Question

PART C: Profit Planning

Kamel Company is a chain of retail outlets selling closing, its sales have increased from $370 million to $780 million over the last five years. The company’s gross profit is currently 20% of sales, the mark-up on the cost of goods and retail store running costs is 25%. Corporate overhead is $22 million and the operating profit is $134 million.

The company’ finance director has produced a budget, which has been approved by the board of directors, to increase sales by 20% next year and to improve operating profit margin to 20% of sales. Corporate overheads will be contained at $25 million.

The strategy determined by the marketing director is to continue expanding its sales by winning market share from competitors and by increasing the volume of sales to existing customers. The company also intends to open new stores to extend its geographic coverage.

Star Company also plans to improve its cost effectiveness by continuing its investments in major regional warehouses and distribution facilities servicing its national network of stores, together with upgrading its information systems to reduce inventory and delivery lead times to its retail network.

Required:

Produce the relevant financial information for the senior management team to support the business strategy.

Identify any financial and non-financial details arising from the strategy that need to be addressed. (250 words)

Answer 1

A) Relevant Financial Information

$M	Current	Budget
Net Sales	780	936
COGS	624	724
Gross Profit	156	212
GP% to Sales	20%	23%
Less : Overheads	22	25
Overheads % to Sales	3%	3%
Operating Profit	134	187
Operating Profit % to Sales	17%	20%

If we look at the financials, the company has a lower gross margin leading to a lower operating profit.

To ensure, a 20% operating profit on Sales, the company will have to optimize the Cost of Goods sold and bring up the Gross Margin % to 23 from the current 20%. The Overheads should also be tried to be contained at the current year levels.

Geographic expansion will entail higher revenues, but the set up needs to keep a tab of fixed costs which it will incurr if the business doesnt pick up. Cost of running the retail store, depreciation on assets etc.

Startegy to use major regional warehouses should give the company economies of scale and help reduce the storage cost in return.

Invetsing in inofrmation system will involve huge Capex for the company. If they are a cash rich company, this startegy would work for them giving them more granular visibility of the inventory helping them to plan the movement and further production/purchases.

A shorter delivery time can attarct more customers, because the company would be ableto fulfill the orders early which would be very much appreciated by the old and new customers.

B) Kamel comapny is a chain of retail outlets haing an increase in the sales from $370 million to $780 million over last five years, ,impllies that asles have increased aound 110.81 % in the 5 years and it is a very good growth.

Strategy takes into acount decisions such as make increament of the market share with the increase teh share of the market with the increment of company's growth & volume of the goods sold. This very staretgy could be supported by opening much more stores and then extending teh grographical area. As product/services will actually be much more be available easily, customer will be available, customer would prefer more buying it and hence it will increase sales & it will help while achieving an increase in the sales of 20% in teh next year.

As the Company makes plan to mke the promotion or improve the cost effectiveness with continuing the investments in a major reguonal ware houses as well as dsitribution facilities servicing its national network of stores , together having ugrading its information systems for reducing the inventory & delivery will lead times to its retail netwrok, it will really won't only reduce cost/unit , though it will also help while making increase in an efficiency and it will increase profit in market.

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