Budgeting is one of the necessary tools to beat the current economic depression enveloping many countries around the world. purchasing the optimum quantity is the best way to control storage and order expenses.

       Management must learn to control expenses. This is very true in the food industry. Cooked food would spoil in the few hours. Uncooked food usually spoils in a few days when refrigerated. Spoiled food can be equated with money going down the drain. Reducing expenses must reach the level of having just enough inventories to fill the clients’ needs. Telling a customer “sorry, we are out of stock right now.” would surely create a negative image of the company (Reilly & Brown, 1997).

        Budgets must be based on realistic figures. The amount of ingredients to be bought for the day should be based on the projected day’s projected sales figures. The forecast should be grounded on the average actual sales figures for the past week, month or even year. We have to also include in our analysis the inventory beginning and the projected inventory end to come up with the amount of ingredients to be bought.  This is one of the best finance formulas in estimating the amount of money one has to spend for purchasing the raw materials or ingredients to produce a finished product (Weston & Brigham, 1993).

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         Buy with the aim in mind of reducing storage and delivery expenses. Buying too much inventory could result to inventory end that spoils, rusts or becomes obsolete. Unsold ingredients and other inventory items will increase storage and other period costs. Obsolete and spoiled inventory permeates to a decrease in net profits. The best financial management strategy would be to estimate the Optimum number of ingredients or raw materials or products to be bought (Weston & Brigham, 1993).

     Buying only the Optimum Order Quantity increases net profits. It would definitely reduce storage expenses and ordering costs. The Optimum order is arrived at by implement the financial management tool known popularly as the Economic Order Quantity formula. This formula includes the order cost, the carrying cost and the customer’s annual demand in projecting the optimum number of purchases to be made (Weston & Brigham, 1993).

References

Reilly, F., Brown, K., (1997), Investment Analysis and Portfolio Management, N.Y.

      London Sydney, Dryden Press

Weston, J., Brigham, E., (1993), Essentials of Managerial Finance, N.Y. & London, 1993, Dryden Press.