
Effective and timely use of the resources
Mobilising financial resources is an integral aspect of any business and retailing is no
exception. Although the initial investment in terms of required space and providing the
necessary infrastructure for a retail operation can be substantial, it needs to be understood
that retailing is generally a negative working capital business. While it is a common
knowledge that most retailers buy on credit and sell them on cash, most products
(merchandise) are available on extended credit terms as well. In fact, an interesting
thing to note here is the fact that the greater the number of stores, the higher would be
the power that the retailer holds, which usually facilitates their supplies. 67

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Overview of If financial planning is carefully implemented d all the systems and procedutks art3 itl
Retailing
place, it is possible to generate surplus cash flow in retail operations. It may dsci tkc ti
g o d financial strategy for retailers who use their suq$m for expandon to bt2 dbk to
offset a large part of their taxable profit by showing a depreciation which is acceptable
ds per Company Law. In other words, an effective tax planning can be done by keeping
various legal requirements in mind. S d smart tax planning (Mind it, we we not talking
about tax avoidance here) can save big bucks which can be used for fuelling growth of
its venture in the right direction.

6.3.2 Understanding Retall Business as a Profit Centre

While the most important factor that support retailingis ~ o s tcofs&d a p p x t i the ~ cost
is equally important. The success of any financial strategy, particulatly in the retail s e c t . ,
is confirmed by its ability to leverage its intangible assets to the greatest extent by
multiplying the same, and then apportioning the costs over a much larger network of
stores.
Profit center accounting is now acquiring increasing significance throughout the g W
business community as it has not ody proved to be the most scientific method of a c c o d n g
but is also able to more explicitly &fine the performance of those responsible for their
respective profit centers. In retailing, the term 'profit center' is significa&as it identifies
every individual store as a center of generating profit.
ln retail business, any company should cut the overheads and the situational needs are to
be reviewed every month rather than just once in a year, Even if a retailer is able to
expand, it must be the prime objective of management to constantly evolve all such
' activities that ate geared towards helping the customer.
6.33 Budgeting and Resstxrce A~~~
"Budget" is a term used by accounts to define a detailed plan that is prepared in advance
for future activities and is usually based ofi the available historicd data. h helps h
retailer to predict as accurately as possible the future performance of the company on
numerous parameters, thereby preparing the decision mctke~fof future.
It al$o offers companies an insight into these areas wherein they must concentrate its
efforts instead of spending time on issues which may be less relevant for the time being.
Budgeting can thus be defined as an approach ie which €k!e # p d @ ~de rhe p W
information or history of business experience available is usedto V y attd prosect e s t h ~ & ~
for future. These estimates can be sales based, revenue based, volume b w d etc. Tbe
key output from this whole process of efficient budgeting is to get cost control.
Budgetingdoes not affect the fixed costs (bottom line expenses which are rnmWxy) to
a certain extent but certainly budgeting is h e with these fixed cost in mind. Howevm,
budgeting can help to a greater extent in managing variable costs thereby adding to the
profitability and revenue. Budgeting needs to be done with the core concern of integrating
all the fields in retail operations and implications.
Key learning from the tradgeting activities:
Standardization and frequent monitoring of the estimates projected b.j the Wget
Discrepancies in estimates and actual figures must be identified ;urd a particul~
process should be followed, that would encompass activities like:
1) Identifying the areas of variation
2) Identifying key factors effecting the variations
3) Re planning with the control measures for these variations
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6.3.4 Strategy Based Planning- Store Operations and
Management
It is very commonly understood that planning is done for future sustainability of any
operation or model. Strategy is done on a holistic scale and covers all the broad as well
as granular aspects of any business model.
To authenticate any definition for strategy we can say that it is done to achieve the
optimum scenario for a retail organization keeping in consideration its current resources
and the external factors that can come into affect its business. Retail~rsall round the
world and now in India have realized the importance of strategic planning and are focusing
on 'planning before execution'.

Ah organization or an individual entering into retailing should be able to understand its

dynamics before hand and the core issues that are associated with the business. Like,
Consumer facused planning
Slow rate of growth
Current market behaviour
Understanding a format and position the business i.e. does the organizatioli or the
individual see themselves as:
A convenient store e.g.: 'In and Out' outletscat petrol pumps
* A department stor; e.g. 'Ebony'
.* A store with proposition of service e.g. financial institutions like 'Kotak
Mahindra'
A store that would provide discounted merchandise aiming at volumes. e.g.
'Big Bazaar'
Any of the above formats needs to undergo a set of planning and pre feasibility analysis
of the persisting market trends and the challenges that are likely to affect the business. It
is critical to understand the initial investment and manage them efficiently. We can list
and address them as the key factors effecting capital requirements in retailing:
1) Real estate-land and building
Security deposits
Rent for floor space
Interiors and exteriors
Civil Works
Electrical Works
I

Racks and Shelves

Fixtures and Furnitures
Signage External and Internal
2) IT Requirements
3) Manpower and HR
Accounts
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 Overview of Sales
Retailing
Merchandising

4)
Supply Chain
Back end management (managing meeting suppliers and vendors for the consistent
I
performance stock)
Apart from the capital investment you have to also look at r e c d n g expenses like travel,
communication phone bill, internet access, electricity, water bill) which needs to be
understood as a fixed expense and you should look to it that an effective cost control

1 6.4 PERFORMANCE MEASURESAND AUDIT IN

RETAILING
There are a few technical filters that are very handy when it comes to analyzing our
performance in a retailing scenario, like :
Pay back period: The pay back period is the duration of time required to recover the
initial cash outlay on the project. Pay back period is widely used in appraisal of investments.

I Benefit-cost ratio: BCR relates the present value of benefits to the investment.
BCR=PVB/I
Where BCR=Benefit Cost Ratio,
PVB= Present Value of Benefits
I= Initial Investment 7

Net b e n t Value: The net present value of a project is equal to the sum of present
value of all the cash flows associated with the project. Mathematically
NPV= CFo /(l+k)O +CF,/(l+k)+. .......+ C F d (l+k)n
Where
NPV= Net Present Value
CFt= Cash flow occurring at the end of the year t (t=O,.........,n)
N=Life of the project
K= Rate of interest
Internal Rate of Return (IRR): The Internal Rate of Return is the discount rate at
which the net present value is equal to zero
O=CFO/(l +r)O+cf l/(l+r) l+. .... .+cFd(l+r)n
Where

I
CFt= cash flow occurring at the end of the year t(t=O,. .... ...,n)
N=Life of the project
R=discount/interest rate

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I
Gross Margin return on investment (GMROI) Store Operations and
Management
GMROI is one of the most used appraisal criteria. It is the ratio of gross margin a
company earns to investment made.
I
I1 Grass Ma* Return on Investment (GMROI)
GMROI is one of the most used appraisal criteria. It is the ratio of gross margin a
company earns to the investment made. For example if a retail store invests 1,00,000 in
I
i garments and gross margin on the garment is say,65,000. Then GMPOI is 65%. This
excludes the taxes, other fixed & variable expenses (salaries, wages, electricity, rent,
I maintenance, etc) which are vital for running the showrooms. .

We can broadly divide the tasks performed in a retail firm under three heads:

6.5.1 Strategic Management

I
Devising and implementing a retail strategy. For devising a retail strategy the retailer
must have a very clear understanding and complete information of the following:
a) Target market

b) Different retail formats catering to the target market

c) Present buying trends and preferences

d) Various tasks to be performed within the organization

I e) Accordingly designing an organizational structure

I f) Site selection, location analysis, layout details

1 g) Design promotional strategy I I

Strategic management is completely under the domain of top management. There can
be circumstances where advisors or consultants are hired by retailing firms in this regard.
Firms need highly experienced and qualified professionals to take such high level decisions.
Here it is worth mentioning that in small sized family owned retail business strategic
decisions generally are a family affair.

45.2 Merchandising

I Merchandise sourcing is the prime task of every retail organization Sourcing of

merchandise is the major component of merchandising process as a whole.
Ir
After the merchandise is acquired, a retailer needs to take full care to implement the
merchandise plan. Finally, the most critical task in merchctise is pricing them. Nowadays,
competition is so intense that a small error in pricing could lead to loss of sale as well as
long term reputation of the firm.

6.5.3 Shop Management

Shop is the pivot for any retail store. Managing the shop involves various issues to be
I
looked into like:
h) Store facilities 71 1
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P

Overview of i) Layout and Display

Retailing
j) Selling of merchandise
k) Customer grievances

1) Complementary services like gift wrapping, home delivery etc.

m) Prevent shoplifting and liventory shrinkage
n) Receive physical inventory and intimating for the procurement of the same
0) Merchandise repackinglalteration
To execute all these tasks one needs to:
a) Conduct manpower planning
b) Prepare manpower requirement
C) Recruit and hire store personnel
d) Train them
e) Plan work schedules
f) Motivate people to perform
g) Evaluate individual performances

6.6 EVOLUTION OF CUSTOMER RELATIONSHIP

MARKETING (CRM)
Customer Relationship Marketing (CRM) refers to all marketing activities directed
towards establishing, developing and maintaining successful relationship with their
customers. The theories and concepts of CRM draw upon a number of distinct areas
including service quahty, services marketing, customer presentation, economics and issues
related to inter personel and social interaction. However, the practice of relationship
marketing is as old as marketing and selling.
The relationship marketing philosophy suggests that at a macro level, retail organizations
should consider their impact across a broad range of market relationships in the value
chain.
The retailing industry plays an important role in the success of relationship marketing as
it serves as the major link between the supplier and the customers. Therefqre, it engages,
mantains, and enhances the relationship with the ultimate entity of the value chain, which
in turn determines the success of all the members of the value chain. The retailers have
always acknowledged the importance of long term relationship with customers in their I
business. 1
6.7 ESTABLISHMENT OF LOYALTY PROGRAMME
Retailers rely on loyalty programme extensively since it is believed that:

a) Loyal customers are cheaper to serve,

b) Loyal customers are willing td pay for more package offerings,

c) Loyal customers are strong advocates for the store's offerings.

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 A number of factors play a part in influencing the loyalty and commitment of customers,
such as the quality and value of the retailer core offerings, levels of customer satisfaction,
'elasticity' inherent in the sector or product category, other competitors in the market,
and even social, demographic and geographical influences.
Store Operations and
Management
I
One of the essential areas of focus wherein these loyalty programmes are used are
supermarkets and general retail stores, telecom industry, travel and entertainment, financial
services, hospitality industry and franchise retail outlets.
Role of Employees in Maintaining Store Loyalty
The dynamic business environment provides ample alternatives to customers, so much
so that they may buy from one store today and shift to another tomorrow, so the loyalty
programmes are considered more important. The concept of engaged employee becomes
more important especially for retail business. In this industry, the level of services bythe >
I
employee determines store patronage by the customers.
Employee retention has become important for the retail players. To build the commitment
within the employees, the companies need to assess whether adequate tools are being
provided to enable them to do their job well. The tools that the company needs to provide
are product knowledge and behaviour skills.
Monetary remuneration plays an important role in all of this. The retailers and marketers
have to initiate two-way policy theme to meet with this problem. There is a need to
generate a short term-long term interest of employees to build employees trust and loyalty.
The short-term measure is more pay and the long term is constant training to equip the
work force with new techniques enabling them to upgrade in their performance.
Monitoring and Controlling Retail Operations
As youwe aware, every business needs to be closely monitored and effectively controlled
for the purpose of growth and developments, this approach assumes significance in retail
I
11
business as the retailer.faces the challenges of increasing competition, shrinking margins
and economic slowdowns. The retail industry covers liumerous market segments and
differing business needs. The success of retailing lies in providing the consumer with the
right product-at the right time and at the right place.

6.8 MEASURING PROFITABILITY OF RETAIL STORE

II '
So far we have discussed the various planning and ratio techniques used for analysis and
profitability measures can be drawn. Retail profitability depends on
Foot falls: The number of people visiting the stores

I-I
Conversions: Percentage of the customers visiting the stores who make purchases.
Suppose the foot falls in a store are 100 but only 25 of them make purchases then
the conversion rate is 25%
Bill size: the average value of the purchases made by the customer

I 6.9 MONITORING PERFORMANCE OF RETAIL

STORE
The retail performance can be measured through several ratios. A retailer can compare

I
his performance against industry average or ratios achieved by similar retailers to judge
effectiveness alongwith defined parameters.
Sales per square feet: A sales per square feet (SPF) is a measure of how well the 73
I
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 Overview of retail outlet is using the space allocated. r not her key element is location; SPF is
Retailing
typically much higher for merchants in a destination mall, than for similar stores in

Relevance of sale per square feet in retail operations: An upward trend in

SPF is almost a positive sign of a retailer's health, whereas a downward trend in
SPF is often a warning sign that business performance is suffering - even if the
company's total sales are increasing.
Assuming the store size reasonable, there are many reasons for a poor SPF relative to
competitors, there are many reasons for a poor SPF - These are considerations for
retailers of all sizes:
1. Poor productlmerchandisemix
2. Insufficient floor inventory(i.e. empty shelves, missing sizes)
3. Un-competitive pricing
4. Poor sales & customer service personnel
5. Poor location & Non-optimal store hours
6. Poor store layout & Design
7. Insufficientlpoor marketing
8. Fixed consumer perception.
Return on Investment-An important monitoring Technique
Apart from all the above ratios used to monitor performance in retail operations, the ideal
ratio is considered to be the return on Investment. Here the investors can evaluate the
investment potential by comparing the magnitude and timing of expected gains to the
investment costs.
As an accounting valuation method, it is popularly calculated as:
#
ROI= Net Income/ Book Value of Assets .
Simple ROI works well in situations where both the gains and the costs of an investment
are easily known. Other things being equal, the investment with the higher ROI is the
better investment. In complex business settings, however, it is not always easy to match
specific returns (such as increased profits) with the specific costs that bring them, and
this makes ROI less trust worthy as a guide for decision support. Simple ROI also
becomes less trust worthy as a useful metric when the cost figures include allocated or
indirect costs, which are probably not caused directly by the action or the investment.

In this unit we have discussed the role of financial management, key issues in financial
management and different performance measures and the importance of Audit in retail
context. We also briefed the different tasks performed in a retail store. We have understood
the evolution of relatianship management in rktail context and the importance of Customer

I used in monitoring the performance in retail operations. 1 I

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