The rise of zero-based budgeting
More food companies are adopting the practice of zero-based budgeting in an attempt to manage costs and boost profits. What is zero-based budgeting? Who is using it and why? And how does it help?
Zero-based budgeting is not a new concept. It was developed around five decades ago by Peter Pyhrr, an account manager at semiconductor firm Texas Instruments. After being taken up by US president Jimmy Carter in the 1970s, the method fell into obscurity. Recent years have seen it experience a revival in the food industry. In this series of articles, just-food examines zero-based budgeting and asks if it is a miracle diet for packaged food companies seeking a shapelier margin profile.
The process of zero-based budgeting removes the budget's baseline and requires every cost to be justified. In contrast to other budgeting techniques, it encourages critical thinking of historic expenses. It can offer big savings - but the process can also be complex, convoluted, costly and there are no guaranteed economies. Execution is key. In just-food's final part of our special report on zero-based budgeting, we look at best-practice on the implementation of the strategy.
Zero-based budgeting is essentially a cost-control mechanism. By re-setting each line of the budget at zero, it focuses attention on expenses and challenges existing costs. There are, however, contradictory views about whether the adoption of this method is supportive of revenue growth while its risks and limitations mean that it is not necessarily a good fit for everyone. Katy Askew reports.
A growing body of food makers are adopting zero-based budgeting as a tool to reduce costs and improve resource allocation. The method has also proven popular with investors with a focus on return on invested capital. However, it is not a one-size-fits-all answer to the challenges facing CPG companies today. In the second part of our series examining zero-based budgeting, Katy Askew takes a look at the pros and cons associated with the method.
Kellogg last week announced mixed second-quarter results, with growth in underlying operating profit above analyst expectations but reported revenue missing forecasts on Wall Street and underlying sales declining. However, the Special K and Pringles maker lifted its forecast for underlying earnings per share for 2016 - and raised its target for underlying operating margin for 2017/18. Its shares closed up on the day. just-food provides the most important talking points from what was a detailed announcement.
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