Chapter 5: ‎ Evaluating Business Performance

Contents:

5.1

Evaluating the Performance of a Merchandising Company

5.1 Evaluating the Performance of a Merchandising Company 

In evaluating the performance of a merchandising business, managers and investors look at more than just net income. Two key measures of past performance and future prospects are trends in the company's net sales and gross profit.

5.1.1 Net sales

Most investors and business managers consider the trend in net sales to be a key indicator of both past performance and future periods. Declining sales, on the other hand, may provide advance warning of financial difficulties. 

5.1.2 Financial analysis  

As a measure of performance, the trend in the net sales has some limitation, especially when the company is adding new stores. For these companies, an increase in the overall net sales in comparison to the prior year may have resulted solely from sales at the new stores. Sales at existing stores may even be declining. Business managers and investors often focus on measures that adjust for changes in the number of stores from period to period, and on measures of space utilization. These measures include:

 Comparable Store Sales. Net sales at established stores, excluding new stores opened during the period. Indicates whether customer demand is rising or falling at established locations. (Also called same-store sales.) . 

Sales per Square foot of Selling Space. A measure of how effectively the company in using is physical facilities (such as floor or, in supermarkets, shelf space).

5.2

The Cash Budget as a Control Device

Many businesses prepare detailed cash budgets that include forecasts of the monthly cash receipts and expenditures of each department within the organization. Management (or the internal auditors) will investigate any cash flows that differ significantly from the cash transactions occurring within his or her department.

5.2.1 Short-Term Investments

 Companies with large amounts of liquid resources often hold most of these resources in the form of marketable securities rather than cash.

5.2.2 Case In Point

 The first and most liquid asset listed in a recent balance sheet of Microsoft Corporation was "Cash and short-term investments … $ 8.94 billion."  But who wants nearly $ 9 billion sitting in a corporate checking account and not earning any interest? Certainly not Microsoft. A footnote indicates that less than 10% of this asset was held in the form of cash. More than 90% was invested in short-term interest- bearing securities. If we assume Microsoft earns interest on these investments at in annual rate of, say, 5 %, that's nearly $ 450 million in interest revenue per year.  

Marketable securities consist primarily of investment in bonds and in the capital stocks of publicly owned corporations. These marketable securities are traded (bought and sold on organized securities exchanges, such as the New York Stock Exchange, the Tokyo stock exchange, and Mexico's Bolas. A basic characteristic of all marketable securities is that they are readily marketable – meaning that they can be purchased of sold quickly and easily at quoted market prices. 

Investments in marketable securities earn a return for the investor in the form of interest, dividends, and – if all goes well – and increase in market value. Meanwhile, these investments are almost as liquid as cash itself they can be sold immediately over the telephone, simply by placing a "sell order" with a brokerage firm such as Merrill lynch or Salomon Smith Barney, or on the Internet, by using an online brokerage firm such as Dlj Direct.

Because of their liquidity investments in marketable securities usually are listed immediately after cash in the balance sheet.