A traditional budget is usually prepared by reviewing past year’s budget and actual expenses, with addition or deduction towards extra business activities or reduced business activities planned and also by effecting changes towards changing factors, such as growth, inflation etc. It is basically to tie managers to predetermined actions in order to achieve the planned budget. It is usually based on organizational hierarchy and centralized leadership. In a business that operates in a very dynamic, rapidly changing, and innovative environment, traditional budgeting is inappropriate to exercise. Budget is a barrier for the business because the vibrant market demands flexibility, fast response, innovation, process improvement, customer focus, and shareholder value. And it is the limitation of the traditional budgeting not to be able to fulfill these demands. The dynamic driven business should keep up with the change and adaptive to recent development to achieve success. Hence Beyond Budgeting approach introduced.
The Beyond Budgeting Model is designed to overcome traditional barriers and to create a flexible, adaptable organization that gives your local managers the self-confidence and freedom to think differently, make decisions rapidly, and collaborate on innovative projects with colleagues in multi-functional teams both within your company and across its borders. Exercising beyond budgeting may have become the turnaround for many companies of their budgeting problems.
Beyond budgeting is about a performance management system, made up of a series of interdependent and interlocking process. The objective is to create an adaptive system to the real world that ideally develops the business plan from the environment, i.e. growth of markets, performance of competitors, etc. Then, instead of trying to meet a negotiated number in the budget, business should try to beat this performance standard. Thus it would not make managers feel undervalued.
The process of beyond budgeting is portrayed in 12 principles of Beyond Budgeting. The first six ‘process’ principles is concerning performance management systems that allows employees to response faster to customer needs and competitive environment. The second six ‘leadership’ principles provide a decentralization framework of responsibility to employees to facilitate them adapting quickly to potential events and improves their relative performance. Beyond budgeting can be exercised successfully by applying these principles and the business can be adaptive to the rapidly changing environment.
Beyond Budgeting Process Principles;
- Targets Set aspirational goals based on continuous relative improvement not fixed targets
- Rewards Base rewards on relative performance with hindsight not on meeting fixed targets
- Planning Make planning an inclusive and continuous process not an annual event
- Resources Make resources available on demand not through annual budget allocations
- Coordination Coordinate cross company actions dynamically not though annual plans and budgets
- Controls Base controls on KPIs, trends and relative indicators not variances against plan
Beyond Budgeting Leadership Principles;
- Governance Base governance on clear values and boundaries not on detailed rules and budgets
- Performance Build a high performance culture based on relative success not on meeting targets
- Freedom to act Devolve decision making authority to frontline teams don’t micro-manage them
- Accountability Create a network of small units accountable for results not centralized hierarchies
- Customer focus Focus everyone on improving customer outcomes not on meeting internal targets
- Information Promote open and shared information don’t restrict it to those who ‘need to know’
The benefits of beyond budgeting is that it will examine targets, strategies, action plans, forecasts and management reports. Comparisons might also be made against competitors and past-year performance. It will concentrate on the key drivers of business performance. The purpose is to be alert and take advantage of new opportunities and respond to potential threats by using an advanced information system to make decisions early. Speed of action and good decisions are the result of beyond budgeting.
Beyond Budgeting rejuvenates the implementation of transparency of forecasting and resource allocation. Companies, in this modern age, might want to incorporate and monitor co-ordination of skills of their employees as well as incorporate training and development of staff and employees to manage finances in the company. This is advised to be practiced in order to ensure efficiency and effectiveness throughout all levels of hierarchy in the firm, in addition, to achieving goals without little or no supervision. In addition, style of leadership can be related to whether managers would refocus on this style of budgeting, this ensures the grasp and stronghold of the company’s strategic plans.
The major change required by beyond budgeting will raise some resistance to change. Organisations will differ in scale, culture and business context. It would be challenging to demonstrate to key stakeholders that control can still be achieved without a budget. Beyond budgeting may raise issues such as doubt of loosening control, giving front-line people decision-making authority, and trusting people to act in the best interest of the business that is not easy change to contemplate. However if these issues can be handled, the business may gain success in long term.
For example, the companies that have successfully practiced beyond budgeting and abandoned the traditional budgeting system are Volvo (one of Europe’s most profitable car manufacturers), IKEA (the world’s largest furniture manufacturer and retailer), etc. Many organizations that have gone beyond budgeting found that their performance has improved once the budgeting process was abandoned in favor of more relative and adaptive means of planning, evaluating performance and control.