Beyond Budgeting – Continuous & Dynamic Targeting
What is beyond budgeting?
Beyond budgeting is a more agile approach than traditional budgeting. The strategy was introduced as early as the 1970s and has since been a topic that has interested many – but has historically only managed to convince a few. One of the major proponents of abandoning the classic budget was the Swedish bank Handelsbanken and their then CEO Jan Wallander, who early on saw the value of a more dynamically controlled organisation.
So, what are the benefits of working with beyond budgeting instead of a traditional budget? In this article, we answer that question: we will go over the difficulties with traditional budgeting that you can avoid with beyond budgeting, and also how you can make your work with forecasting more dynamic and active.
Why can the traditional budget be a problem?
The budget is a classic instrument which must align with the overall business plan, allocate resources and bring the business closer to the set goals. However, few people actually experience that the budget lives up to all of this. It can often be perceived as rather inhibiting and counterproductive – especially when it comes to bringing the business closer to its goals.
Working towards a fictitious deadline with an established framework can in some cases be beneficial, but unfortunately it can also lead to a lot of missed opportunities along the way. In addition, it becomes hard to adapt your business in the pace that’s needed to really be able to execute towards the long-term business plan or short-term goals.
For example: due to external factors, the budget for travel expenses has been maxed out even though there’s still time left before the fictitious deadline. You therefore try to save money by restricting the travel budget and thus risk missing out on opportunities – which in a worst-case scenario can be income- and growth inhibiting. Another example is when you decide to stop all recruitment processes since you’ve hit the ceiling for HR- and staff expenses because the replacement recruitments cost more than you had budgeted for.
The budget was kept – but was it the best thing for the business in the long run?
Another common criticism of the traditional budget is that it often becomes obsolete even before the board has had a chance to vote on it. The world we live in right now is changing faster and is more unpredictable than ever before and therefore, the need for agile and dynamic business management is growing.
Agile and budgetless management - Beyond Budgeting
Today, several big companies have abandoned the traditional budget for a beyond budgeting strategy with agile business management, for example: Toyota, American Express, Statoil, Hilti to name a few. However, when looking at the big picture, few companies have dared – or succeeded – to leave the traditional budget behind. There are many different reasons for this: the difficulties in establishing a new structure, lack of alignment, cultural barriers and the lack of a financial or operational planning system, to name a few.
Beyond Budgeting – Reduced control and more dynamic performance management
What you want to achieve with beyond budgeting is to implement relevant instruments that continuously support the business' strategic direction – you want to look beyond the traditional accounting-focused management and instead follow well-known KPIs, concepts and drivers while moving the business from "command & control" to “empower and adapt”. This means that you stop striving for control and instead make room for flexibility so that the business can change with the outside world. You can work with dynamic management in several different ways and one of the most popular ways is rolling forecasts, but dynamic resource allocation and target-based management are also examples of how organisations work with beyond budgeting.
In order to work effectively with beyond budgeting you need an in depth understanding of the business KPIs and drivers, and you also need to make a cultural change within the business – from board to management, middle management and down to all employees. Everyone in the company need to have a consensus on how the business should be planned and followed up. Strategy and objectives must be crystal clear and IT systems should be implemented to support the business.
Beyond Budgeting requires dynamic and active forecasting – and well-functioning systems
When you abandon the traditional budget, you need to implement a dynamic and active forecasting process. The forecast and follow-up processes must be continuous to reach a higher degree of flexibility, proactivity and adaptability – and everything needs to be aligned with a clear business plan as well as short- and long-term targets. This places high demand on the IT-system you use.
Well-designed business intelligence applications – which make KPIs and drivers visible and accessible to everyone in the business – must be implemented, as well as a system that enables proactive, data-driven and continuous forecasting processes with a dynamic and flexible structure. The level of detail may be lower, but the frequency requires an integrated system set-up that truly supports the new way of working and increases the accountability for everyone involved.
Would you like to discuss your prerequisites and how you can move beyond budgeting to a more proactive, continuous and dynamic performance management? Please don’t hesitate to get in touch with us.