Briefly on Beyond Budgeting
Half of companies believe their budget will be no longer of interest when more than half of the financial year has expired. Beyond Budgeting accommodates a more modern management form.
Beyond Budgeting focus more on measuring our performance over time and ensuring ongoing planning, such as, rolling forecasts as well as learning ability to better understand the future. Beyond Budgeting helps ensure the involvement of the entire organization. This gives more responsibility and ownership, and thus, more faster reaction to market changes.
49 % of the companies estimate that their budget is not relevantfor more than half of the financial year
Is it time for a showdown with traditional financial management and budgeting? The question becomes relevant when an analysis by Basico Consulting shows that only 1/3 of the companies are satisfied with their budget. Does the budget lose its actuality too fast? Does budgeting take time from other more value-creating activities in the company? Is a static budget relevant in a dynamic world, where most industries experience changes at such speed that budget and traditional financial management are no longer geared to this? Is it time to go Beyond Budgeting?
Criticism of traditional budgeting
Over the years there has been increasing criticism of the traditional approach to budgeting and financial managament. Some criticsm are about the budget assumptions and the market situation can change many times during a financial year. One can question whether the budget is useful in measuring a company’s performance. If the company reaches the budgeted revenue increase, it is, of course positive. But is it real, if the market has significantly higher revenue increase? Or if the biggest competitor has one twice as high?
Does the budget reward the right people?
The Budget is a way to tell how good we were to predict the future and not to measure our performance. Another part of the criticsm of the traditional budgeting is that the companies reward people who reach their budgets. But does it really say anything about this person’s skills? Or is it instead a person in this department who got lucky with how the market developed to his or her advantage?
War of numbers
Budgeting is for many companies a time-consuming process, where many people spend time on calculations and data, and things are put on standby while budget negotiations are on. In many companies, a war of numbers and a struggle to budget in a way to make sure the budget its reachable. This process might be much more value-added if the energy instead was used for constructive strategic dialogue and decisions. In many companies, there is a lot of time and effort wasted to make budget follow-up in reports, explanations of deviations, meetings, etc.
Beyond Budgeting – an option?
If you recognize one or more of the above-mentioned criticism in relation to budgeting, then the company might be ready to use a completely new management philosophy – Beyond Budgeting
All companies are probably able to optimize the way of doing different things – also when it comes to financial management. Even though the concept of traditional budgeting and financial management is used, it not necessarily means all companies work with the budget process the same way.
On the contrary, there are many different ways to resort the traditional budget. Also, criticism of existing budget processes is not new. There has been a number of different trends over the years, ways to abolish the traditional budget, and there have been many suggestions for what could replace it.
So far, it has not been seen to the extent what Beyond Budgeting adds. Firstly, the philosophy has some very specific bids on how concrete techniques like rolling forecasting, trend curves and relative performance evaluation can be used as a management tool when used in a structured interaction. Secondly, the philosophy is based on the fact that the company discusses and assesses existing budget and management models. The starting point is, that you initially begin to conduct an analysis of the company’s budgeting and management methods. When doing this, the company has a good basis for assessing whether new methods are needed and if the techniques of Beyond Budgeting consists of may contribute positively to the individual business.
Elements in Beyond Budgeting
There are several elements in the Beyond Budgeting philosophy. One of the most important is that you go from the annual budget process and instead switch to ongoing planning. By this, there is a greater degree of dynamism and continuous adaption to market developments. This can be done monthly, weekly or down to daily forecast. The accuracy of these forecasts may pave the way for the traditional measurement of whether traditional budget goals are achieved.
Beyond Budgeting requires the entire company to be integrated into the current forecasts so all departments can organize and plan from non-contradictory forecasts. Beyond Budgeting contributes to creating a much higher degree of involvement and probably also the sense of responsibility and ownership in relation to the individual tasks and departments. Advocates for Beyond Budgeting argue that much greater dynamics and higher degree of readiness are achieved so that crises such as the financial crisis or other changes of the market is seen much faster and the company can respond more easily and adapt to these changes.
Qbit will help you with Beyond Budgeting
Like traditional budgeting and financial management requires some concrete tools to handle the process, Beyond Budgeting requires the company to have the right tools and concrete knowledge about the management philosophy.
Qbit is one of the companies that is already at the forefront of Beyond Budgeting. We have built up extensive knowledge in the fields of finance, activity and budget management. Our solutions are based on the German product Jedox, which can be integrated 100% with Excel and at the same time as easy to use.
