Case: Chester & Wayne Budgeting in a business is important for so many reasons. Business leaders often deal with large amounts of money, and some employees or outsiders might see the organization's revenue as nearly limitless. Regardless of the business cash on hand, though, careful budgeting plays a critical role in any organization's success. Chester & Wayne is a large regional food distribution company and the CEO of the company has asked for some assistance in preparing a budget for their cash flow. With the information provided by CEO, Mr. Wayne, the budget will be carefully planned. By having a firm plan in place you can easily see, over the year, in which months you are making a profit and you can track this against each individual month to see how your business actually performed in relation to your budget. When you are able to see what you planned and what actually happened, you will then be able to easily identify any differences – where they occurred, why they happened and how you can adjust your budget or spending to get on track” (Loubser, 2011). First, a cash budget for each month of the fourth quarter and for the quarter in total will be prepared.
The reason Mr. Wayne thinks that the gross margin may shrink to 27. 5 percent because of higher purchase prices. He is concerned about what impact this will have on borrowings. Because share prices move frequently, and company is exposed to the risk that the shares might fall in value.
If margins decrease it a chance that they could possible impact them receiving loans. Being that there was an increase in sales there could mean a decline in customer or bringing in more customers. Since there is a decline in the margins and an increase in sales Mr. Wayne is worried about stocks which is normal. “Stock out" has no dollar value, it usually represents inventory that is owned by the company but physically not in their warehouse. He acknowledge the fact that there will be stock out and in this case this could help or harm the company. Researchers found that customers experienced less negative emotion when the online retailer acknowledged the stock-out. Compared to simply acknowledging stock-outs or giving a backorder option, financial compensation such as discounts on next purchase was more effective in mitigating the negative impact of stock-outs on patronage intention (Marineau, 2011). For a supplier or retailer, stock-outs are simply a part and parcel of doing business—with hundreds, thousands or even hundreds of thousands of SKUs, it’s unsurprising when a marginal few are unavailable.
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This could be of an inconvenience to Mr. Wayne so that is why the concern of stock outs. Budgets usually represent a detailed analysis of how a company expects to spend money in future time periods. The increase of discount could help the company but discontinue the cash discount for prompt payment could possibly harm the company. Many companies create budgets on an annual basis so they can carefully outline the expected needs of each department in the business. Using an annual budget process also limits the amount of time companies spend creating and managing capital resources.
Mr. Wayne should take in consideration that budgeting can only help the company.
- Loubser, T. (2011, November 7). Retrieved April 7, 2013, from Why budgets in business are a must have: http://www. efinancialmanagement. com. au/accounting/why-budgets-in-business-are-a-must-have/ Marineau, M. (2011, April 12). KVAL. com.
- Retrieved from OSU study: 'Stock-outs' bad for e-commerce: http://www. kval. com/news/business/119732304. html Schneider, A. (2012). Managerial Accounting: Decision Making for the Service and Manufacturing Sectors. San Diego: Bridgepoint Education, Inc.
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