Introduction
Budgeting is a key performance management tool; it sets benchmarks in the operations. It provides valuable analysis for target sets and variance in the results. Different budgeting techniques serve different purposes, for instance; Beyond Budgeting vs Traditional Budgeting.
The budgeting process for a company sets an environment of quality management starting from planning, communication, monitoring, and control measures. Sometimes though, historic data may be outdated and forecasts based on these data sets may not be as accurate as desired. So the managers need to look further than the budgeting controls.
Beyond budgeting is “A management philosophy that relates to an alternative approach which should be used instead of traditional budgeting”
Beyond Budgeting vs Traditional Budgeting
As traditional method of budgeting has so many drawbacks, Beyond Budgeting has increasingly become an interesting topics when talking about budgeting. So what are the drawbacks of Traditional Budgeting vs Beyond Budgeting?
In subheading below, we will discuss about the drawback of Traditional Budgeting approach as oppose to the benefits of increasingly popular Beyond Budgeting.
Drawbacks of Traditional Budgeting
As this approach contradicts the traditional budgeting approach, it is worth mentioning the lapses in traditional budgeting approach:
- We normally prepare for annual terms
- This approach lacks flexibility in decision making and towards the target setting
- It is a strict command and control type approach which discourages innovation
- The benchmarking in traditional budgeting sets lower standards, and the managers look as far as the targets are set
- The focus of traditional budgeting is normally on the financial performance measurement, which sometimes can be conflicting to the company stakeholder objectives
Benefits of Beyond Budgeting
The beyond budgeting approach defies the traditional budgeting method in many ways. Some of the core values of beyond budgeting approach are:
- Starting with planning, the beyond budgeting relies on rolling budget. Flexible budgeting with a monthly or quarterly time frame.
- With the flexibility of timely data and robust decision making, this approach will rely on continuous planning, rolling forecasts, and KPIs.
- This approach is more future centric, as it sets targets for managers on the market competitive based benchmarking.
- The flexibility of this approach allows managers to make decisions, which in turn enhances a culture of innovation.
- This approach sets targets and rewards for managers on results oriented basis.
- When we empower managers with robust decision making, the resources are also allocated on demand basis
- This approach sets an environment of total quality management (TQM) in any company, as the purpose is to look beyond the financial performance targets.
- The control and authority given to lower management helps create value addition
- Unlike traditional method, we encourage managers to achieve future results, rather than just interpreting the past information.
- In some organizations non-financial performance indicators are more valuable to stakeholders than the conventional financial ratios, beyond budgeting allows measuring these NFPIs
- We set the relative targeting for shorter terms to achieve the targets realistically
Conclusion
The beyond budgeting approach aims for decentralized control in management. This approach makes decision making faster and creates flexibility in short term planning. The management is then encouraged to set targets beyond the traditional financial performance metrics. The management empowerment comes with clearly defined goals and objectives.
The reward culture associated with the beyond budgeting approach encourages the behavioral change in the staff. This method is helpful for the fast changing industries like IT, marketing, and social media agencies.
The performance evaluation in the beyond budgeting is based on total team performance, with weighted performance measuring metrics. While the basic purposes of budgeting remain the same, the holistic approach that creates a sense of TQM makes beyond budgeting method more appealing to the managers and staff alike.
