Beyond Budgeting – Overview, Definition, Principle, And More

Overview

Budgeting and Monitoring are an increasingly important part of all organizations, regardless of their size and functionality.

It helps to give numerous valuable insights regarding the company, and what needs to be done to ensure that there are no financial losses due to inefficiency on the part of the company.

Beyond Budgeting is defined as a relatively fresher approach to budgeting. It is defined as the principle where companies make a shift from traditional budgeting techniques because of their inherent flaws.

It proposes a wide range of techniques, which mainly vest on the grounds of better analytics that are highly relevant to the market dynamics.

Therefore, beyond budgeting mainly advocates a faster and smarter strategy than traditional techniques. The main rationale beyond budgeting is decentralization which helps all managers to make their own decisions accordingly.

Principles of Beyond Budgeting

Beyond Budgeting is structured around two main principles: leadership principles and management principles. Within each of these subcategories, there are 6 principles that help develop an understanding of the rationale behind budgeting. These principles are given below:

A subsequent description of these principles is given below:

Leadership Principles

  • Purpose: This involves motivating and inspiring people to direct their energies towards noble causes that are largely beneficial for everyone, not around short-term financial goals.  
  • Values: under this leadership principle, workers must govern through shared values and sound judgment. It discourages seeking values from detailed rules and regulations.
  • Transparency: This principle implies that information should be sought as a by-product of self-regulation, innovation, learning, and control. It should not be restricted, and all ideas should be discussed with others to gauge the best possible course of action.
  • Organization: It requires cultivating a strong sense of belonging and organizing around a stringent hierarchy. Therefore, it involves avoiding hierarchy control and bureaucracy.
  • Autonomy: Under this principle, all organization members should be given freedom in how they want to act. This means that they should not be called out upon in the case where they try to do something differently.
  • Customers: This is directed towards realizing how customers are an important part of the business, and how they cannot be entirely ignored. The main premise here is to ignore conflict of interest as much as possible.
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Management Processes

  • Rhythm: This Principle states that management processes should be directed around business rhythms and cyclicality. It should not always be focused on particular calendar years.
  • Targets: Fixed and cascaded targets are less effective than directional and ambitious targets. Therefore, targets should be set using a SMART methodology, so that better results can be obtained.
  • Plans and Forecasts: Planning and forecasting should be considered as lean and unbiased processes. They should not be rigid and short-term to extrapolate the best possible results.
  • Resource Allocation: Resource Allocation should be a perpetual state of affairs, unlike typical detailed annual budget allocations. This requires organizations to foster a cost-conscious mindset, which is flexible across all business events.
  • Performance Evaluation: This requires evaluating performance consistently with all the required feedback. These concurrent feedbacks are supposed to be further utilized for learning and development to achieve better results.
  • Rewards: Rewards should be shared against competitiveness and projective growth as compared to fixed performance contracts.

Beyond Budgeting Techniques

Beyond budgeting mainly propagates business agility to better business practices that are different from the previous standards. Even though beyond budgeting does not specifically mention the techniques that are applicable to the given companies, yet there are a couple of other different techniques that businesses can use in order to implement Beyond Budgeting Techniques. They are as follows:

  • Rolling Budgets: creating rolling budgets and forecasts involves companies approaching forecasts on a monthly or quarterly basis instead of the annual basis previously used.
  • Identification of Key Performance Indicators (KPIs): Identification and subsequent utilization of the company imply that companies can set their targets following the KPIs.
  • Benchmarking: Rather than aiming toward achieving internal efficiency, companies should ideally focus on external benchmarks. External benchmarking will likely make a company more competitive regarding the industry dynamics they are subject to.
  • Encouraging innovation: Beyond budgeting mainly concerns decentralization and autonomy, business innovation can be considered one of the most important premises of beyond budgeting.
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Differences between Beyond Budgeting and Traditional Budgeting Model

Differences between beyond budgeting and traditional budgeting model are described in the table below:

 Traditional Budgeting Management ModelBeyond Budgeting Management Model
Targets and rewardsFixed Incentives and Incremental TargetsRelative Targets and Flexible Rewards
Planning and controllingFixed Annual Plans with variance controlsContinuous planning using KPI Approach
Resource and coordinationPre-allocated resources using a centralized systemDynamic coordination and resource allocation on demand
Organizational CultureCentral Control and focus on managing numbersFocus on value creation

Advantages of Beyond Budgeting

Beyond Budgeting is rapidly accelerating in popularity and application by companies from almost all corners of the globe. There are several reasons why companies normally advocate beyond budgeting. These advantages of beyond budgeting are as follows:

  • It aims for business agility: Business agility is considered to be an antidote for the increasingly competitive and complex business environment. Beyond budgeting propagates businesses to be more agile to respond swiftly to the rapidly changing business dynamic. Hence, it empowers businesses and helps them better prepare for the future.
  • Improvement in the inner culture of the organization: As a matter of fact, beyond budgeting encourages organizations to liberate their workers so that they have more control over the decision-making in the company. Therefore, it significantly results in an improvement in the business culture. The workers feel more motivated, resulting in a much-needed influx of creativity within the organization.
  • Customer Orientation: Beyond budgeting also focuses on customer service, and ensuring customers have a good experience. Therefore, it helps leverage high customer lifetime value, which tends to hold tantamount importance for the company in the long run.
  • Team-Based reward System promotes team building: Since budgeting involves team-based reward systems, it helps in cultivating good relationships within the workforce. Since it emphasizes team-based rewards, it encourages individuals to be more collectivist instead of an individualist. The trickle-down effect is subsequently enjoyed by the company in terms of higher profits.
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Limitations of Beyond Budgeting

Regardless of the fact that beyond budgeting seems to be an increasingly attractive option when it comes to achieving business agility, yet there are certain limitations of beyond budgeting that also need to be considered. These limitations are as follows:

  • Beyond budgeting is often considered to be time-consuming, because it is often difficult to implement it across organizations.
  • It is not applicable to all organizational types – particularly those organizations that have a fast-paced culture. Particularly, for those organizations that need to have a centralized organizational culture, this might be practical.
  • Since they focus on short-term financial rewards, it often makes it difficult to retain key metrics like shareholder value, and brand equity. It might not always be a feasible strategy in the long term.
  • It often results in an over-complex business dynamic, which might not be well-suited to all employee types. Working without direction might be overwhelming for these particular workers, and hence the required targets might not be achieved.