What And Why Beyond Budgeting.

Beyond budgeting approach to performance management aims to reduce the limitations of traditional budgeting process. The problems associated with budgeting are:
1. Budget takes lot of management time which can be used to concentrate on core activities.
2. Budgeting limits the opportunities available to the organization not identified in the budget. Ex, opportunity to bid for the tender will be lost, if budget has not allowed for it.
3. Budget is perceived as pressure to achieve targets. In current world, people like freedom.
4. Budgeting limits the innovation which is considered key to success in today's rapidly changing environment. Employs have to act within budgeted figures.
5. Budgeting imposes the targets on employees which they might consider unrealistic.
6. Budgeting is against the current team working and decentralization philosophy adopted by many businesses.
7. Budgeting focuses on short term results which may be detrimental for business in future.
8. If rewards are linked to performance, employees adopts unethical means to achieve targets.
Beyond budgeting argues that budget trying to do every does nothing. Other performance measures can be used more successfully used for forecasting, rewarding, planning, co-ordination, resource allocation and control.
9. Forecasting.
Other forecasting techniques can be employed like time series analysis and moving averages by extrapolating historical figures. Forecasting should not be limited to financial information, it should incorporate non-financial information as well.
10. Resources allocation.
Resources should be allocated to each responsibility center as needed. This will allow to grab opportunities which are not identified when making budgets. Resources can be directed towards business unit having opportunities.
11. Rewards.
External benchmarking should be used for performance measurement, like competitors actual performance (financial and non-financial), instead of using budget to compare actual results. Linking rewards to non-financial performance measures encourages employees to focus on other area critical to business success, like customer, quality and innovation. Beyond budgeting encourages employees to focus on long term objectives of the business.
12. Planning.
Employees should be involved in planning for the achievement of business objectives. Important information from employees expected to follow the plans enhance acceptability of plans to employees. Planning should be done on a continuous basis according to the current and future circumstances and past experiences. In traditional budgeting, planning is done when budget is made which may not be feasible in constantly changing environment.
13. Co-ordination.
Divisions or responsibility should be given autonomy to act. It does not mean that department, like production and sales can do what ever they want. It means independent subsidiaries, division and branches should be allowed to take decision in their best interest. External forces will determine strategic and operational decisions.
14. Control.
Control should be exercised through the use of financial and non-financial performance measures. Models can be adopted like balance score card. Goals are set are continuous improvement as opposed to fixed target which are forced to achieve that employees may feel being pressurized.
Essentials for Beyond Budgeting Implementation.
15. Decentralization & empowerment.
Business structure should be decentralized and have sufficient authority to take decisions. Budgeting is the part of bureaucratic business structure and centralization.
16. Clear communication.
Clear flow of information across whole business will enable business units to take sound decisions in the management of their affairs within the bounds of authority, principles and values, communicated to them.
17. Focus on customer.
Business should have a philosophy to respond flexibly to changing customer needs. Beyond budgeting will provide the flexibility to respond to customers in efficient and effective way.
18. Guidance for head office.
Head office serves as a support centre which provides supporting activities like legal advise, information technology based services.
Benefits of Beyond Budgeting.
19. Rapid response.
Opportunities and treats identified can be dealt with. Decision can be taken quickly due to decentralization and empowerment which reduces the need to communicate matters to top level management. In rapidly changing environment ability to quickly respond to change is vital.
20. More loyal customers.
Efforts are directed towards customer satisfaction instead of compliance with budget. In today's environment customers are considered vital for the business success. Decision can be made by employees involved in provision of goods or services to customers.
21. Cost savings.
Resources are allocated when it is needed. It prevents over-consumption of resources by not allocation resources in advance which may be seen as permission to consume whole of it. Every item of expenditure can be challenged for its necessity in terms of value to the customer. Unnecessary costs are be voided.
22. Innovative strategies.
It encourages managers to act creatively as result of cost barriers are removed. It is done in the climate of trust and discipline. Skill inherent in the employees can be used to achieve competitive advantage.