BEYOND BUDGETING

This article covers brief knowledge on the concepts of Beyond Budgeting and how it differs from traditional budgeting and control systems. Beyond Budgeting is an important topic in Paper P5. Make sure you understand each bit of information provided. Throughout your academics, you guys must have been taught the benefits of having organizational budgets. Budgets enable an organization to plan for the future, realistic targets can motivate employees, and some writers even argue that budgets call for cost savings. Despite these benefits, it has been widely argued in the industry that in fact budgets add zero value to the organizations functioning. What adding value means? Adding value is a concept taken from Michael Porters Value Chain Analysis. Mr. Porter gave the idea that every activity within the organization adds value to the finished product, whether its procurement, inbound/outbound logistics or marketing. We will discuss Value Chain Analysis in detail in our upcoming articles. Coming back to the topic, budgets are often criticized for not adding value. It has been argued, both in public and private sectors, that budgets impose resource constraints on managers. In a dynamic environment such as of today, managers need liquid access to resources in order to innovate, survive and compete. Competitive advantage may be forgone if firms cannot create something new at the right time. Jeremy Hope and Robin Fraser were the first ones to carry out research on managers regarding their perspectives on budgets. In their research they pointed out ten problems in the traditional budgeting process; 1. Budgeting prevents rapid response. In a dynamic environment, managers need to respond fast, the annual budgets preclude them from being decisive. 2. Budgeting is too detailed and expensive. Budgeting process requires too much time of finance personnel. This time could be spent on some other activity that actually adds value. 3. Budgeting is out of date within a few months. Markets have been so inconsistent lately (changes in interest rates or inflation) that original budgets often require rework. 4. Budgets do no link with the competitive environment. Todays environment is much more than just managing people and budgets but continuous innovation and fast response. 5. Budgeting is divorced from strategy. Budgets often emphasis so much on short-term targets that they create a divorce from the overall long-term strategy. 6. Budgets kill innovation. Budgets support autocratic management style that prevents managers from actually looking beyond what was planned a decade ago!


7. Budgeting protects non-value-adding costs. Budgets are often based on previous years results. The root-causes of the costs are virtually unknown and thus budgetary slack makes its way within the final budget. 8. Budgeting reinforces command and control. Budgeting was originally introduced to empower functional leaders. However in practice, empowerment is bound by strict budgetary controls that stifle innovation. 9. Budgeting demotivates people. Annual budgets do not allow managers to perform extraordinarily. Employees actually do the minimum they are required i.e. what the budget requires. 10. Budgeting encourage unethical behavior. Aggressive targets and the relative incentives drive people to achieve them at any cost. This may call for some unethical practices being adopted by the management, hence putting organizations reputation in jeopardy.

What is Beyond Budgeting?

Beyond budgeting is about understanding strategy in a different perspective. Organizations should prohibit traditional bureaucratic practices of budgeting and focus more on adding value. According to beyond budgeting, the drawbacks of budgeting can only be eliminated by abandoning the budgeting process altogether. Managers can then focus more on innovation and ways to achieve competitive advantage. Think yourself, competitive advantage is what you want by the end of the day! Beyond Budgeting outlines two main advantages; It is a more adaptive process than traditional budgeting. Traditional budgets are set by senior managers and are imposed on juniors. Employees hardly have any idea of the long-term strategy. BB calls for a de-centralized approach, where anyone with an idea is welcomed.

Many companies both in public and private sectors believe that the road towards adaptive management through BB is an important concept. However, whether BB can be applied in the public sector is an ongoing debate. Perhaps due to the expression of politically motivated policies and objectives incorporated in the public sector budget, this change is hardly possible. In private sector this change is becoming essential with the passage of time. Knowledge- based corporations cannot risk their competitiveness on something which is radically an old-age concept.

 Traditional Budgeting v/s Beyond Budgeting

Purpose of Performance Traditional Budgeting Management Process Short-term actions are Goals driven by rigid annual targets. Rewards Individuals focus on achieving targets that benefits them rather than the organization as a whole. Annual plans support greedy culture where 'company first' approach to strategic management is adopted. Centrally allocated resources discourage fast response and encourage easy wastages. Lack of coordination provides solutions that often do not meet customer demands. Financial variances provide a poor basis for learning from mistakes. Beyond Budgeting Process Competitive success is achieved through adaptive management. Team based rewards build a 'one team' attitude. Every individual focuses on continuous improvement. Adaptive Management encourages quick response environment within the company. A 'customer first' approach to strategic management is adopted. On demand resource availability encourages fast response and reduces wastages. Adaptive management enables managers to satisfy customer demands in a more appropriate manner. Adaptive management involves learning at each stage so that future decisions provide better results.

Plans

Resources

Coordination

Controls

We shall therefore conclude that adaptive management has particular relevance for knowledge-based companies which are increasingly a feature of a developed economy. Other companies however, may also find it useful. It should be noted that corporations cannot implement such a model without a complete revival of organizational culture and management style. Implementing such a big change into management style can never be easy due to the challenges faced in introducing change.


Note: Beyond Budgeting concept was also present in curriculum of paper F5 (Performance Management). However in P5 (Advanced Performance Management) students should focus more on linking the BB concept with the exam scenario. For example, if the question identifies a small company or a company operating in a stable industry, students should not recommend implementation of BB. There is no point in stating the whole concept just because you know it! Your answer should also relate with the scenario. From the Content Team, Just to say, I dont believe in writing long articles just because they look nice. At the end of the day when you are in the examination hall, you remember very little. It is very important for students to focus on the quality of their content in answers rather than the length of their answers in isolation. Hope u guys like this one! Well be giving more articles on different subjects soon. Kindly write to us with your feedback. We as a team always value your feedback. We provide study materials for all ACCA subjects (F1-P7). Feel free to contact us any time via email (acca.lecturer@ymail.com) or Facebook. If you like our work spread it, otherwise help us improve! Regards, ACCA Lecturers

References:
http://www.bbrt.org/beyond-budgeting/bb-journey.html http://www.12manage.com/methods_fraser_beyond_budgeting.html http://www.cimaglobal.com/documents/importeddocuments/cid_tg_beyond_budgeting_oct07.pdf http://www.accaglobal.com/en/student/qualification-resources/acca-qualification/acca-exams/p5-exams/examsp54/beyond-budgeting.html http://www.hpartner.com/pdf/Beyond_Budgeting.pdf http://www.facebook.com/#!/pages/ACCA-Lecturers/444200272315196?fref=ts