Beyond Budgeting

Question 1

What is beyond budgeting

Answer 1

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, can take the place of traditional budgeting’.

Beyond budgeting approaches are commonly used in organisations that face regular environmental changes or where continues improvement is critical to the organisation’s success. There are some common features of ‘Beyond Budgeting’ systems such as:

• The use of rolling budgets, produced on a quarterly or monthly basis, as an alternative to annual budgeting. These are flexible, do not rely on obsolete figures and should result in more timely allocation of resource. It also means that budgets are quickly adjusted for changes in the organisation’s environment.
• A wider range of performance measures are assessed such as customer satisfaction, production times, innovation, staff utilisation etc.
• Targets are often based on ‘benchmarks’ observed externally. For example, if amazon can guarantee next day delivery on products then this may become the benchmark for an organisations own distribution department.
• There is greater focus on determining and explaining what might happen in the future (for example, how might product design be changed to reduce material usage) rather than on what has happened in the past (for example, examining why material usage variance has occurred).
• Innovation is encouraged and rewarded.
• Budgets are set at a local level rather than being prepared centrally based on organisational goals and then having these provided to local managers who might actually understand the local environment better.

Question 2

What are the advantages and disadvantages of beyond budgeting

Answer 2

What are the advantages and disadvantages of beyond budgeting

Advantages

• Planning is continuous and the organisation is more likely to be proactive rather than reactive to changes in its environment.
• Targets become more challenging and more market focused. They stretch staff and encourage staff to find better ways of doing things. They also make the organisation more customer focused.
• The organisation becomes more innovative and continuously improves.
• Managers are more involved in the decision making the process which provides better information for decisions as providing better motivation for managers.
• Managers can take decisions much more quickly.
• It creates information systems which provide fast and open information throughout the organisation.

Disadvantages

• Planning, coordination, and performance evaluation become more complicated. This has the added impact that reward systems also become more complex.
• If benchmarks and targets are seen as being unachievable then effort to achieve them is reduced rather than improved.
• Organisational goals are less clear and are not communicated throughout the organisation. This means that may key stakeholders such as providers of finance and shareholders loose out as the organisation focusses more on customers and innovation.
• Organisations who move to a beyond budgeting structure can often face a lot of resistance from staff and managers where traditional budgets may be very deeply ingrained in the organisations culture. Is staff fail to fully embrace the new systems and targets then the system is set to fail.
• It may be very difficult or impractical for organisations to adopt the culture of decentralisation on which BB depends.
• The need for more up-to-date and accurate information requires costly investment.