Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap

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Modern organisations often depend upon teamwork, but traditional budgeting often rewards the manager to whom the team reports to. 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? 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.

The value will encourage the employee to work hard for the company. The value-based management will provide guidance and let the employees work on their own. It will give freedom to employee to chose their way to work and take responsibility in case of something wrong. We believe that using our judgment and common sense is enough to replace the strict rule. It motivates people by giving them challenges, responsibilities and clear values as guidelines. Rewards are team-based, in recognition of the fact that no single person can act alone to achieve goals. In this view of the world, the traditional budget is seen as the fixed plan in accordance with which all management processes are based and aligned. This determines how managers behave and the activities and objectives on which they focus. Annual budgeting is seen as absorbing considerable management time and the monthly comparisons of actual and budgeted performance are primarily concerned with control issues. Managers will not exceed their budgets by perhaps spending necessary resources outside the planned budget cycle to react to events because their bonuses or even their jobs may be put in jeopardy. As this approach contradicts the traditional budgeting approach, it is worth mentioning the lapses in traditional budgeting approach: As mentioned above, businesses may allow departmental managers to prepare a budget for their respective departments. This allows the departments within a business to have greater control over their budgets, thus, promoting decentralization within the business.

Disadvantages of Beyond Budgeting

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. In some organizations non-financial performance indicators are more valuable to stakeholders than the conventional financial ratios, beyond budgeting allows measuring these NFPIs Whether the public sector can adapt to the concept of greater flexibility - which lies at the heart of beyond budgeting - remains a matter of ongoing debate. Such an adaptation would require a mindset which not only moves away from control but also requires a reduction in the internal political power of large departments which has been at the heart of public sector budgeting for many years.

The rationale behind the Beyond Budgeting framework is that traditional budgeting processes carry a number of flaws. Some of the flaws include the following: The use of budgeting as a base for communicating corporate goals - setting objectives, continuous improvement etc - is seen as contrary to the original purpose of budgeting as a financial control mechanism.

A viewpoint has emerged during recent years which challenges the traditional approach to the budgeting process that has operated in both private and public sector organisations since time immemorial. While there may be comfort in tradition, what is being proposed may be more relevant to the current business environment and the challenges that must be overcome by organisations facing increasing competitive pressures. Some of these ideas are revolutionary, particularly for the public sector, and indeed even for the private sector where tradition can provide a comfort blanket for managers in the increasingly demanding environment in which they operate. This comfort derives from the predictability of the traditional budgeting process. Once both the revenues and expenses of a business are estimated, the profits of the business can be estimated. The business will subtract its estimated costs from its estimated revenues to calculate the profit. Budgets lead to unnecessary spending because managers do not want to see their next year’s budgets getting slashed. Complete abolition of traditional budgeting processes requires the implementation of new techniques that will replace them. The BB framework does not specify the exact techniques that are applicable to all companies.

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. The two pillars of the Beyond Budgeting framework are decentralized leadership and adaptive management processes. Each dimension of the framework consists of six principles, as shown in the image below:The business operation has nothing to do with the calendar year. There is no point in setting the target sale and profit for each year. We recommend the target, resource allocation, and performance evaluation should base on business rhythm, event-driven, and less calendar-driven. Values: Leaders lead through shared values and sound judgements, not through stiff rules and regulations. Resource allocation: Leaders boost a cost awareness mind-set and make resources available as demanded; not through concrete annual budget allocations.

The creators of Beyond Budgeting argue that in the modern business environment, the traditional approach to budgeting is no longer appropriate, and hinders performance. When a fixed, annual budget is used as the primary source of performance metrics for managers, for example hitting static sales or cost targets, problems can emerge: The company should open for innovation, self-control, and regulation. It will send a strong message to all employees that we are doing the right things and had nothing to hide. The front line employee will be able to act faster when they receive enough information. They do not provide strict guidance to do their work. Transparency: Leaders make information easily accessible for self-regulation, creativity, learning, and control. The market and other external factors keep changing every day. For sure, our annual budget will not be able to catch up.Values: under this leadership principle, workers must govern through shared values and sound judgment. It discourages seeking values from detailed rules and regulations. While ABB can help a company more thoroughly analyze cost drivers, it can be expensive to implement. Even there are many criticism and disadvantage, there is some circumstance when budget plays a very important role in determining business success. Beyond budgeting sounds very interesting, but it is not practical for all businesses and scenarios.