The Aims and Benefits of Beyond Budgeting

For a long period of time, budgets have been the furthermost vital management and control tool. They are being used to provide targets for a company and help point them in the right direction. Due to the great success of budgets throughout the years, they are being used within almost every company.

However, like in life we develop, the management and control tools also progess. There are new management and control tools which are developed. One management model we will be focusing on is the beyond budgeting model. The model believes traditional budgets are an obstacle to progression and too complex and time consuming. However it could be argued if this was the case then why are so many companies still using traditional budgeting, which is a question the model cannot answer.

Traditional budgeting

Budgeting is an estimation of costs, revenues and resources which will be used as a forecast to specify how resources will be acquired and used during a specified period of time. According to a study by Hacket Benchmark, enterprises spend on average 25,000 person days on planning and performance measurement per US$ 1 billion turnover. According to another study (by KPMG) the budgeting process takes up 20-30 percent of managers time.

Budgets can be used in a various amount of ways. The most important ways to use budgets are (Drury, 1992) planning of the yearly activities, communicating the plans towards the managers, motivating managers to reach goals controlling the activities and evaluating the performance of the staff.

Budgets traditionally flows out of the mission statement and the vision of the Organisation. From this goals are deprived and these are the goals the organisations work towards in the upcoming years. A financial plan is composed from the goals and this becomes the budget. Next, the budget is used to control to see if they are still on track and if any necessary corrective measures need to be taken. At the end of the year the evaluation and rewarding takes place. A comparison is made between the goals set in the budget, and the goals reached by the staff.

Despite the widespread use of budgets, the related problems have been acknowledged. Libby and Lindsay, (2010) found the most commonly proposed budget-related problems are classified into three categories; game playing, time related issues and strategic issues.

Game playing - Using budgets as a strategic tool provokes employees to engage in dysfunctional game playing, where the budgeted numbers can be manipulated to be more favourable for some of the parties involved.

Libby and Lindsay (2010) found that deferring necessary expenditures to future periods and negotiating easier targets by “sandbagging are the most common ways of budget gaming, and reported to occur almost in every organization. Thereby it should be very common that the budgets become misleading when used in operational planning as the numbers cannot be trusted to reflect the best knowledge.

Time-related issues - Budgets have also commonly been criticized for being too time-consuming to (Libby and Lindsay, 2010). The budgeting process usually begins several months prior to the year which it relates to (Libby and Lindsay). And when the employees and managers need to spend so much time on budgeting it naturally decreases the time that they have available for running the actual business.

Strategic issues - Another common argument against the use of traditional budgets is that they often tend to be unaligned with the company’s strategy, as the focus is only on the following year.

Budgets are also being accused of directing the resources only for the best projects within the divisions, instead of the best projects in the whole organization and to restrict the drive for constant improvement (Libby and Lindsay, 2010)

A survey by David Dugdale and Stephen Lyne (2005) found that all 40 companies in their research used budgets. Managers thought they were useful for planning, control, performance measurement, co-ordination and communication. Managers tended to disagree that budgets headed to dysfunctional performance or that they provided tiny or no significance.

However majority of managers agreed that budgets were too time-consuming and that managers could be controlled by budgets and delay essential action.

Beyond budgeting

Beyond budgeting is a leadership philosophy that relates to an alternative approach to budgeting which should be used instead of traditional annual budgeting (Kaplan, 2012). It tries to resolve the weaknesses and limitations of traditional approaches to budgeting.

The aim of the the Beyond Budgeting management model is to increase the adaptability of enterprises. For this, controllers have to conceive and implement the required control instruments and processes. And management has to promote an appropriate performance management culture by supporting responsible behavior and market orientation on all levels in the organization. When this hapens, Beyond Budgeting promises new possibilities for strategic enterprise management by making resource allocation more flexible and adaptive.

Beyond Budgeting believes organizations can be managed successfully without a fixed annual budget has been demonstrated by companies like the German ALDI Group, by the Swedish furniture giant IKEA, by the British retailer Boots and its subsidiary Boots Healthcare International and by Svenska Handelsbanken, a Swedish retail bank, which is managing for now over 30 years without budgets - and with enormous success.

Daum & Hope (2003) argue that Beyond Budgeting is a more adaptive method to controlling, with more regular performance reviews. A second feature is that centralized and hierarchical structures are converted to a decentralized management style. This empowerment pushes authority and decision making to lower levels of the business. The effect can be found in increased productivity and motivation.

Pilkington & Crowther (2007) have found that Beyond Budgeting is most commonly adopted by large firms employing over 1,000 people. The smaller firms (10 -50 employees) be likely to execute secure budgets for employees to follow. This is likely to be due to the size, management style and ability to train staff in unfamiliar concepts.