How will zero-based budgeting impact Unilever?

Unilever is a multinational consumer goods company headquartered in Rotterdam, Netherlands, and London, United Kingdom. Some of its major brands in the U.S. include Dove, Hellman's, Lipton, and Ben & Jerry's. The company is organized into four main divisions including Foods, Refreshment (beverages and ice cream), Home Care, and Personal Care.

Despite reporting better than expected results for 2015, the Unilever CEO, Paul Polman, has warned that the company expects tougher market conditions in 2016. Speaking in mid-January 2016, Polman pointed to the volatility in the stock market in January 2016 as evidence of the tougher market conditions.

Polman stated that Unilever is rolling out a zero-based budgeting initiative across the entire company. This initiative is expected to save approximately €1bn (about $1.09 billion in US dollars) per year by 2018. Unilever is seeking steady improvement in its operating margin and strong cash flow.

Questions

 

1. What is zero-based budgeting?
2. What is operating margin?
3. How would zero-based budgeting help Unilever increase its operating margin?
4. How would zero-based budgeting impact Unilever's cash flows?
5. What benefits does zero-based budgeting potentially hold for Unilever? What disadvantages?
6. Put yourself in the position of a brand manager for Unilever. Imagine that your brand has been performing well over the past three years. How would you feel about the zero-based budgeting initiative? How could this impact your work performance?

1)Zero budgeting;

Under the conventional budget the target of next year is established on the basis of past performance. However under zero based budgeting thus future targets are established purely on the basis of future projection completely ignoring the past performance. In other words the no base for the establishment of future targets.

This concept demands the justification for the occurrence of every rupee it focuses on why expenditure is required instead of what expenditure is required.

This approach of zero based budgeting is labor intensive and time consuming.

Step-by-step explanation

1)Zero budgeting;

Under the conventional budget the target of next year is established on the basis of past performance. However under zero based budgeting thus future targets are established purely on the basis of future projection completely ignoring the past performance. In other words the no base for the establishment of future targets.

This concept demands the justification for the occurrence of every rupee it focuses on why expenditure is required instead of what expenditure is required.

This approach of zero based budgeting is labor intensive and time consuming.

2)Gross profit means the profit earned made by the company solely out of the sale of those products or rendering of those services in which the company deals. In order to compute these all the expenses which are directly incurred for the production of thses goods and rendering these services deducted.

Gross profit can be calculated as Gross profit = revenue - cost of goods sold.

3)Help provided by zero based budgeting to UL to increase its gross profit.

Previous years performance is often used by the company to establish a target to current year this may may lead increase in profit year after year. By using zero based on budgeting where the future targets are implemented using projections of future and not giving any significance to past performance to profit which comes out is more realistic/

When UL company used this technique it was found out that certain expenses which were previously incurred and were being included in every budget by virtue of being considered as base expense no longer needs to be expended . This saves UL company 1 billion worth of expenses.

Hence zero based budgeting helps to increase gross profit.

4.

Impact of zero based budgeting on cash flows of UL. 

Zero based budgeting will lead to better management of cash flows because all expenses such as the cost of goods sold or labor cost are justified by management instead of using previous years figures as a base.

Therefore zero based budgeting will lead to improvement of cash flow.

5.

 Advantages and disadvantages of zero that it holds for UL.

 Advantages

Efficiency zero based budgeting leads to allocation of resources efficiently in each department because actual figures are used rather than through previous figures.

Accuracy. It makes the management to look at all costs and cash flows to compute their operating cost instead of using the previous year figures.

Coordination and communication. Zero based budgeting leads to improved communication and coordination and employee motivation.

Disadvantages.

Labor intensive preparing an entire budget from the scratch requires a large number of the employees involved.

Time consuming It consumes more time for the company to prepare a budget from the scratch every hear instead of using figures of the previous year.

6.

The brand has been preforming well in the previous three years. There may be some resistance from the employees for preparing time consuming and labor intensive process of preparing zero based budget and employees may lose motivation and become frustrated.

Especially if employees are not be able to understand the need of the reason for preparing zero based budget even if the brand is preforming well.

Hence in the given case zero based budgeting lead to conflict between organization and brand managers..