Chapter 9, Problem 9.2SE

Explain why companies use zero-based budgeting (Learning Objective 1)

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

Despite reporting better than expected results for 2015, the Unilever CEO, Paul Polman, warned that the company expected 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 would be rolling out a zero-based budgeting initiative across the entire company. This initiative was expected to save approximately €1 billion (about $1.09 billion in US dollars) per year by 2018. Unilever was seeking steady improvement in its gross profit.

Requirements

1. 1. What is zero-based budgeting?
2. 2. What is gross profit?
3. 3. How would zero-based budgeting help Unilever increase its gross profit?
4. 4. How would zero-based budgeting impact Unilever’s cash flows?
5. 5. What benefits does zero-based budgeting potentially hold for Unilever? What disadvantages?
6. 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?