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Budgeting And Beyond Budgeting

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Budgeting and beyond budgeting
Introduction

With the economic rapid develop recently, more and more companies pay attention to the cost budgeting, some people think that this is a good and efficient way to operate the company, it will take more benefit for them. However, some people believe that it is a inefficient method, it will waste long time and capital to do, and bring the little profit.

This essay wills analysis this issue from the different parts. The first part, it will talk about the respects of the traditional budgeting method form some sides. The second introduce the new budgeting method which named beyond budgeting. The third, it will compare with the traditional and beyond budgeting from the kinds of parts. Finally, I will give my own opinion and a reasonable conclusion about this problem. 1. What is the traditional budgeting?
CIMA’s Official Terminology of Management Accounting defines a budget as: ‘a quantitative statement for a defined period of time, which may include planned revenues, assets, liabilities and cash flows. A budget provides a focus for the organization aids the co-ordination of activities and facilitates control.

Since budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt.

In recent years, there are different viewpoints about the budgeting; some people thought that budgets are pilloried as being out of touch with the needs of the modern business and accused of taking too long, costing too much and encouraging all sorts of perverse behavior.

Advantages:
Traditional budgeting is a tool for control. 99% of European companies use a budget to control their business, help to monitor and control operations.
It promotes more forward thinking. Increasingly, connected with the company’ strategic planning. This is especially important in the fast-changing business environment.
Show employees an overall picture of the direction of the organization which can motivate staff.
Provide a framework for delegation, help to co-ordinate different departments and align them towards shared objectives.
.

Disadvantages:
Budgets are time-consuming and costly to put together, and make lots of problems, it leads to the work is inefficient.
Budgets constrain responsiveness and flexibility and are often a barrier to change. 78% of companies do not change budgets within the current fiscal years.
Budgets are rarely strategically focused and are often contradictory. Budgets add little value; especially given the time require preparing them. Budgets concentrate on cost reduction and not on value creation. Budgets strengthen vertical command and control. Do not reflect network structures that may be adopted by firms.
Budgets encourage ‘gaming’ and perverse behaviors. For example, developed and updated infrequently, often based on unsupported assumptions and guesswork, in addition, reinforce departmental barriers rather than encouraging knowledge sharing.

2. What is the beyond budgeting?
Beyond budgeting means beyond command-and-control toward a management model that is more empowered and adaptive. A set of guiding principles that, if followed, will enable an organization to manage its performance and decentralize its decision making process without the need for traditional budgets. Its purpose is to enable the organization to meet the success factors of the information economy.

The Beyond Budgeting Round Table (BBRT) is at the center of a movement to help organizations continuously improve their performance in a business environment that is market led, highly competitive and unpredictable, and in which intellectual capital is the key strategic resource. It has been in existence since 1998 with its origins in the UK, but it now has many members from the rest of Europe, the US and Australia.

Beyond budgeting – principles for adaptive Performance management
Process principles
1. Goals Set. Aspirational goals aimed at continuous improvement, not fixed annual targets.
2. Rewards. Reward shared success based on relative performance, not on meeting fixed annual targets.
3. Planning. Make planning a continuous and inclusive process, not an annual event.
4. Controls. Base controls on relative key performance indicators (KPIs) and performance trends, not variances against a plan.
5. Resources. Make resources available as needed, not through annual budget allocations.
6. Co-ordination. Co-ordinate cross-company interactions dynamically, not through annual planning cycles.
Leadership principles
1. Customer. Focus everyone on improving customer outcomes, not on meeting internal targets.
2. Accountability. Create a network of teams accountable for results, not centralized hierarchies.
3. Performance. Champion success as winning in the marketplace, not on meeting internal targets.
4. Freedom to act. Give teams the freedom and capability to act, don’t merely require adherence to plan.
5. Governance. Base governance on clear values and boundaries, not detailed rules and budgets.
6. Information. Promote open and shared information, don’t restrict it to those who ‘need

The advantages and the disadvantages.

Quick response.
Because of avoids the various complex factors in the management process, the use of Beyond Budgeting model of the company, the operation more efficient and simple.

Innovation strategy.
Through the use of Beyond Budgeting model within the company, employees consciously create an open, introspective environment, the establishment of such a work atmosphere of mutual trust between employees, for knowledge sharing and exchange of experience is very useful. Such knowledge sharing culture while benefiting go on budget allocation, sector performance of a reward system in addition.

Low cost.
The entire business process becomes extremely simple, managers when considering quality and cost improvements, just consider "suppliers - consumer" this relatively simple relationship chain. Unplug the budget concerns and because managers are encouraged by the courage to challenge fixed costs, seeking to reduce the cost of sustainable method. Use beyond the budget model of the company, not only closely linked to production and customer needs, also products, processes, projects, and organizational structure and corporate strategy unifies.

Customer loyalty.
Beyond Budgeting model using the company depending on customer value as a strategic center of the design process in order to meet customer demand. In the course of business, the customer's request to make a quick response is very important, therefore, frontline staff have the right to make a quick decision.

Limitations of beyond budgeting
It is difficult to say categorically whether any one program of change leads to direct and measurable improvement in shareholders’ wealth within a given period of time. It is easier to say what hasn’t worked. For example, it is doubtful that many of the aggressive expansion projects of the 1990s involving significant mergers and acquisitions have improved the wealth or shareholders. But in a numbers of organizations that have migrated towards the adaptive and decentralized model, their leaders have been adamant that it was this switch that underpinned their performance transformation.
3. The difference between the traditional and beyond budgeting
1. Management style:
Traditional Budgeting: command and control
Traditional Budgeting is grounded in command and control. The core approach: the executive team is best equipped to translate objectives into operational goals, plans, and initiatives for all business units and employees.
An underlying assumption can be that managers and employees do not have the skill sets, motivation, or honesty to act in a way that supports company objectives. A command and control approach is too often driven by an end-over-means focus on short-term profits that can foster questionable and even dishonest behaviors.
Beyond Budgeting: empower and coach
By contrast, Beyond Budgeting is grounded in empowering and coaching. The core approach: results improve when management relinquishes control and allows business units and teams to leverage customer proximity and act autonomously on goals, plans, and initiatives. The executive role shifts toward a coaching role characterized by entrusting business units and teams with executing on high-level goals – and then challenging and supporting them as needed.
2. Seat of authority: centralized bureaucracy vs. decentralized teams
Traditional Budgeting: centralized bureaucracy 集中官僚主义
Under a Traditional Budgeting approach, authority is centralized at the top of a management bureaucracy. Objectives, plans, and initiatives are handed down through multiple levels of the organization, and business units and teams are micromanaged to deliver results aligned with these mandates.
Beyond Budgeting: decentralized teams 分散团队
With a Beyond Budgeting approach, power is delegated to decentralized business units and teams that are now empowered to act autonomously. Because these groups are closer to customers and engaged with them on a daily basis, they are more aware of shifts in customer needs and able to respond to these shifts more effectively and more quickly. it is a change in where decisions are made rather than a change in the structure of the organization itself. Charged with innovating and experimenting based on more intimate day-to-day customer interactions, front-line groups are empowered to obtain the resources they need, as well as the freedom to act as they see fit.
3. Performance measurement: fixed targets vs. relative targets
Traditional Budgeting: fixed targets
Under a Traditional Budgeting approach, executive management sets fixed targets and assigns them to the appropriate business unit or individual in a silo-like or standalone manner.
Beyond Budgeting: relative targets相对目标
A Beyond Budgeting approach foregoes fixed targets in favor of relative targets. Contrasted with comparing business unit and individual performance to fixed budgets, service level agreements, and incentives, Beyond Budgeting compares team performance to dynamic and more relevant performance indicators like peer performance, benchmarks, and best practices.
The goal is not to meet or exceed rigid stretch targets, but rather to achieve success by cooperating as a team to continuously improve relative performance.

Conclusion
We see the beyond budgeting model as having particular relevance for knowledge-based companies which are increasingly a feature of a developed economy.

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