Beyond Budgeting – Principles, Definition, and Requirements
When traditional budgeting is criticised by Chief Financial Officers (CFOs) and Controllers, the complaints often revolve around the process being time-consuming, costly, centralising Financial Management, shifting decisions upwards, and creating an illusion of control. There are also opinions that budgets quickly become outdated and are not sufficiently tied to the company's strategy. Some even argue that the budget sometimes creates obstacles in change work.
If you are working with traditional budgeting, it can be difficult to adapt when conditions change, and if a cost soars, you may not have the opportunity to re-plan your resources.
To save time, many are therefore transitioning their planning, budgeting, and forecasting process to be more in line with the principles behind Beyond Budgeting. You can then move from a detailed budget that spans a fixed period to working with drivers, time periods that suit your operations, and target levels linked to key figures instead of cost centres and accounts.
Beyond Budgeting's 12 Principles
According to the Beyond Budgeting Institute, Beyond Budgeting is a management philosophy with 12 associated principles that should not be seen as a checklist, but guiding principles that help you and the managers in your organisation to manage and lead. The principles are divided into (decentralised) leadership and (agile) management:
Leadership with Beyond Budgeting
1. Purpose: Engage employees through bold, communicated, and long-term common goals to create a common purpose and aspiration, rather than focusing on achieving short-term financial goals.
2. Values: Guide through sound values and common sense instead of details and rules.
3. Transparency: Do not silo information. Open up and let employees regulate and educate themselves, creating their own control and innovation.
4. Organisation: Cultivate a sense of belonging and organise work around teams with shared responsibility. Avoid control and bureaucracy.
5. Autonomy: Trust that employees act in the company's interest and do not penalise everyone if someone exploits the situation.
6. Customers: Link everyone's work to activities that create value for the customer and avoid goal and interest conflicts.
Management with Beyond Budgeting
7. Rhythm: Organise the business rhythm around events, not just the calendar year.
8. Targets: Set directed, ambitious, and relative goals. Avoid “waterfall thinking” and fixed goals.
9. Plans and forecasts: Make planning and forecasting agile and impartial processes. Avoid rigidity and politics.
10. Resource allocation: Foster cost awareness and make resources available when there is a need instead of detailed annual budgeting.
11. Performance evaluation: Evaluate performance holistically and with feedback from other employees (the team) to create a learning experience and development. Performance evaluation should not solely be based on metrics and should not only lay the foundation for reward (bonus).
12. Rewards: Reward shared success in comparison to competitors. Not based on fixed performance agreements.
The term "Beyond Budgeting" puts a large part of the company's change work in the hands of the finance department and the CFO. To succeed, a deep understanding of the company's Key Performance Indicators (KPIs) and drivers, and the business at large, is needed. Mandate and consensus among management and managers is also required.
Definition of Beyond Budgeting
As the 12 principles are intended to serve as a guide, it's difficult to know what level you need to reach "in principle" to be able to say that you are working with Beyond Budgeting. Many companies work with the principles through other management philosophies without having defined them as "Beyond Budgeting".
The concept of 'Budgetless Management' or 'Dynamic Management' has been in use since the 1970s and is synonymous with Beyond Budgeting, although it doesn't have the same clear conceptual connection to the principles of Beyond Budgeting.
What is required for success with Beyond Budgeting?
Initiating work based on the principles of Beyond Budgeting can be a significant transformation that isn't suitable for everyone. Nowadays, it's slightly more prevalent amongst software companies that operate with more agile governance and methodologies.
For traditional or hierarchical enterprises, Beyond Budgeting may seem challenging. However, Handelsbanken and Volvo are two renowned examples of businesses that have transitioned to Beyond Budgeting, with increasing interest being shown by others, as stated by the Boston Consulting Group.
Numerous businesses that have attempted to transition to Beyond Budgeting have encountered difficulties because their business operations, lead times, organisational structure, or existing control systems do not support the notion of budgetless control. Hence, be prepared to conduct a thorough assessment and develop a plan for this transformation. It may require several smaller steps and adjustments before making the "great leap".
Having support in the form of comprehensive planning software, established strategies, and objectives also form the preconditions for success. The software should facilitate the implementation of Beyond Budgeting principles and enable decentralisation, communication, and flexibility. It also creates a sense of shared ownership.
Also, bear in mind that just because decisions can be made more swiftly doesn't necessarily mean they'll be better. Better decision-making inputs, based on facts, data, and insights, usually lead to better outcomes.
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Financial Management – Methods and Tools
Financial Management is the process of translating strategies and business plans into actions that will help achieve the company's financial goals. In this process, you aim to align the goals of employees with those of the company by implementing control, measurement, and follow-up.
Financial Scenario Planning and the Budgeting Process
In a fast-changing business environment, companies and organizations need to be able to quickly monitor their financial situation and make changes in their plans going forward.
Rolling Forecast and Rolling Budget
Rolling Forecasts are a type of forecast that, instead of focusing on the calendar year, always base themselves on a set period going forward, such as 12 or 18 months. Rolling Forecasts are carried out continuously and are a support to the company management, but can also be used to, for example, forecast sales.