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 budgeting processes. In this blog post, we’ll compare two budgeting methods: the more traditional budgeting approach and the method commonly called “Beyond Budgeting.”
Agility & Flexibility is Key
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 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.
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.
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.