Chester & Wayne Case Study

Chester & Wayne is a company at cross roads when it comes to a several of operational issues tied to cash-flow. The business budget can be used to demystify the issues. Table 1 in the appendix section shows a cash budget and other supporting schedules for the business in the fourth quarter. The following sections of this paper discuss each operational issue as the owners of the business would like advised.  First is the issue of the relationship between gross margin and borrowing, second is stock levels and finally is the discount problem. 

The gross margin is something that managers often know has the potential to affect their functions and ability to optimally manage their businesses in terms of profit making and pricing of products among other business dynamics. High purchase prices, often a costing decision is a sure way to adversely affect the gross margin. High purchase prices will lead to an increase in borrowing due to an increase in cost of business. It is therefore true that if high purchase prices will obviously lead to a shrink of gross margins to 27.5%. According to Kaplan & Norton (2001), placing a tab on gross margins is a sure way of being in control of the pricing problem, the sales function and ultimately maintaining the concept of the business as a going concern. 

An increase or a decrease in inventory levels is a decision that comes with various costs. When there are stock outs, a business is likely to be in a position of struggle. The position does not come with actual financial loss but it comes with loss of sales and customer satisfaction. This might be the case if there are no penalty clauses between the business and its clients. If the clause exists, stock outs might lead to financial losses. An increase in inventory comes with storage and handling charges and it is the role of Mr. Chester and Mr. Wayne to identify the costs likely to be incurred and compare the same with the benefit the same is likely to bring to the business. If an increase in inventory levels is favored, they should execute the idea. Considering concepts like Just in Time should be done before arriving at the decision to increase inventory levels. As explained by Keller et al, (2006), firms should evaluate their internal functions (such as inventory levels) to ensure that there is optimal or near optimal level of operations. Keller et al, (2006), goes ahead to say that with such evaluation of internal procedures, there is a tendency to discover opportunities that can be further exploited to leverage on performance. 

One obvious eventuality of delayed payments to the business of Mr. Chester and Mr. Wayne is an increase in borrowing. Increased borrowing comes with increased costs. On this note, I would strongly suggest that discounts be increased to ensure that there is more collection of payments promptly. For instance, in the month of October sales for the two scenarios would appear as shown in the Table 2 below, for the same month, if a 3% discount is implemented, discounts total to $ 9,450. 

Appendix

Table 1

CHESTER & WAYNE CASH BUDGET FOR THE 4TH QUARTER
	OCTOBER	NOVEMBER	DECEMBER	TOTAL Q4
Beginning Balance	142,100.00	120,000.00	120,000.00	382,100.00
Receipts:				–
Receivable Collection (1)	730,575.00	767,056.00	805,424.00	2,303,055.00
Rent Income	24,000.00	–	–	24,000.00
Total Receipts	754,575.00	767,056.00	805,424.00	2,327,055.00
Total Cash Available	896,675.00	887,056.00	925,424.00	2,709,155.00
Disbursements:				–
Accounts payable (2)	702,339.00	643,743.00	642,738.00	1,988,820.00
Other Payable (3)	134,886.00	136,365.00	142,928.00	414,179.00
Equipment Purchases	–	250,000.00	–	250,000.00
Dividends	–	–	45,000.00	45,000.00
Total Disbursments	837,225.00	1,030,108	830,666.00	2,697,999.00
Balance before Loans and Investments	59,450.00	(143,052.00)	94,758.00	11,156.00
Sale(purchase of Investments)	60,550.00	263,052.00	25,242.00	348,844.00
Loans needed (repaid)	–	–	–	–
Ending Cash Balance	120,000.00	120,000.00	120,000.00	360,000.00

Supporting Schedules 

Purchases on other Expenses
	Oct	Nov	Dec
Cost of goods Sold	599,430.00	629,445.00	660,910.00
Add Ending Inventory	157,361.30	165,227.50	168,562.50
Less Beginning Inventory	(150,388.00)	(151,935.00)	(159,530.00)
Total Purchases	606,403.30	642,737.50	669,942.50
Selling & Admin	111,340.00	113,352.80	115,580.00
Advertising	24,804.00	23,011.68	27,348.00
Total to be Paid	742,547.30	779,101.98	812,870.50

Table 2 

No Discounts	3% Discount
From Prior Month without discount 0.6*787,500	472,500	From prior month 0.3*787,500	236,250
Sales for Oct 0.4*826800	330,720	No Discount prior month 0.25*826,800	206,700
		Sales for Oct 0.6*826,800	496,080
Total Collections from Sales	803,220	Total  collections from sales	939,030
Discount	0	Discount	9,450

References 

Keller, S. B., Lynch, D. F., Ellinger, A. E., Ozment, J., & Calantone, R. (2006). The impact of Internal Marketing Efforts in Distribution Service Operations. Journal of business logistics, 27(1), 109-137.Kaplan, R. S., & Norton, D. P. (2001). The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business Press.