The Concept of beyond Budgeting - Essay Example

BEYOND BUDGETING by Introduction Budgeting is the process of developing a plan to spend resources, such as money on a certain project. It is simply balancing between costs and income. The budgeting process involves certain key aspects that includes the target, forecast and resource allocation. A target is what one wants to achieve. The forecast is what a person or organization thinks will happen and resource allocation is putting resources to particular projects. The target, forecast and target are found in step one of the budgeting purposes. The second step entails improvement which is usually event driven. It includes issues such as inspiring and motivating employees, holistic performance evaluation, limited detail, no annual allocations, trend monitoring and setting of KPI targets among others. In recent years, the criticism and debate of budgeting as a planning and control tool has increased considerably especially in ideologies such as beyond budgeting. This paper will examine the beyond budgeting concept, analyze and critique the model and its practical application using academic literature and case study evidence. Reasons why traditional budgeting cause problems Traditional budgeting practises have proved less significant in terms of helping organizations establish effective plans and controls within their organizational operations. First, traditional budgeting causes problems because it fails to address the planning and controlling aspects of public and private sector in the same way. In the public sector, budgeting is very difficult because it does not align with the objectives of the organisations because it is difficult to quantify them compared to the private sector. Using budgets in the public sector causes problems because measurable aspects cannot be quantified easily yet budgeting depends on this provision (Lalli, 2012). Traditional budgeting does not justify the existing costs as long as one can simply prove that there is an increase in activities equivalent to something new that has been introduced in the organisation. This means that it does not give incentives to departmental managers to cut costs, yet it is an aspect of planning and control (Hope & Fraser, 2001:4). This fact beats the sense of using a budget in planning and control because if it cannot help in the process of reducing unnecessary costs or show exactly why a certain activity must exist, then it fails to live up to the standards it sets. Traditional budgeting does not formally consider external and internal customers and suppliers, yet they are important in terms of organizational planning and control. Too often, the focus of traditional budgeting has been to control the result rather than the process. In the same manner, traditional budgeting focuses too much on the effects as opposed to the causes of an end. Traditional budgeting is of little benefit compared to modern day budgeting theories such as the balanced scorecard that links performance indicators to underlying business indicators, activity based budgeting that presents a budget in terms of costs that links with organisational deliverables and performance-based budgeting that allocates resources based on goals and measured results. The concept of Beyond budgeting The concept of beyond budgeting is to move away from traditional budgeting processes and consider budgeting as an exercise that adds value to every organization in both the public and private sectors. Beyond budgeting is defined as an ideal that companies need to move beyond traditional budgeting because it has inherent faults in budgeting in its techniques and in setting contracts. Hope & Fraser (2003) define Beyond Budgeting as, “A set of guiding principles that, if followed, will enable an organisation to manage its performance and decentralise its decision making process without the need for traditional budgets. Its purpose is to enable the organisation to meet the success factors of the information economy (e.g. being adaptive in unpredictable conditions)” (Hope & Fraser, 2003:212). The definition above shows that this is a new concept compared to traditional budgeting and it focuses on management decisions that help organizations meet success factors set in their objectives. It emphasizes on the abolition of traditional budgeting to improve on management control within organizations. It calls for the re-examination of the manner in which organizations can be better managed. It is more adaptive to the modern day challenges that organizations face and also offers a decentralized process in terms of enabling the management and decision making process to occur at different levels within the organization, thereby maximizing potential (Goode & Malik, 2011:207). The beyond budgeting concept characterizes theory X and theory Y. It advocates for organizations to move from theory X that is characterized by rigid, detailed and rules based micromanagement and centralized organizations that have low motivation towards high performance to theory Y that is characterized by decentralization of decision making, value-based organizational planning and internal motivation within organizations. This shift is called for to improve organizational control and planning and to achieve better outcomes. Beyond budgeting concept operates on the basis of the fact that it is relevant for current business environments and will overcome the challenges faced by organizations because of the ever-increasing competitive pressures. The idea comes in handy by addressing the challenges that traditional budgeting has failed to address and go further to respond to the needs of the modern-day business world. The concept calls for managers to abandon the traditional budgeting methods because of the unnecessary and unprofitable comfort and apply beyond budgeting concepts that promise a bright future for businesses and success in business operation. The current business environment is more complex, turbulent, dynamic and uncertain. Beyond budgeting concept presents ideas that are meant to address these issues through a devolved managerial responsibility, a performance environment based on competitive success and also through empowering operational managers to remove resource constraints among other issues. Companies in the current business environment must have knowledge of the business opportunities and be ready to make critical decisions to ensure that such challenges are addressed. Beyond budgeting helps by providing an environment that helps companies to establish knowledge bases which will help them realize more benefits. The principles of Beyond Budgeting Beyond budgeting emphasizes on several key issues that it considers as the key principles in organizational management. First, beyond budgeting emphasizes on values that are clear and reflect on organizational objectives rather than rules and budgets. Secondly, it emphasizes on high performance through the creation of an environment that supports high performance, for instance motivating employees and decentralization of decision-making. Thirdly, it emphasizes on transparency in organizations (Østergren & Stensaker, 2011:141). Traditional budgeting allowed for restrictions based on hierarchy and centralization, which promoted secrecy. However, beyond budgeting emphasizes on promotion of open information sharing for better management. Fourth, it emphasizes on better organizational arrangement, which can be achieved through teamwork and decentralization of important activities instead of centralizing all-important functions leading to time and resource wastage. Fifth, it emphasizes on organizational autonomy, which means giving teams the freedom and capability to do their responsibilities in the best way possible and contribute to organizational performance. Sixth, beyond budgeting emphasizes on suppliers and customers as an integral part of organizational success unlike traditional budgeting that does not consider customers and suppliers. It calls for actions that lead to better supplier and customer outcomes such as quality services. Next, beyond budgeting emphasizes on setting goals that can lead to continuous improvement of organizational outcomes rather than goals that only focus on the immediate need of the organization. It calls for flexibility in goal setting. Another principle of beyond budgeting is rewards on relative performance rather than on fixed targets on annual budgets. This enables the organizational workforce to go beyond the normal targets and perform exceedingly well (Lohan, 2012:27). Another principle of beyond budgeting is providing resources on demand, which focuses on allocation of resources based on demand rather than on annual budgets, which leads to wastage. Another principle of beyond budgeting is planning. It calls for continuous and inclusive process of planning within all levels of the organization (Rickards, 2006:62). It emphasizes on integrative planning where all sections of the organization contribute. In addition, beyond budgeting emphasizes on coordination of activities and efforts within the organization as one of its principles. Coordination should occur as a dynamic and continuous process rather than in terms of annual planning cycles, which do not respond to organizational needs. Lastly, another principle of beyond budgeting is controls. It emphasizes on base controls on relative indicators and trends rather than on variances against the plan. It calls for the inclusion of competitive, industry and benchmark data in the budgeting process, which helps in ensuring that no opportunity is lost and also that future forecast accuracy is achieved. The above principles are arranged into four major categories that include governance and transparency principles (values, performance, transparency), accountable teams (organization, autonomy and customers), goals and rewards (goals and rewards) and planning and controls (planning, coordination, resources and controls). The four main categories show how the principles are important in fulfilling the ideas put forth by beyond budgeting concept. They capture the areas that are important to organizational planning, control and performance and specifically address the weaknesses presented by the traditional budget. How organisations react with Beyond Budgeting Organizations have responded significantly to beyond budgeting concept. The first organizations that responded to the concept was during 1980s and 1990s when CarnaudMetalbox, a packaging company and Groupe Bull, a computer company adopted the concept (AccountingWEB. 2007). Since then, many organizations have taken up the concept and implemented it in their businesses. However, in the private sector, the reaction towards beyond budgeting has been slow. A research undertaken by the Bristol Centre for Management Accounting Research (BRICMAR) revealed that a majority of the 40 companies that were surveyed showed that the concept has value. However, only 55 percent out of the whole number hand implemented change in their budgeting processes to integrate the principles of beyond budgeting (AccountingWEB. 2007). Traditional budgeting worked relatively well in private organisations compared to public organisations because several aspects in private organisations can be quantified but the same cannot happen in public organisations. Therefore, taking up the concept has been slow in private sector compared to the public sector. Advantages and limitations of Beyond Budgeting There are several benefits of beyond budgeting. First, beyond budgeting enables organisations to operate with speed and simplicity because it reduces complexity with organisational operations. It enables managers and workers to work with ease and handle their responsibilities without time wastage because beyond budgeting promotes flexibility and clarity of purpose and value. It also provides innovative strategies that could not be provided by traditional budgeting methods (Sandalgaard & Nikolaj Bukh, 2014:410). It offers clear working and management principles that provides a good environment for new ideas and implementation of innovative ideas at the organisational level. Beyond budgeting helps organizations lower costs of operation because it takes out fixed costs and discourages budgeting on processes and equipments whose worth and necessity cannot be proven. It only allows spending on things and processes that add value to the organisation and the customer. Beyond budgeting also has certain limitations. First, as a program of change, it is difficult to clearly point out whether it can lead to direct or measurable improvement in organisational output. Secondly, the success of beyond budgeting depends significantly on how it is implemented (Sandalgaard & Nikolaj Bukh, 2014:411). If managers do not understand it clearly, it is easy for them to fail. It also poses a threat to organisations that have used the traditional budgeting style for a long time because it is an entirely new concept to them (Rickards, 2006:62). Conclusion The beyond budgeting concept came up as a way of helping organisations use a new method of planning and control that helps them meet objectives by linking resources to results, studying the process instead of results and emphasising on decentralization of decisions among other aspects. Traditional budgeting does not have the above aspects allowing for errors, time wastage and loss of resources, profits and customers. Beyond budgeting is a promising concept which if implemented properly can be beneficial to organisations. Reference List AccountingWEB. 2007, Traditional budgeting under the microscope | AccountingWEB. Retrieved from http://www.accountingweb.co.uk/topic/financial-reporting/traditional-budgeting-under-microscope-john-stokdyk Goode, M & Malik, A 2011, Beyond budgeting: the way forward. Pakistan Journal of Social Sciences, 31(2), 207-214. Hope, J & Fraser, R 2001, Beyond Budgeting: questions and answers. CAM-I, BBRT, Dorset. Hope, J & Fraser, R 2003, Beyond Budgeting: how managers can break free from the annual performance trap. Boston: Harvard Business School Publishing Corporation Lalli, W R 2012, Handbook of budgeting. Hoboken, N.J: Wiley. Lohan, G 2012, Extending Agile Systems Development: An Application of the Beyond Budgeting Model (Doctoral dissertation, National University of Ireland, Galway). Østergren, K & Stensaker, I 2011, Management control without budgets: a field study of ‘beyond budgeting’ in practice. European Accounting Review, 20(1), 149-181. Rickards, R C 2006, Beyond budgeting: boon or boondoggle. Investment Management and Financial Innovations, 3(2), 62-76. Sandalgaard, N & Nikolaj Bukh, P 2014, Beyond Budgeting and change: a case study. Journal of Accounting & Organizational Change, 10(3), 409-423. Read More