The Chartered Institute of Management Accountants (2005: 5) defines a budget as a ‘numerical measure for expressing a plan for a stated period of time. It includes the business capacity, sales and revenues, the availability of resources, cost of production, expenses to be incurred in the production process, assets, liabilities and cash flows.’ A budget aims to offer substitutes for performance targets with a structure that is based on constraint methods through regular or periodic reviews, and transparency.
According to Bogsnes (2008), the budget target is a predefined absolute number, a cost number, an income number, a production or market share number. Bogsnes said these targets can be quite misleading because they are narrow and might not describe performance appropriately. He goes further to explain performance as a continuous improvement which involves delivering promises in the most appropriate and defined ways. Performance is basically about doing better than our peers and better than the competitive force within the business environment either internal or external.
The Beyond Budgeting Institute defines beyond budgeting as a “means beyond command and control towards an organizational model that is more entrusted and innovative.” According to the Beyond Budgeting Institute, “beyond budgeting is about transforming the leadership of the management of organizations in a post-industrial world where innovative management models represent the driven competitive advantage.it is also about liberating people from the problems of restrictive bureaucracy and domineering control systems by trusting them with information and allowing them time to deliberate, reflect, gain knowledge and develop.” Beyond budgeting is one approach to budgeting that tries to sort out the drawbacks and limitations of traditional approaches to budgeting. Beyond budgeting is a management approach with leadership values and beliefs that share an alternative approach to budgeting which should be used instead of traditional annual budgeting. The traditional budgeting, on the other hand, is based on historical performance and the future findings are then based on these past performances i.e. the trends of the previous years are projected forward with some adjustments. Traditional Budgeting, on the other hand, is a top-down, command and control approach, with authority firmly seated at the executive level.
Benefits of beyond budgeting – Private Sector.
Benefits of beyond budgeting- Public sector
Advantages of beyond budgeting
Comparison between Traditional Budgeting & Beyond Budgeting.
1. Management style: The two approaches are primarily diverse on their perception of leadership. Traditional Budgeting is coached on command and control. The executive team translates its objectives into operational goals, plans, and initiatives for the members of each department and the organization. Traditional budgeting encourages bureaucracy which in turn brings the assumption that managers and employees do not have the required skill to achieve the business objectives. This kind of management control could also make the employees feel undervalued because their ideas are not welcomed or important to the organization. A command and control approach to the traditional budgeting questions the trust of the employees i.e. and makes the business objectives focus mainly on short term goals.
Beyond Budgeting approach is more of an alignment between leadership and management. The beyond budgeting adopts a management process that is more of empowering and adapting to the business principles rather than commanding and controlling. This allows business units and teams closeness to customers and acts freely on the goals, plans, and initiatives of the organization. The executive role is more of creating a sense of belonging and accountability among team members by delegating business units and teams with executing on goals and then inspiring and supporting them. Managers and employees are believed to be trustworthy and capable of undertaking the roles & tasks assigned to them with positive outcomes. Their efforts are characterized by teamwork and performance evaluation which encourages a cost-conscious mindset of using the available resources effectively and efficiently. Executive management supports making information open and also encourages ideas and innovations from everyone which allows easy learning and control. The accessibility to needed information allows transparency which makes better and quicker decision making, and accountability. The core belief of the beyond budgeting approach is that business units and teams will perform responsible and accountable in the path of the organization's growth.
2. The seat of authority: Traditional Budgeting approach, the authority is centralized at the top of a management. Objectives, plans, and initiatives are handed down through multiple levels of the organization, and business units and teams which managed to deliver results according to the objectives of the organization. Cutting of costs as low as possible is one of the values, but ideally, what matters is the unit cost of production says much more about the efficiency and performance of an organization. What an organization should try to achieve is not the lowest cost possible but the optimal cost of production which maximizes the value of product created. This centralized management method consumes money, resources, and time.
With a Beyond Budgeting approach, power is delegated or decentralized among the various departments/units and team members that are empowered to act in diverse ways which will increase the efficiency of the organization. This enables the team members to have a close relationship with the customers and have a one-on-one interaction with them on how to meet their diverse needs. These interactions with the customers enable the team members to be aware of the change in customers needs enables them to respond to their needs more effectively and in the most efficient way. Beyond budgeting approach encourages innovation and individual development on a day-to-day basis, while empowering them with the resources needed, as well as the ability to react quickly to changes. The decentralized approach of beyond budgeting helps to deliver better products and services.
3. Performance measurement: Under a Traditional Budgeting approach, executive management sets fixed targets and assigns them to the appropriate business unit or individual. Managers could get carried away since they are working towards meeting up with the set targets that they could omit the main purpose of budgeting. It fails to take into consideration unforeseen challenges in the business environment such as a competitor, or changing market conditions which can cause variations in actual plan of the business. The traditional budgeting reinforc
es the barriers between departments rather than encourage knowledge sharing, encourage rigid planning and a lack of flexibility. This may not be appropriate in a rapidly growing economy.
Under the Beyond Budgeting approach, directional, ambitious and relative targets are set. According to Hope and Fraser (1997), Beyond budgeting approach makes use of Rolling budgets which are made on a quarterly or monthly basis. These are more flexible compared to the traditional budgeting approach. It doesn’t rely on outdated figures and, therefore, doesn’t result in the unnecessary allocation of resources. The rolling forecasts of budgets incorporate KPIs based on the balanced scorecard which is correlated to organization strategy. Performance employees and team members are based on this. The beyond budget approach can also use present targets to benchmark performance and not based on the individual or team's past performance. This encourages or gives room for individuals to improve daily on their outputs and increase the employee’s concentration on managing future results and not past performance. The goal here is not to meet or exceed rigid stretch targets, but rather to achieve success by cooperating as a team to constantly improve performance relatively.
In conclusion, both approaches seek improved performance and shareholder value, their means of achieving them are quite different. Beyond Budgeting and its shift of authority to business units and teams results in quicker and more effective responses to customer needs. It allows the employees to be personally developed and also have a driving force, as well as wide range of experience in ways strategically, plan and executE on product and service delivery in line with the objectives of the organization. Traditional budgeting, on the other hand, is a tool for control. 99% of European companies use a budget to control their business and monitor its operations. The traditional budgeting fosters a one-line management which encourages employees to work in line with the company’ strategic planning i.e. gives employees direction of the organization which in turn motivates the staff. There is a specified framework for delegation of duty which co-ordinates different departments and supports them towards shared objectives.
The major attributes of a budgeting process are promptness and compliance, direct communication, openness, and flexibility. These features, the Beyond Budgeting movement promotes. Companies applying the principles of Beyond Budgeting see continuous improvement in performance and shareholder value. Although every budgeting process should be reviewed from time to time as there is always a better way