Introduction
Effective budgeting contributes to improved company outcomes. It should consider financial constraints, achievement of targets, and accounting conventions. Budget production often begins with determining management’s basic expectations about the upcoming year. At this stage, management must balance the needs of all stakeholders and their expectations of financial performance (Oliver and Nin, 2019). Almarai’s goals by 2025 are to achieve 1.5X market growth, RONA > WACC+2%, top quartile employee satisfaction, preferred consumer brand, and Almarai’s 2025 sustainability goals (Almarai Company, 2021, p.29). These goals are considerable; therefore, when budgeting for the next few years, it is necessary to consider them and evenly distribute the available resources for achievement.
The second thing to rely on is the limited resources and financial constraints. Financial constraints are often characterized as an inelastic supply of finance, indicating a constraint on firm decisions whenever internal financing is insufficient (Cherchye et al., 2020). In Almarai, the finance function is responsible for financial controls, the preparation of detailed budgets for each business unit, and monitoring performance against such budgets through the production of monthly management accounts.
Almarai relies on financial constraints in its budgeting. Due to the highly competitive market, the prices are affected by the market conditions, which change dynamically. The company needs to remain flexible to adapt to new conditions. Continuous development, improvement of production technologies, and cost reduction play a vital role in being competitive. Given the specifics and marginality of the product, the company always needs to look for a balance between volume and margin.
Assessing a Budget
Almarai takes a hybrid approach to traditional budgetary control methods. The finance function and management control actual performance monthly. This performance is constantly compared against the budgets to detect variances in the early stages. If deviations are detected, a series of corrective actions are taken. Then the event is analyzed to avoid it in other markets and regions and prevent the same in the future.
A flexible approach is applied where strict and inflexible adherence to the annual budgets is not promoted. The flexible approach considers the behavioral patterns of different costs (Rumble, 2018). Companies should plan on changing or amending plans on a monthly or quarterly basis, with an emphasis on real-time evaluation and decision-making. (Kunnathuvalappil, 2020). The company stayed on budget for the past month, which means that the company is on the right track. However, the budget may require changes based on the financial picture for the next month. New Income & Expenses Spending for the next month will change based on the seasonal market fluctuations. Seasonal fluctuations in sales can be reflected in the month’s budget (Weygandt, Kimmel, and Kieso, 2018). These are changes that occur regularly and may be forecasted based on Almarai’s previous years’ data.
In 2020 and 2021, Almarai Company used top-down budgeting. It means that the budget is created by upper management and then routed to department managers for implementation (Amar, 2022). The process of evaluating the budget may reveal hidden problems in spending, known as budget leaks. In Almarai’s budgets were not found such leaks, however, the need for regular review and evaluation of budgets remains, as they can appear in the future. As market conditions change, the companies must constantly re-assess (Weygandt, Kimmel, and Kieso, 2018). It will help the budget always remain relevant and consistent with the company’s goals. In general, the assessment of budgets in the company is effective and corresponds to the goals, opportunities, and limitations.
Budget Supporting Organizational Objectives
It is necessary to mention organizational objectives to identify how a budget for Almarai can support organizational objectives and targets, considering financial constraints and accounting conventions. They have a strong focus on operating efficiencies and asset optimization, increased investment in innovation and marketing, expansion into new growth areas, organically and via acquisition, and technology enhancements, with a focus on digitization (Almarai, 2020). Almarai is a complex organization with a high number of resources. At the same time, achieving organizational objectives is complicated due to the number of stakeholders and steps that need to be followed in a process.
Above all, the budget guideline is a statement of the chief executive’s priorities or objectives for this year’s budget (Duncombe, 2018). Therefore, the objectives of Almarai are the sources of all the budgets that are prepared annually and monthly and a visual financial guide to action. Planning requires managers to look ahead and establish diverse objectives, maximizing short-term and especially long-term (Ushakov, 2018). These plans form the basis for monthly and yearly budgets.
Since a budget is a numerical representation of an organization’s financial plans, it involves a multistage process to produce a plan, which will be implemented through actions (Phillips, Newman, and Subramanian, 2018). Budgets act as a roadmap for Almarai managers to achieve company goals. They also define some of the company’s objectives since the resources, although considerable but still limited. The budgeting process makes it clear that some objectives are out of reach at this stage, while others can be achieved in a much shorter timeframe than management anticipated.
Criteria by Which Proposals Can Be Judged
Different departments in Almarai may have different needs in the presentation of financial proposals, but they are some of the most universal and applicable in real life. It is essential that financial proposals for expenditure meet specific criteria to make sense to the managers who are going to use them for making decisions. One of the criteria used to evaluate financial proposals is relevance (Madura, 2020). It assesses if correct and in-time data were used in financial proposals. Lack of accuracy, miscalculation, or untimeliness may have disastrous effects on the project.
The second criteria are comprehensiveness and consistency. Financial proposals should take into account all aspects of the company’s activities and take into account their specifics and features. All elements of any system must be able to “live with” (function in some way) in the system, or the system will not work (Buck, 2020). Without any consequences, it is impossible to transfer resources and finances from one project to another. Therefore, it is important to evaluate each aspect separately and then consider it in the context of the entire company. The third criterion is risk assessment. The desirability of a proposal should be considered based on its profit and risk. If profit alone is considered, a firm may commit to a risky action (Mehta, 2020). Assessing the risks is the most important activity for any capital expenditure project. It is critical that all risks have been considered and the risk mitigation strategies devised.
The Viability of a Proposal for Expenditure
Almarai is one of the stable companies with continuous growth, which can be easily recognized from its annual financial statements and has occurred due to turning points (WSJ Markets, 2022). The company has continuous growth potential, as evident from its annual financial statements (Mohamad and Asfour, 2020). CAPEX incurred in 2021 amounted to SAR 1.3 billion, which is a slight increase from 2020. Expenditure was incurred as follows: Sales Depot, Poultry and Logistics expansion accounted for approximately SAR 0.3 billion. Replacement and other CAPEX accounted for approximately another SAR 0.4 billion (Almarai Company, 2021). The proposition is SAR 0.3 billion for capacity expansion projects, including the poultry plant expansion.
Net present value method: NPV = total of PV of cash inflows – a total of PV of cash outflows. The higher the NPV better the proposal. The net present value calculated using a 10% return for this proposal is SAR which is positive. The projects with the highest NPV may be chosen for further evaluation as a prospective one (Hulme and Drew, 2020). NPV helps to compare various alternatives, but it does not reflect many other non-financial factors that may affect the project in the long term (Pattavina, 2018). Sometimes among propositions, the one with the highest NPV may be less favorable due to the impact on the quality and reputation of the company or involvement of staff.
Strengths and Weaknesses of a Proposal
Strengths and weaknesses are both internal factors and serve to evaluate the proposal from a qualitative point of view. They are characteristics of a proposal that give it a relative advantage or disadvantage over other proposals (CFI Team, 2022). It is a subjective area where the judgment of the decision-makers plays a significant role. The strengths and weaknesses of a proposal are not stated in absolute terms. (OECD, 2020). The same attribute can be a strength in some situations, whereas it can be a weakness in others. The strengths of this proposal are as follows: according to the NPV indicator, this proposal is considered ‘promising’. Regarding the evaluation criteria, the proposal is relevant, comprehensive, and consistent. Strengths include a quick payback period, although this aspect requires a more detailed study for forecasting. Proposal directly affects the organizational objectives of the company and leads to their achievement.
A focus on achieving the objectives raises the level of productivity and affects positively the company’s ratios and financial statements. (Bint-Tariq & Nobanee, 2020). Weaknesses include insufficient risk analysis, such investment requires a thorough and extensive risk assessment project. In addition, the proposal requires tangible capital investments, which may adversely affect the balance sheet and other financial statements.
Analysis of the Viability of a Proposal
Implementing a proposition only makes sense if the project itself is sound and the expected results will have a positive result for stakeholders. In order to make the right decision, management should be capable of prioritizing between various proposals as to the best cost-benefit ratio, and lowest risks (Kaili, Psarrakis, and Hoinaru, 2019). This process should evaluate certain capabilities of a project, such as an impact on organizational objectives, strengths and weaknesses, financial viability, risk assessment, and impact of financial ratios. A limitation of the method is that all evaluation criteria are treated as equally important. When some criteria are clearly more important than others, a method called weighted rating is used instead, wherein the relative importance of each criterion j is indicated with an assigned weight w. After a given criterion has been scored, the score is multiplied by the weight of the criterion (Nicholas and Steyn, 2020).
Conclusion
The proposal for Almarai appears to contribute toward the organizational objectives, such as increased investment in innovation and technology enhancements. Moreover, expansion into new areas provides for a further increase in the volume of production and an increase in its efficiency, which is the main goal of the selected proposal. Although a detailed risk analysis has not been carried out, being in the same sector, the organizational risks of this proposal may be minimal.
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