The Coca-Cola Company is one of the global giants in the beverage industry, and it has attained tremendous growth by developing a business plan that involves aggressive marketing and reinvestment of its profits. The multinational company has attained an exponential growth rate in its profits over the past several decades, but the recent past has presented challenges in sales. These challenges are a result of stiff competition from other major players in the business like PepsiCo. Coca-Cola has also seen a decline in sales owing to the many health issues that have been associated with its products. Coca-Cola’s needs to look into its financial budget to ensure that the appropriate business measures are employed to regain its large market share.
A high-level budget plan is required to attain the same. The company needs to prepare and manage its budget to limit the amount of unnecessary financial liabilities, and to prevent diminishing profit margins. This paper looks at budgeting recommendations for the Coca-Cola company in response to its financial constraints.
Positive and negative financial outcomes
If the company implements proper budgeting, the first positive financial outcome is the ability to control its expenses. The Coca-Cola Company has financial targets that are becoming harder to attain by the years because of the stiff competition that it faces, and the social constraints involving changes in consumer behavior. These challenges have led to a decline in profit margins for the company, but with a good budget, Coca-Cola can effectively attain good returns for its financial inputs. Proper budgeting will also enable the company to pinpoint financial risks that might lead to negative effects on its performance. The second positive outcome of proper budgeting will be a long-term financial guide for the company (Anwar, 2011). Coca-Cola has traditionally used a four-year reinvestment budgeting plan, and it requires to be managed effectively to ensure the long-term goals are attained.
One of the negative consequences of keeping an improper budget for Coca-Cola is diminishing returns for the company. Budgets attract financial losses if they are not properly planned and executed (Anwar, 2011). The recommended budget for the company should be followed religiously if the company is to realize the short-term and long-term objectives. Improper budget management may also lead to a financial crisis for the company. Mismanagement of financial resources will result in cost overruns for the different business process, and this will translate to lower profit margins.
Budget outline for the company
During the 2014 fiscal year, Coca-Cola had an accrued marketing budget of $2.103 billion, accrued expenses of $3.182 billion, Trade accounts payable amounts of $2.089 billion, and sales, payroll and other taxes amounting to $0.511 billion. The total accounts payable and accrued expenses for the company were $9.234 billion. The accrued maturities of long-term debt of the company were $3.552 of loans amounting to $19.130 billion (Coca-Cola Co. (KO), 2015). The recommended budget plan for the future should focus on reducing the liabilities of the company. The company should look at laying off a significant number of employees to reduce the sales, payroll, and other taxes.
The company should ensure that the remaining number of employees in its entities is sufficient to handle the various business processes. The value of sales, payroll and other taxes should be cut by a third, and this amount should be allocated to service the long-term loans. This will ultimately reduce the accrued maturities of long-term debt. The company should also reduce its marketing budget by $0.5 billion to allocate more finances to debt servicing. Coca-Cola is one of the companies with the largest marketing budget, and it has been cited as a viable strategy for harnessing a larger market share. However, with the current constraints, there are diminishing returns in the marketing segment; thus, the company should reduce its budget. The implementation phase of the budget should be addressed appropriately to ensure the company does not incur cost overruns.
Methods to manage the company’s budget
The company needs to implement a continuous budget forecasting. It is normal for budgets to get out of hand because of the unexpected internal and external organizational pressures. Coca-Cola should expect this, and the company should perform regular budget correction to ensure that the cost overruns do not go out of hand. The management function of the company should be actively involved in forecasting the budget to ensure the short-term and long-term goals are achieved.
One technique of forecasting the budget is to regularly evaluate the use of the available resources (Hofstede, 2012). The management function of the company should develop a plan to look at the allocation and use of financial resources in the different business processes. Another technique of managing a budget is by trying to ensure there is a balance between the income and the liabilities. This technique ensures that the profit margins do not get too low (Westland, 2011).
Coca-Cola can also manage the recommended budget managing the scope of the business effectively. Most of the debts incurred by companies are a result of cost overruns caused by the emergence of business processes that were not included in the initial plan. The Coca-Cola Company should ensure that these cost overruns are limited to reduce the organizational debt. The organizational debt of the Coca-Cola Company is a major cause of the low-profit margins (Westland, 2011).
An action plan to resolve budget misalignment
In the event of Coca-Cola facing financial challenges that cause the actual amounts of money that it spends to become significantly off target from the budgeted amount, an action plan must be implemented. The action plan should involve three phases, including management of scope creep, deploying a technical team to control the finances, and borrowing. Management of scope creep is one of the most effective ways of ensuring that cost overruns in business processes do not get out of hand (Roberts, 2011).
Coca-Cola should ensure that the business processes that attract cost overruns are controlled through the elimination of the unnecessary expenses. If this is not possible, financial experts should be deployed to look into ways of saving money from other business processes to allocate the surplus to the affected processes. If this is not possible, the last option should be borrowing to cover the financial deficits (YIN, 2010). Cost overruns can jeopardize the profit margins, but they can also be turned into advantages through strategic borrowing. Borrowing is a budgeting technique used by companies to cover their financial deficits (Edge, 2015). This technique can be risky if the borrowing is recurrent. For instance, the current debt status of the Coca-Cola Company can easily get out of hand if the company continues to accumulate the debt.
References
Anwar, M. (2011). Budgets-Positive and Negative Effects. Web.
Coca-Cola Co. (KO). (2015). Web.
Edge, K. (2015). Methods of financing the deficit and use of a surplus. Web.
Hofstede, G. H. (Ed.). (2012). The game of budget control. London: Routledge.
Roberts, P. (2011). Effective Project Management: Identify and Manage Risks Plan and Budget Keep Projects Under Control. Kogan Page Publishers.
Westland, J. (2011). Project Management: 4 Ways to Manage Your Budget. Web.
YIN, G. L. (2010). Project Time and Budget Monitor and Control. Management Science and Engineering, 4(1), 56-61.