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Beyond Budgeting

A framework aimed at establishing a highly decentralized organizational system and adaptive set of management processes

What is Beyond Budgeting?

Beyond Budgeting is the idea of abolishing traditional budgeting processes to eventually improve management control over an organization. By abandoning traditional budgeting processes, a company aims to establish a highly decentralized organizational system and adaptive set of management processes.

 

Beyond Budgeting

 

Summary

  • Traditional budgeting processes carry a lot of serious flaws.
  • Beyond Budgeting is an idea of abolishing traditional budgeting processes to improve management control over an organization.
  • The Beyond Budgeting framework is built upon six leadership principles and six management processes principles.

Rationale Behind Beyond Budgeting

The rationale behind the Beyond Budgeting framework is that traditional budgeting processes carry a number of flaws. Some of the flaws include the following:

  • Development of budget is time-consuming and costly.
  • Budgets are rarely focused on the company’s strategy.
  • Budgets generally do not stimulate value creation.
  • Budgets may create obstacles for changes.
  • Budgets increase the centralization of power within an organization.

 

Breaking Down Beyond Budgeting

The idea of Beyond Budgeting is still relatively new. The active development of the framework started in the last 20 years. Its rise is associated with the shift from a traditional bureaucratic organizational model to an agile business structure.

Essentially, the Beyond Budgeting framework is based on the idea of business agility. Initially, agile enterprises were prevalent primarily among software development companies. Such companies established agile techniques of business to quickly adjust and adapt to the constantly changing goals and requirements in an extremely competitive environment. Nowadays, businesses across different industries actively implement agile techniques to adhere to demanding megatrends such as digitalization, globalization, and mobility.

Beyond Budgeting Institute is a non-profit organization that develops and promotes beyond budgeting principles. The organization hosts the annual Beyond Budgeting Round Tables (BBRT), a global network that encourages organizations to learn the BB principles. BBRT also fosters sharing information and experiences of adopting the principles.

 

Beyond Budgeting Principles

The Beyond Budgeting framework is based on 12 principles. However, according to the institute, the principles are neither a recipe nor a checklist for management. The principles merely serve as a guide to companies and managers who are willing to adopt the framework.

The two pillars of the Beyond Budgeting framework are decentralized leadership and adaptive management processes. Each dimension of the framework consists of six principles, as shown in the image below:

 

Beyond Budgeting - Principles
Source

 

Beyond Budgeting Techniques

Complete abolition of traditional budgeting processes requires the implementation of new techniques that will replace them. The BB framework does not specify the exact techniques that are applicable to all companies.

However, there are some techniques that are proven to be effective in real cases in the past. The techniques include the following:

  • Rolling forecasts are created monthly or quarterly rather than annually.
  • Company’s targets are based on the key performance indicators (KPIs).
  • The performance of the company’s managers is evaluated based on external benchmarks rather than their past performance.
  • Operational managers are empowered to react to the changes in the business environment and can dynamically coordinate their actions.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Bureaucracy
  • Guide to Project Finance
  • Top-Down Budgeting
  • Types of Financial Analysis

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