Why beyond budgeting

As businesses are rethinking how their management systems should be changed in a post-industrial world, the principle of beyond budgeting has received much attention due to its revolutionary nature. But what exactly is beyond budgeting?

And how is it different from the current practices? Beyond Budgeting is a movement where organisations seek to overcome the inherent limitations of the traditional budgeting approaches. It represents a new management philosophy which is more agile and adaptable, aiming at eliminating bureaucracy and rigid control mechanisms, empowering people, and promoting transparency.

Read more: A primer of budgeting. Read more: How has Dana-Farber shortened their budget cycle by 40 per cent? Read more: How to turn budgeting into a value-adding process.

The beyond budgeting model is well-suited to industries with an accelerating pace of change. Such business environment would naturally require a more dynamic and responsive management approach. Newly established organisations or those undergoing radical transformations will find traditional budgeting methods hard to implement due to lack of historical data. Organisations that embrace kaizen — continuous improvement — are also poised to benefit the most from beyond budgeting.

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The rapid production of new solutions and strategies also depends on attracting and retaining such individuals. In this view of the world, the traditional budget is seen as the fixed plan in accordance with which all management processes are based and aligned. This determines how managers behave and the activities and objectives on which they focus.

Annual budgeting is seen as absorbing considerable management time and the monthly comparisons of actual and budgeted performance are primarily concerned with control issues.

Managers will not exceed their budgets by perhaps spending necessary resources outside the planned budget cycle to react to events because their bonuses or even their jobs may be put in jeopardy. A major problem lies in the fact that circumstances will be different when the budget was set and when subsequent comparisons are made and management decisions required.

An increasingly competitive global arena further accentuates the problem. Inflexibility is thus seen as the key failing of traditional budgeting, and companies are being urged to move towards continuous rolling forecasting to enable speedy and coordinated adaptations to actual and anticipated changes in the business environment.

Traditional budgets show the costs of functions and departments eg staff costs and establishment costs instead of the costs of those activities that are performed by people eg receipt of goods, processing and dispatch of orders. Thus managers have no visibility of the real 'cost drivers' of their business.

In addition, it is probable that a traditional budget contains a significant amount of non-value-added costs that are not visible to managers. The annual budget also tends to fix the capacity for the forthcoming budget period, thereby undermining the potential of activity-based management ABM analysis to determine required capacity from a customer-demand perspective. Those experienced in the use of ABM techniques will be familiar with such problems.

However, their tasks would be much easier to perform, and their results more reliable, if such problems were removed. In essence, the 'beyond budgeting' model entails devolved managerial responsibility where power and responsibility go hand in hand. The view held by proponents of the beyond budgeting model is that the following benefits may accrue as a result of its successful application by management:.

As with all alternatives, the success of a particular process depends on the needs of the individual organisation. The alternative of the beyond budgeting model places considerable emphasis on the need for organisational, managerial and cultural changes in order that it may be successfully applied by organisations.

This will present considerable behavioural challenges and individual managers might become overwhelmed by the complexity of decision-making in such an unregulated decision-making environment.

In the public sector, the budget process inevitably has considerable influence on organisational processes, and represents the financial expression of policies resulting from politically motivated goals and objectives.

Yet the reality of life for many public sector managers is an increased pressure to perform in a resource-constrained environment, while also being subjected to growing competition. In essence, a public sector budget:. While these issues may be common with the private sector, a number of issues arise which are specific to the public sector. For example, UK local authorities are prevented by law from borrowing funds for revenue purposes or budgeting for a deficit. If the beyond budgeting model is to allow greater freedom for managers then it will take a considerable change of mindset in the public sector to achieve the flexible agenda envisaged, especially where such flexibility would involve considerable and increased delegation to managers.

One wonders therefore, from a behavioural perspective, if such managers are capable of making this change, as it would entail the adoption of a radically different approach. Local authority financial regulations also tend to prevent the transfer of funds from one budget head to another otherwise known as virement without compliance with various rules and regulations. These rules expressed in the financial regulations of public sector organisations will be consistent with the policies of the organisation and are designed to prevent expenditure on items such as permanent staff where such costs would go beyond the budget year and represent a commitment of future resources.

Budgets in the public sector tend to concentrate on planning for one financial year ahead. Attempts are being made by UK central government, through the comprehensive spending review, to place an emphasis on the longer-term. However, considerable difficulties exist within the individual organisations that make up the public sector when creating a budget system that reflects longer-term objectives and goes beyond the annual cycle. It also remains to be seen how the relatively new system of resource accounting in central government will fit into the budgeting framework.

Traditional methods of budgeting in the public sector centre on the bid system and incremental budgeting. These approaches focus on changes at the margin and generally reflect acceptance of the budget base from the previous year. It was pleasure to visit our Qbit office in Riga for the first time in more than a year — and to personally meet all employees again and of cause for the first time meet new employees face-to-face.

They perceive the combination of these two topics of high importance for a growing number of companies. Skip to content. What is- and why Beyond Budgeting? Briefly on Beyond Budgeting. Half of companies believe their budget will be no longer of interest when more than half of the financial year has expired.

Beyond Budgeting accommodates a more modern management form. Beyond Budgeting focus more on measuring our performance over time and ensuring ongoing planning, such as, rolling forecasts as well as learning ability to better understand the future.

Beyond Budgeting helps ensure the involvement of the entire organization. This gives more responsibility and ownership, and thus, more faster reaction to market changes. Is it time for a showdown with traditional financial management and budgeting?

Does the budget lose its actuality too fast? Does budgeting take time from other more value-creating activities in the company? Is a static budget relevant in a dynamic world, where most industries experience changes at such speed that budget and traditional financial management are no longer geared to this? Is it time to go Beyond Budgeting?

Criticism of traditional budgeting. Over the years there has been increasing criticism of the traditional approach to budgeting and financial managament.

Some criticsm are about the budget assumptions and the market situation can change many times during a financial year. If the company reaches the budgeted revenue increase, it is, of course positive. But is it real, if the market has significantly higher revenue increase? Or if the biggest competitor has one twice as high? Does the budget reward the right people?

The Budget is a way to tell how good we were to predict the future and not to measure our performance. Another part of the criticsm of the traditional budgeting is that the companies reward people who reach their budgets. Or is it instead a person in this department who got lucky with how the market developed to his or her advantage? War of numbers. Budgeting is for many companies a time-consuming process, where many people spend time on calculations and data, and things are put on standby while budget negotiations are on.

In many companies, a war of numbers and a struggle to budget in a way to make sure the budget its reachable. This process might be much more value-added if the energy instead was used for constructive strategic dialogue and decisions. In many companies, there is a lot of time and effort wasted to make budget follow-up in reports, explanations of deviations, meetings, etc.

Beyond Budgeting — an option?