Budgeting and Beyond!

Budget concept
While studying for the operational case study I was revising the budgeting section of the P1 syllabus and the idea of Beyond Budgeting really struck a chord with me.

Traditional budgeting methods, in my opinion, are becoming outdated and counter-productive. The idea that departments will needlessly spend in the final months of the year to ensure their budget is not cut the following is crazy.

Traditional Budgeting Methods

I’ve seen this first-hand when managers have been scrambling around in November/December to spend their capital expenditure budget so they got the same amount the following year. I was relatively new to the company and quizzed a colleague as to why there was so much spend in December and she told me “Well, they will lose their budget next year if they don’t spend all of this years”. Madness.

Beyond Budgeting: A new approach

So Beyond Budgeting looks to rectify these problems by abandoning traditional methods  – the two main drivers for this are;

1. A more adaptive set of management processes
2. A highly decentralised organisation

Beyond Budgeting empowers management by giving them the freedom to achieve their goals without the need of a rigid set of budgeted numbers. Instead, front line management are given goals that are in line with shareholder value and the bigger picture.

As one of the main criticisms of traditional budgeting methods is the fact it’s too short-term in it’s thinking.

These goals are measured using a set of KPI’s, industry benchmarks, customer satisfaction and revenue or market capitalisation.

Hope and Fraser identified 6 shared common principles that should be used by all companies who want to adopt a Beyond Budgeting technique:

– A governance framework based on clear priorities and boundaries.
– A high performance climate based on visible and relative success at all levels.
– Front line teams with a freedom to take decisions in line with the company’s governance principles and strategic goals.
– Teams given responsibility for value creating systems.
– Teams focuses on customer outcomes.
– Open and ethical information systems.

If applied correctly, the beyond budgeting process rewards the high performers within the company and not just the skilled budget negotiators.

Other key benefits include accountability and ownership by empowering the front line teams to make decisions. And, of course, there is less waste as managers are encouraged to work towards medium and long term strategic goals rather than traditional annual budgets that produce unnecessary spend.

CIMA produced a topic gateway document on Beyond Budgeting that can be found here and makes for interesting reading.

Beyond budgeting is:
‘An idea that companies need to move beyond budgeting because of the inherent flaws in budgeting especially when used to set contracts. It is argued that a range of techniques, such as rolling forecasts and market related targets, can take the place of traditional budgeting.’
CIMA Official Terminology, 2005