As businesses rethink how their management systems should change in a post-industrial world, the beyond budgeting principle has received significant attention for its revolutionary nature. But what exactly is beyond budgeting? And how is it different from the current practices?
What is Beyond Budgeting?
Beyond Budgeting is a movement where organisations seek to overcome the inherent limitations of the traditional budgeting approaches. It represents a new management philosophy that is more agile and adaptable, aiming to eliminate bureaucracy and rigid control mechanisms, empower people, and promote transparency.
Read more: A primer of budgeting
Drawbacks of traditional budgeting practices
- Budgets take time to create, making them obsolete as soon as they are published.
- Budgets focus on short-term financial performance rather than long-term value drivers.
- Budgets are too expensive to prepare, especially when you factor in the time senior management needs to get involved.
- Budgets are hinged on assumptions which are, more often than not, inaccurate.
- Budgets encourage employees to achieve financial targets no matter what, risking eroding the ethical foundation of the organisation.
- Budgets lead to unnecessary spending because managers do not want to see their next year’s budgets getting slashed.
- Budgets favour a rigid top-down control mechanism, often at the expense of the organisation’s potential.
- Budgets can cause unproductive behaviours in the organisation from sandbagging to settling for mediocrity.
Read more: How has Dana-Farber shortened their budget cycle by 40 per cent?
Alternative to Traditional Budgeting Practices
- Rolling forecastingrequires organisations to continuously plan at regular and brief intervals. Forecasts are created monthly or quarterly rather than annually.
- The company’s objectives are based on the key performance indicators (KPIs).
- The company’s managers’ performance is measured against external benchmarks rather than past performance.
- Managers are empowered to respond to changes in the business environment and alter their course of actions accordingly.
- A culture of innovation is nurtured.
12 Fundamentals of Beyond Budgeting
Leadership fundamentals
We have 6 elements in the leadership fundamentals:
- Purpose: Leaders engage and inspire people around bold and noble causes, not around short-term financial objectives.
- Values: Leaders lead through shared values and sound judgment, not through stiff rules and regulations.
- Transparency: Leaders make information easily accessible for self-regulation, creativity, learning, and control.
- Organisation: Leaders establish a strong sense of belonging and promote accountable teams in order to get rid of hierarchical control and bureaucracy.
- Autonomy: Leaders trust people with the freedom to act.
- Customers: Leaders make sure every action is linked to customer needs and conflicts of interest are avoided.
Read more: How to turn budgeting into a value-adding process
Management processes
- Rhythm: The management processes are organised dynamically around not only the calendar and fiscal years but also the business rhythms and activities.
- Targets: Leaders opt for directional, ambitious, and relative targets instead of fixed and cascaded objectives.
- Planning and forecasting: Leaders plan and forecast clean and unbiased processes, not rigid and political exercises.
- Resource allocation: Leaders foster a cost-awareness mindset and make resources available as needed, rather than through concrete annual budget allocations.
- Performance evaluation: Performance is evaluated holistically, with peer feedback for learning and development, not based solely on measurement or rewards.
- Rewards: Leaders reward shared successes against the competition, not against fixed performance targets.
Who should apply Beyond Budgeting?
The beyond budgeting model is well-suited to industries with an accelerating pace of change. Such a 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 a lack of historical data.
Organisations that embrace kaizen – continuous improvement – are also poised to benefit the most from beyond budgeting.
