Financial Model. Accounting Principles

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Financial modeling of the project is closely associated with the necessity to allocate the resources properly. The project is mainly aimed at creating additional workplaces, developing industrial sector, and engaging in partnership with private sector. The total area of the project (including roads and utilities) will total 750 000 sq.m. (the cost of one sq.m. in Jeddah region equals 3.75 SR. Total cost will be 2 812 500 SR).

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Considering the feasibility requirements of similar projects, the key difficulty is associated with proper resource allocation practices: financial and HR resources. In accordance with the key project statements, the sectoral composition structure of the operating factories in the Kingdom at the end of 1428H shows that the manufacturing of metal products, machinery, and equipment sector is heading all other sectors in terms of number of factories (1,080 factories representing 26.5% of total operating factories). On the other hand, the chemical industries and plastic products sector occupied the leading position among other industrial sectors by size of investments (SR 188,351 million, representing 54.9% of total investments of operating factories). In the light of this statement, it should be emphasized that the actual importance of proper resource allocation is explained by the fact that cash flow forecasts generally involve several aspects of pricing and financial planning:

  • Option pricing
  • Modeling interest rate structure
  • Portfolio problems
  • Real options
  • Risk modeling

Hence, Nouncer Old financial modeling principle will be required for reviewing the project from the perspective of effective resource allocation. The growth rates for effective project development should be associated with the necessity to provide the stable basis for project implementation and effective allocation of the financial resources invested into the project.

Months Growth Annualized
3 100% 1200%
6 50% 600%
8 20% 240%
12 15% 180%
18 10% 120%
+ 7% 84%

Such growth tempos will provide the necessary stability and assuredness of the investors in the reliability of project developers.

Costs for staff employment and salaries will be as follows

Staff Cost
Type Minimum Month Annual
Management 2 SR25 167 SR 302 000
Finance 8 SR47 600 SR 571 200
Operational 37 SR74 200 SR 890 400
Gardening 7 SR10 500 SR 126 000
Infrastructure Costs
connection charges SR2 565 500.00
Area Allocated SR500 000.00
Vehicles SR270 000.00
Construction Cost per sq.m. SR500.00
total Constr.cost SR375 000 000.00
Miscellaneous Costs
Hiring Cost SR 2 813
Office Rent SR 8 301 000.00
Legal Monthly SR 87 500 000

Assumption

Assessing the project feasibility, it should be emphasized that the actual importance of the given expenses and costs is associated with the necessity to perform properly planned resource allocation. Considering the fact that the costs are mainly based on renting the land, constructing utilities and hiring personnel, project assumption should be linked with accepting the most reliable and effective resource allocation strategy. The key notion of the project assumption involves the key aspects of “organizational purpose”. It may be vague, especially if the project is immensely large-scale. So, the purpose is associated with the goal of the project: create the reliable basis for industrial development and cooperation of the government with private sector. In the light of this fact, it should be stated that the key assumption of project developers should be based on the necessity to create an atmosphere of trust and reliability for the private sector wished to cooperate with government in further projects. This assumption requires effective, professional, and reasonable allocation of the resources provided for the project. As it is stated by Dinsmore and Cabanis-Brewin (391):

Assumption plan involves two parts: Firstly, there is the basic allocation decision and secondly there are contingency mechanisms. The basic allocation decision is the choice of which items to fund in the plan, and what level of funding it should receive, and which to leave unfunded: the resources are allocated to some items, not to others.

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As for the possible contingency mechanisms, it should be stated that priority ranking system should be developed first. These priorities define the queue of investment, as it is impossible to create infrastructure previously to renting land and so on. Additionally, priority ranking defines the funding principles, and states which points of the investment plan should be sacrificed. This helps to assess the values of each point, as well as provide a brief implementation plan to investors. Considering the fact that investors wish to see S.M.A.R.T. plans, such a priority ranking may be helpful for creating such a plan:

  • Specific: the project is aimed at developing cooperation between government and private sector, as well as improving the industrial sphere of the State.
  • Measurable: the project will require up to $ 100 billion, and will take up to 5 years for implementation.
  • Achievable: the invested finances will be spent for precise and realistic aims.
  • Result Oriented: all the points of the plan are intended for creating the reliable basis for project implementation, and there are no excess points that would not make project implementation closer to the end.
  • Timely: all the phases of the project will be implemented in time, or with insufficient delays

The key assumptions of the project are based on these aspects of aim definition. These aspects are generally based on the necessity to provide an effective implementation plan for persuading investors in reliability and feasibility of the project.

Costs represented in the project are regarded as the inevitable part of feasibility assessment as well as assumption analysis. These costs are based on the objective data on the matters of construction expenses given in corresponding resources (Saudi Industrial Property Authority). The given values of assumption and resource allocation principles require traditional assessment based on the importance of analyzing the feasible approaches towards project implementation.

Accounting Principles

Accounting is the inevitable part of any project implementation process. As a rule, accounting and reporting are performed together, as they are closely interacted and their tandem provides affective mechanism for financial control, as well as control over the project implementation in general. Accounting is an indicator of efficient and successful project implementation, therefore, the general principles of accounting are stated by Riahi-Belkaoui (247):

The capital budget processes of a project are concerned with major investment practices that typically have upfront costs and longer term benefits. Investment go / no-go decisions are largely based on net present value assessments. Project accounting of the costs and benefits can provide crucially important feedback on the quality of these important decisions. An interesting specialized form of project accounting is production accounting, which tracks the costs of individual movie and television episode film production costs. A construction agency will employ production accounting to track the costs of its many separate projects.

Hence, the accounting principles should not be intermixed within various components of the project in general. Considering the fact that there are numerous angles of the offered project, investment will be more transparent if every component is invested separately. This will be helpful for better control of financial flows, hence, this will inevitably make the project more feasible.

Costs of the project are multi angled, and require accurate control. Regardless of the fact that all the possible expenses are calculated and offered in the paper, most of them depend on the tendencies of Saudi economic system development. It is considered as one of the most stable in the world, however, force majeure circumstances may violate the stability of the system as well as the feasibility of the project. Hence, risk management strategy should be included into the accounting principles. This will help to overcome the difficulties, or create a financial reserve for increasing the project implementation tempos.

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Accounting principles should be based on the statement that the general aspects of financial management should maintain tight control over strategic direction of project implementation which involves effective support of resource allocation, ensuring timely and complete implementation of project stages, as well as control of the project budget. Project accounting strategy should connect all the project spheres and activities for providing reliable reporting. Hence, accurate accounting and billing processes will be achieved. These are the inevitable aspects of project accounting and financial management. Otherwise, the project implementation will not be transparent enough, that may distract investors.

References

Dinsmore, Paul C., and Jeannette Cabanis-Brewin, eds. The AMA Handbook of Project Management. 2nd ed. New York: AMACOM, 2009.

Riahi-Belkaoui, Ahmed. The New Foundations of Management Accounting. New York: Quorum Books, 2008.

Saudi Industrial Property Authority. Commercial and Industrial Rents. 2011. Web.

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BusinessEssay. 2022. "Financial Model. Accounting Principles." February 22, 2022. https://business-essay.com/financial-model-accounting-principles/.

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