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Chester and Wayne Cash Budget
Chester & Wayne Budget Analysis
After preparing the cash budget, including sales and expenses, for the Fourth Quarter of the year, it is important to review the information carefully. There are a number of trends and instances which are a cause of interest regarding the budget, especially in regards to the rising costs of goods and the decreasing margins. Thus, it is important to discuss such events with Mr. Chester and Mr. Wayne.
First, it is clear that the costs of goods are increasing, which is driving down the margin. In September, the costs of goods sold were $551,250. However, this number jumped to $638,120 in December. Yes, this was due to an increase in sales altogether; yet this also leaves the company vulnerable to rising costs of business as well. In this volatile economy, suppliers have begun raising prices. Yet, at the same time, it would be a mistake for Chester & Wayne to increase prices to make up for the lost margins because many of their competitors are keeping prices much lower. In fact, major food retailer Wal-Mart has such a dominating force in the market that it can negotiate and force supplier prices down, where Chester & Wayne cannot (Geller & Wohl, 2012). This creates a situation where Wal-Mart is...
Yet, Chester & Wayne are at the whim of suppliers, but increasing unit prices would leave them at a disadvantage to other competitors, like Wal-Mart. To compensate, there are other measures that can be taken. The company could raise its desired monthly cash balance to a higher amount, closer to $150,000 in order to have greater flexibility when prices of supplies rise. This would mean lowering monthly investments into marketable securities as needed when profits are high, which may have a long-term impact. However, it keeps the current margins at a more desirable amount during price increases with suppliers.
Additionally, the executives were concerned about frequently occurring stock outs, where there was not enough inventory to fill rising demands. Due to this, they wanted to see what would happen if inventory levels were raised to 30% or 40% instead of the 25% of sales they were set at now. It is true that sales have been increasing with each passing moth, therefore demanding higher inventory amounts. Stock outs can be extremely costly, since they deny a company the ability to meet increasing demands for products (Kokemuller, 2014). This would ultimately help bump up inventory, but it would also eat into…
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