Quiz 12: Operations Management: Financial Dimensions


Relationship of assets, liabilities and net worth: Assets are any items with monetary value that a retailer owns. Liabilities are financial commitments that a retailer incurs upon operating a business. Net worth is the value of the retail business after deducting the financial commitments. The balance sheet itemizes these items at a specific point in time. The balance sheet helps the retailer in managing and controlling the assets and liabilities. The mathematical relationship between assets, liabilities and net worth is:

Assume that a retailer has net sales of $1.075, 000; net profit of $185,000; total assets of $600,000 and a net worth of $225,000. a) Calculate the asset turnover, profit margin and return on assets: Calculation of asset turnover: Therefore, the asset turnover of the retailer is Calculation of profit margin: Therefore, the profit margin of the retailer is Calculation of return on assets: Therefore, the return on assets of the retailer is. b) It is asked to determine financial leverage and return on net worth. Calculation of financial leverage: Therefore, the financial leverage of the retailer is Calculation of return on net worth: Therefore, the return on net worth of the retailer is c) The evaluation of the retailer requires information on the type of retail institution, degree of growth and more. However, the profit margin of 17.2 percent; return on assets of 30.8 percent and an 82.2 percent return on net worth can be regarded as best performance for any type of retailer.

Methods to increase the asset turnover in convenience stores: The asset turnover of the company can be mathematically defined as: Asset turnover of the company can be increased by increasing sales with the same level of assets or maintaining sales with reduced assets. In addition, the convenience store can increase its asset turnover by implementing the following strategies: • Increase in the operation time • Ensuring no stock outs on key items • Reducing inventory • Reducing product proliferation • Using refurbished store fixtures • Outsourcing delivery • Leasing versus owning buildings and capital equipment