The recent rebuffed $50 a share offer from Kraft Heinz to buy rival conglomerate Unilever is not only a struggle for boardroom power but a battle of accounting philosophies.
As any good entrepreneur knows, squeezing more profits comes from watching spending as well as boosting sales.
Kraft Heinz operate a Spartan ‘zero-based budgeting’ that aims at spending as little as possible.
Where most businesses set managers an annual budget to spend up to, managers at Kraft Heinz start with nothing and must justify every penny spent.
If staff want a pencil, chair or desk, they need to explain the business reason why.
Expenses are like fingernails
After Kraft took over Heinz in 2013, the change of philosophy was followed by 2,000 job cuts and the closure of three plants.
The surprise is one of the big names behind Kraft Heinz is superstar investor and billionaire Warren Buffett.
His partner is Brazilian financiers 3G Capital.
The firm’s boss, Jorge Lemann, is famous for pronouncing business expenses are like fingernails – if they are not regularly trimmed they can run away.
His zero-based budgeting operations clearly work for shareholders. With Buffett, Lemann has also taken over fast food outlet Burger King and Budweiser brewer Anheuser-Busch.
At both, his savage cost-cutting has reaped profits and added value to the companies.
Beer and burgers
Lemann professes to know little about beer or burgers, but a lot about business, which is why he is such a success.
Zero-based budgeting aims to switch resources to the people in a company that need them rather than allocate money because a department has a history of spending an amount every year.
For businesses that embrace zero based budgeting, the benefits are significant.
Costs are cut, efficiency is improved and the organisation is more streamlined.
Another advantage is zero based budgeting eliminates percentage cuts across an organisation’s total budget, which can be harmful to some departments while leaving others with an excess of funds.
If the plan goes wrong, the business budget needs rebuilding from scratch. The process is also risky for organisations with limited budgets or uncertainty over how much saving can be made.