Budgeting and Monitoring tend to be 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 in order to ensure that there are no financial losses as a result of inefficiency on the part of the company.
Beyond Budgeting is defined as a relatively fresher approach towards 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 as opposed to traditional techniques. The main rationale beyond budgeting is decentralization that helps all managers to make their own decisions accordingly.
Principles of Beyond Budgeting
Beyond Budgeting is structured around two main principles, defined as leadership principles and management principles. Within each of these subcategories, there are 6 principles of them that help in developing an understanding of the rationale behind budgeting. These principles are given below:
Subsequent description of these principles is given below:
- Purpose: This involves motivating and inspiring people to direct their energies towards noble causes that are largely beneficial for everyone, and not around short-term financial goals.
- Values: under this leadership principle, workers are required to govern through shared values and sound judgment. It discourages seeking values from detailed rules and regulations.
- Transparency: This particular principle implies that information should be sought as a by-product of self-regulation, innovation, and learning and control. It should not be restricted, and all ideas should be discussed with others in order to gauge the best possible course of action.
- Organization: It requires cultivating a strong sense of belonging and organizing around a very stringent hierarchy. Therefore, it involves avoiding hierarchy control and bureaucracy.
- Autonomy: Under this principle, all members of the organization 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.
- 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 known to be 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 in order to extrapolate the best possible results.
- Resource Allocation: Resource Allocation should be a perpetual state of affairs, as opposed to 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 on a consistent basis with all the required feedbacks. These concurrent feedbacks are supposed to be further utilized for learning and development so that better results can be achieved.
- 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. Regardless of the fact that 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 can be used by businesses 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 as opposed to the annual basis that was previously used.
- Identification of Key Performance Indicators (KPIs): Identification and subsequent utilization of KPIs for the company imply that companies are able to set their targets in accordance with the KPIs.
- Benchmarking: Rather than aiming towards achieving internal efficiency, companies should ideally focus on external benchmarks. External benchmarking is likely to make a company more competitive in terms of the industry dynamics they are subject to.
- Encouraging innovation: Since beyond budgeting mainly talks about decentralization and autonomy, business innovation can be considered to be one of the most important premises of beyond budgeting.
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 Model||Beyond Budgeting Management Model|
|Targets and rewards||Fixed Incentives and Incremental Targets||Relative Targets and Flexible Rewards|
|Planning and controlling||Fixed Annual Plans with variance controls||Continuous planning using KPI Approach|
|Resource and coordination||Pre-allocated resources using a centralized system||Dynamic coordination and resource allocation on demand|
|Organizational Culture||Central Control and focus on managing numbers||Focus on value creation|
Advantages of Beyond Budgeting
Beyond Budgeting is rapidly accelerating in terms of popularity and application by companies from almost all corners of the globe. There are a number of reasons as to 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 business to be more agile, so that they are able to respond swiftly to the rapidly changing business dynamic. Hence, it empowers businesses, and helps them to be better prepared for the future.
- Improvement in 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 improvement in the business culture. The workers end up feeling more motivated, and it results in a much needed influx of creativity within the organization.
- Customer Orientation: Beyond budgeting also focuses on customer service, and ensuring that customers have a good experience. Therefore, it helps in leveraging high customer lifetime value, which tends to hold tantamount importance for the company in the longer run.
- Team-Based reward System promotes team building: Since beyond budgeting involves team based reward systems, it helps in cultivating good relationships within the workforce. Since it puts more emphasis on team based rewards, it encourages individuals to be more collectivist as opposed to individualists. The trickle down affect is subsequently enjoyed by the company in terms of higher profits.
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.