In recent years, The Coca-Cola Company (KO) is facing decreased global demand fo

Question

In recent years, The Coca-Cola Company (KO) is facing decreased global demand for its soft drinks due to customer health concerns about the sugary drinks. It has responded to decreased demand with a variety of ways, including cost cutting measures.(Trivia: Coke sells Coca-Cola in every country in the world except for Cuba and North Korea.)

In January 2015, Mike Esterl of the Wall Street Journal reported that Coke is using zero-based budgeting throughout its organization. In addition, Coke is standardizing operations across its business units. It expects to complete the cost-cutting by 2019.

Required:

You are the Accounting Manager coordinating the budgeting process.  

You need to compose a Business Memo to management responsible for preparing budgets for their own departments at The Coca-Cola Company.

Use the information from the discussion draft you posted, your classmates posts, and the comments received from classmates.

Your memo must include the following information (see the rubric for specific grading instructions):

Note: You are not simply responding to the questions, but weaving the information from the Week 12 Discussion Draft posts into a memo that speaks to the role listed above.

What is zero-based budgeting?

Why might Coca-Cola want to use zero-based budgeting?

Do you expect that managers at Coca-Cola would embrace zero-based budgeting? Why or why not?

Why would standardizing operations across business units help with cost-cutting?

Explanation / Answer

1.Zero-Based Budgeting - ZBB

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a "zero base," and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.

Zero-based budgeting allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped and then measured against previous results and current expectations.

Because of its detail-oriented nature, zero-based budgeting may be a rolling process done over several years, with only a few functional areas reviewed at a time by managers or group leadership. Zero-based budgeting can lower costs by avoiding blanket increases or decreases to a prior period's budget. It is, however, a time-consuming process that takes much longer than traditional, cost-based budgeting. The practice also favors areas that achieve direct revenues or production, as their contributions are more easily justified than in departments such as client service and research and development.

2.Since company predicting that the sales of Coca-cola will come down due to health consciousness of peoples. By adopting the Zero Based Budgeting (ZBB) strategy company will curtail its expenses and utilises the Assets optimum level, so that the losses of the company will be limited, if there are.

3. Coca-Cola would embrace zero based budgeting ?

Embrace Zero-based budgeting frees capital to drive growth

Budgeting from zero each year helps to remove unnecessary cost and create a detailed forecast. Zero-based budgeting (ZBB) can fuel growth by freeing up capital that can then be turned to more lucrative activities.

In ZBB, budget holders build a budget starting from a zero base, justifying each item’s need or cost, while respecting strict policies and top-down targets set by the cost category owners. This level of detail allows for useful internal and external benchmarking.

ZBB is an open and transparent way of creating a budget, resulting in important insights into consumption that will help procurement drive additional price savings. ZBB becomes an annual exercise, not a one-time activity, to help drive sustainable cost management.

At its core, ZBB is about agility and getting companies to run in a more cost-efficient way to make them more competitive. ZBB provides a valuable tool to help companies striving towards a relentless focus on cost efficiency. It can achieve cost savings from five percent to 40 percent depending on the cost centre.

An American multinational confectionery, food and beverage conglomerate, for example, achieved 15 percent savings in the first fiscal year of its ZBB initiative, and targets more than 20 percent in annual savings through 2018. In some cases, 80 percent of non-people cost savings are realised within the first year and cost savings can be achieved rapidly from as fast as three months.

Using ZBB companies are able to easily identify areas on which they should increase or lessen their focus to drive growth. Indeed, without zero-based budgeting it’s likely the money needed to grow just wouldn’t be there.

Reinvesting to accelerate competitiveness

To achieve profitable, sustainable growth and enhance performance through ZBB it is critical to have an effective blend of cultural change, business process improvement and technology deployment—underpinned by a deep understanding of industry dynamics.

ZBB can create better forensic visibility into spending making it possible to identify tangible cost reduction opportunities through better price negotiations, more competitive consumption policies and better operational efficiency.

Most importantly, organisations should closely link spending reduction with their strategic growth plans. Savings can be reinvested into areas of the company to drive, innovation, improved productivity and better customer experiences.

Key to sustaining cost benefits is improving accountability with employees at all levels so that they can contribute to budgetary goals. The aim should be to change the company culture so that sustainable cost management becomes part of the company’s DNA.

The bottom line, is that companies must think of growth, efficiency and their enabling capabilities simultaneously. The prize for those that are able to do so is the ability to operate super-effectively while driving competitiveness in the digital era.

4. All businesses want to boost productivity and efficiency while reducing errors and accidents, but this is especially important for small businesses operating with tighter budgets and smaller staffs. Standardization can be an effective way to increase productivity and efficiency, since it defines expectations, formalizes processes and creates accountability. Not all employees may welcome standardization, since it can reduce opportunities for creativity and individual decision-making.

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