Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap

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Traditional methods of budgeting in the public sector centre on the bid system and incremental budgeting. These approaches focus on changes at the margin and generally reflect acceptance of the budget base from the previous year. This is partly a reflection of the size and complexity of public sector organisations, but also the internal political power of large departments, which protect their positions through their relative strength. Bid systems also minimise conflict, as debate and power struggles are o Most budgets are not based on a rational, causal model of resource consumption, but are often the result of protracted internal bargaining processes. Unlike traditional method, we encourage managers to achieve future results, rather than just interpreting the past information. Financial performance reports that compare actual results against budgets are ‘lagging’ indicators. This means they only measure past performance and they don’t help the user of the report identify the root cause of any issues flagged.

The Beyond Budgeting framework is built upon six leadership principles and six management processes principles. Related article What Is a Master Budget? Definition, Purposes, Usages, and More Differences between Beyond Budgeting and Traditional Budgeting Model 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 Sometimes though, historic data may be outdated and forecasts based on these data sets may not be as accurate as desired.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. Targets: Leaders opt for directional, ambitious, and relative targets instead of fixed and cascaded objectives.

Raising the Bar

Purpose: This involves motivating and inspiring people to direct their energies towards noble causes that are largely beneficial for everyone, not around short-term financial goals. 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.

We encourage the company to decentralize, free communication, persuade the employee to initiate a new idea. It will lead to high engagement, a strong sense of belonging and accountability throughout the whole organization. Read more: How has Dana-Farber shortened their budget cycle by 40 per cent? Alternative to Traditional Budgeting Practices Targets: Fixed and cascaded targets are less effective than directional and ambitious targets. Therefore, targets should be set using a SMART methodology, so that better results can be obtained. Starting with planning, the beyond budgeting relies on rolling budget. Flexible budgeting with a monthly or quarterly time frame. In some organizations non-financial performance indicators are more valuable to stakeholders than the conventional financial ratios, beyond budgeting allows measuring these NFPIsThe beyond budgeting approach defies the traditional budgeting method in many ways. Some of the core values of beyond budgeting approach are: However, there are some techniques that have proven to be effective in real cases in the past. These techniques include the following: Traditional budgets, as discussed above, also rely on the previous period’s data and may, therefore, not be suitable for startups. Similarly, businesses going through unstable periods may also find that traditional budgets are not suitable for them and should use zero-based budgets or activity-based budgets instead.