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

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Beyond Budgeting is a movement where organisations seek to overcome the inherent limitations of the traditional budgeting approaches. It represents a new management philosophy which is more agile and adaptable, aiming at eliminating bureaucracy and rigid control mechanisms, empowering people, and promoting transparency. 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. It creates and fosters a performance climate based on competitive success. Goals are agreed via reference to external benchmarks as opposed to internally-negotiated fixed targets. Managerial focus shifts from beating other managers for a slice of resources to beating the competition.

Traditional budgets, as discussed above, are easier to prepare and implement as compared to other types of budgets. This is because these budgets use the previous period’s budget as a base.

What are the Criticisms of Budgeting?

Transparency: Leaders make information easily accessible for self-regulation, creativity, learning, and control. Beyond Budgeting is more than just a method of preparing an annual budget. Instead, Beyond Budgeting encompasses a modern, alternative approach to performance management that looks past the traditional, annual budget as the primary control tool of a company. Abandoning budgets doesn’t mean abandoning high expectations. On the contrary, you raise the bar even higher. Instead of demanding that managers and business units meet fixed targets, you ask them to do something much tougher: measure themselves against how well their competitors will have done during the same period. 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 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:

However, there are some techniques that have proven to be effective in real cases in the past. These techniques include the following: Similarly, in cases of uncertainty, the traditional budget can be used as a reference. This allows for a business to use traditional budgets as a framework to control its performance. Disadvantages of Traditional Budgets 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 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. 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.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. 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. Purpose: Leaders engage and inspire people around bold and noble causes, not around short-term financial objectives.

Beyond Budgeting is an idea of abolishing traditional budgeting processes to improve management control over an organization. As mentioned above, some businesses allow the managers of departments to make a traditional budget for their department which gives them more control over the budget than they should have.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: Resource allocation: Leaders boost a cost awareness mind-set and make resources available as demanded; not through concrete annual budget allocations. Budgets encourage employees to achieve financial targets no matter what, risking eroding the ethical foundation of the organisation. For example, the cost drivers for a manufacturing facility can be the total labor hours and wages paid to employees. Budgets lead to unnecessary spending because managers do not want to see their next year’s budgets getting slashed.