The way we use budgets isn’t working. The concept of Beyond Budgeting aims to fix this – but users need to brace themselves for change. SAIPA’s Professor Rachied Small, speaking at Finance Indaba Africa on 12 October 2017, was critical of the way that organisations create and use budgets.
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Rachied said that the current model of budgeting involves the allocation of resources without an understanding, ahead of time, of where those resources will be needed. Instead of communicating management goals, departments are merely given money and told to spend it wisely.
"Most expenses in terms of budgets happen in the last two months of the financial year," he said.
This is because managers know that they need to spend their budgets or they won't get the same allocation in the next year, so they buy new computers or have a strategy session to use up their funds.
In organisations that have rolling three-year budgets, the second year isn't recalculated in response to the changing environment - the third year is merely added as the budget rolls over with each financial year.
"But do you agree that the environment is changing? Everything is changing. Yet, we are still using budgeting models and theory developed in the 1900s. We haven't taken any changes into consideration."
This, Rachied says, is where the "radical transformation" of Beyond Budgeting comes into play. Beyond Budgeting is a fundamental re-examination of how budgets and organisations might be managed better.
"We are living in a constantly changing business environment, therefore our budgets must be flexible and agile," he said. "They must be like water and flow to where your operations are."
He said that with Beyond Budgeting, the budget should not extend beyond three months. The budget must be linked to KPIs and the information must be relevant and up to date, so that when you get the results, the next budget is related to actual performance.
This, he said, encourages managers to become leaders in their particular areas, to make decisions and be accountable. "It becomes your responsibility to achieve your directive with the resources you said you would need. Your performance impacts on the entire organisation with links to other departments. You are one of the links. If you are weak, the chain collapses." He added that incentives should be flexible.
"What it says is that under Beyond Budgeting you must stretch your goals, and when you reach the outer boundary, you must ask yourself how far you can still go. Question your own abilities continuously."
And likewise, he said, trust the people you work with - don't micromanage. "Everyone is equal and treated with respect." In this way, he said, budgeting becomes a planning model rather than a control model.
The benefits are as follows:
- Eliminates the waste of resources
- Improves performance management
- Clear accountability
- Better communication across functional teams
- Front-line managers are empowered to run the business
- Organisational nimbleness is facilitated in response to the changing business climate.
