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Categories: Knowledge6.9 min read

Corporate Budgeting: Traditional vs Beyond Budgeting

When choosing the right budgeting method for your business, the management style and corporate structure of an organization have a significant influence on the design and implementation of corporate budgeting processes. In this blog post, we’ll compare two budgeting methods: the more traditional budgeting approach and the method commonly called “Beyond Budgeting.” Three additional tips on how to improve the corporate budgeting process in your organization will help you to put the theory into practice.

What is Corporate Budgeting?

Corporate Budgeting is the process of translating an organization’s planning into financial data. A budget is a goal-oriented plan formulated in terms in numbers. Within the plan, a certain time period with a certain degree of commitment is predefined. A budget allocates resources aligned to meet strategic goals and targets.

Corporate Budgeting in need of Agility and Flexibility

Agile, flexible, unified: More than ever, companies are faced with rapidly changing markets and business demands. Even with something that seems as straightforward as budgeting, to successfully identify and use market opportunities and successfully shape your organization’s approach to Digital Transformation, adapting quickly to technological progress within all areas of your company is mandatory.

Because it is a fundamental element of business to support sound decision making, planning and budgeting is among the most important tasks for organizations. With this in mind, it is not surprising that more and more organizations across various industries are looking to improve their approach to planning and budgeting.

Management Style Matters

The traditional corporate budgeting approach is commonly found in business. Broadly speaking, it includes a top-down approach and manages almost purely “from the top.” Traditionally, budget decisions are firmly rooted at the management level. It translates the objectives into operational goals, plans and initiatives for all departments and employees.

A “from the top” approach is primarily aimed at short term goals and profits. This creates potential disadvantages: short term goals may contradict each other in some circumstances and can even negatively impact employees who may feel the need to go “outside the lines” to meet those goals, especially when pressure is high.

The “Beyond Budgeting” approach is quite different: Managers empower and coach appropriate teams and departments that are much closer to internal and external customers in their daily business and more likely to be intimately familiar with the changing demands of the market.

The key mindset of this modern budgeting approach is businesses will see an improvement in results as management partially relinquishes control. This enables departments and teams to take advantage of their proximity to customers and to react autonomously. This in turn influences goals, plans and initiatives.

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The Corporate Structure

The traditional budgeting approach gives centralized authority to the top of the administrative “pyramid.” It communicates goals, plans and initiatives at several corporate levels. This centralized management structure consumes large amounts of resources, time, and money. There is also a risk that this form of corporate structure can isolate managers from fast-moving market developments.

A “Beyond Budgeting” approach changes where those decisions are made. The formal structure of a company remains unaffected. Decentralized business units and teams are now able to act more autonomously.

Because these groups are closer to the customers and work with them on a daily basis, they are more aware of changes in customer needs and are able to respond more effectively and quickly to these changes. The approach, when used correctly, generally provides impressive results: Delivery of faster services, better products, and more collaborative, engaged stakeholders. Listen to those who are most often listening to your customers and adapt your budget accordingly.

Corporate Budgeting: Conclusion

More inclusive collaboration across the organization can achieve better results. With the modern “Beyond Budgeting” approach, traditional, fixed targets can be replaced by relative comparisons with colleagues, benchmarks, and best practices. This opens up new potential without having to change the fundamental company structure.

However, the Beyond Budgeting approach isn’t a “perfect solution” for every organization. Combinations of top-down and bottom-up budgeting approaches are becoming more common to make sure valuable firsthand knowledge from the different departments or business units isn’t missed.

3 Tips on how to improve your Budgeting

For corporate budgeting, companies often rely on solutions they’ve pieced together over time, or on the traditional tool of finance, Excel spreadsheets. Given the growing amount of financial data that goes into enterprise budgeting, both approaches can lead to a relatively high error rate and, as a result, unnecessarily long turnaround times, coordination and approval processes. These three tips can help your organization to improve your corporate budgeting process.

The budgeting process is collaborative. This means that a solid budgeting approach is based on a broad data foundation that includes the planning data from departments across the organization. With the right approach and careful planning, end-to-end improvements in the budgeting process are possible!

1. Make data handling more transparent

Timing, as well as the way in which data is transferred, can influence the design of the budgeting process. Ensuring confidentiality of sensitive business information is also an important component.

It is therefore particularly important that all involved in the process are informed about what data, whether financial or non-financial, they may share with whom and when. This ensures that collaboration is not unnecessarily slowed down.

An exchange with other finance experts can help here and provide input on how working methods can be improved and boost confidence in the budgeting process.

2. Involve colleagues early and often

No planning process is perfect. Transparency and cross-departmental cooperation are what helps make the magic in this process. And despite the short life cycle, the timely submission of data is of particular importance. After all, this influences the financial and strategic goals of the company. Only when the last line item in the budget is clear to all those involved in the process, will you be able to achieve buy-in from all stakeholders on the importance of timely submitting data and working cross-functionally.

A solid foundation for buy-in and having the confidence of those involved in the processing of the data can have positive effects at all levels: On the optimization of budgeting, the direction of the organization, and the overall results.

3. Get the flood of data under control

We all know the amount of data in a company is continually increasing, which makes it more and more challenging to maintain a solid overview of all that data. Company data must be compiled, sorted according to relevance for budgeting, planning and forecasting and then analyzed.  To realize that, a common data foundation in form of a single source of truth (SSOT) is central. Additionally every change, like a new employee or a new process, reiterates the need of a solid approach to data management.

Using a modern, customized solution provides organizations a remedy by automating and consequently simplifying data collection and analysis. Once manual activities can be smoothly managed through automation, the susceptibility to errors is significantly reduced and data entry and approval processes are drastically shortened.

With the right solution, simple as well as complex budgeting scenarios can be created and the efficiency of individual business functions can be significantly increased, resulting in a more precise, more collaborative, and more accurate corporate budget.

Jedox

Jedox is the world’s most adaptable planning and performance management platform that empowers organizations to deliver plans that outperform expectations. Over 2,800 organizations in 140 countries trust Jedox to model any scenario, integrate data from any source and simplify cross-organizational plans across all business systems. Jedox enables a culture of decisiveness and confidence so teams can plan for opportunities, react quickly to changes, and uncover what they didn’t know was possible.

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