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?
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 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
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 take into account the time when the 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.
Alternative to Traditional Budgeting Practices
- Rolling forecasting requires organisations to continuously plan at regular and brief intervals. Forecasts are created on a monthly or quarterly basis rather than annually.
- Company’s objectives are based on the key performance indicators (KPIs).
- The performance of the company’s managers is measured based on external benchmarks rather than their 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 fundamentalsWe 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 judgements, 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 belongings 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.
- 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 planning and forecasting clean and unbiased processes, not rigid and political exercises.
- Resource allocation: Leaders boost a cost awareness mind-set and make resources available as demanded; not through concrete annual budget allocations.
- Performance evaluation: Performance is evaluated holistically and with peer feedback for learning and development; not based on measurement only and not for rewards only.
- 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 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.