Incremental Budgeting Essay

Incremental Budgeting Essay.

The downturn has rendered budgets agreed last year largely irrelevant. Analyse Managers in business make decisions that affect profitability of business. For the decision to be effective and successful, it is important for organisation to plan and coordinate the decision. (CIMA official terminology, 2005) defines budget as an expression of a plan that is quantitative and can be defined over a period of time. Traditional budgeting as offered a lot of contributions in many years. Research shows that it seems it is more unsuitable for the modern business.

The objective of this essay is to explain what budgeting is, the purpose of budgeting, types of budgeting, definition of annual budgeting, its advantages and disadvantages, definition of rolling budgets and it advantages and disadvantages.

Budgeting serves a number of useful purposes. These include:

➢ Forecasting
➢ Planning
➢ Communication
➢ Coordination
➢ Authorisation
➢ Motivation
➢ Performance evaluation

The generally purpose of budgeting is to estimate and predict the future financial performances.

There are different types of budgeting, which are incremental budgeting, zero based budgeting; priority based budgeting and rolling budgeting.

The format of preparing budgeting may be similar but each of the basic approaches has relative advantages and disadvantages.

Incremental budgeting is also known as traditional or annual budgeting. It’s a method of budgeting based on the past and actual results, for example adjusting for known changes and inflation (CIMA official terminology, 2005). It is also used as a base for preparing budgets with additional amounts added to the current budgetary periods. The idea of incremental budgeting is that it is easy to understand thus it is easy to operate.

Incremental budgeting has several advantages. It is simple and easy to prepare. The method is consistent with the line of authority and responsibility in the organisational unit which can be applied to any organisations whether big, small or medium sized because of its flexibility. The main advantage is that it is much more straightforward than ZBB or using rolling budgeting (Drury, 2009). It conserves time and energy, it give better and general understanding which is accepted by government board members and legislators (Smart, 2004).

However, incremental budgeting continues to fail to meet today’s business demands. The major criticism is that incremental budgeting process is incapable of meeting the demands of the new competitive environment. Thus, the cost of non-unit level activities becomes fixed and inefficient. It also encourages wasteful spending which makes it difficult to maintain the main concept of budgeting. When the budgets does not relate with the past working activity level, it tends to become outdated. With this form of budgeting, there are no incentives because it tends to be a percentage of increase in budgets yearly. It also does not consider changes in the priorities of a company, from the previously set budget therefore creating disappointments (Drury, 2009).

The problems with incremental budgeting have given a rise to new method of budgeting such as rolling budget. Rolling budget can be define as a budget that is updated continuously, increasing a further accounting period (month or quarter) when the newest accounting period is outdated. Its use is specifically good where future costs or activities cannot be predicted correctly (CIMA official terminology 2005). Rolling budget is reliable because it allows for update of the budget every time there is subsequent deficit in budget (due to economic increase or decrease).

Rolling budget is reassessed regularly which makes it more realistic and accurate compared to annual budgeting. The uncertainty of rolling budgets is lessen since it is revised regularly. Therefore it can be said to be very useful in period of an increase in inflation. The planning and controlling is based on recent and updated plans because the budgets are continuous as it is always extended a numbers of months ahead. Rolling budgeting is suitable for large organisations such as Texaco, Volvo and Bulmer because it considers the economic changes (Drury, 2008). Although rolling budgets has advantages, however it has disadvantages as well. It takes time and it is expensive as it requires a number of budgets to be produced during the year. The amount of work needed with each reassessment of the budget can be off-putting for managers.

Each revised budget may require revision of standards or stock valuations which is time consuming. Zero based budgeting is a method of budgeting that needs all costs to be particularly justified by the goods expected (CIMA official terminology, 2005). It helps to remove long standing inefficiencies, helps to minimise waste and focuses attention on the value for money although it takes times and may need management to develop and learn new skills (Drury, 2008). Priority based budgeting are budget whereby budget requests are accompanied by a statement outlining the changes expected if the prior period budget was increased or decreased by a certain amount or percentage. It is suitable for non-for-profit organisations that have issues with long-term strategic planning and resource allocation.

“The downturn has rendered budget agreed last year largely irrelevant” this statement is true to some extent, base on the criticisms of budgeting and beyond budgeting which state that budgeting does not reduce cost rather it protect it. Budgets are time consuming, expensive and sometimes it fails to focus on shareholders values. It prevent fast respond, too rigid and it does not focus on customers satisfaction instead it focus on sales targets and can lead to unethical and dysfunctional behaviour such as building slack into the budget (Hope and Fraser, 2003). The Beyond Budgeting Round Table (BBRT) said “traditional budgeting is not only inflexible and inefficient; it is a borderline evil that contributed to notorious corporate scandals such as Enron and WorldCom.” (BBRT et al, 2007, cited in Stokdyk J. et al, 2006).

However, in spite of the criticism research shows that both financial and non financial managers and companies still uses budget because they thought that they were important for planning, controlling, performance, communication, measurement and coordination. Traditional budgeting still has its advantages over the other forms of budgeting not only because it works but because unlike the zero-based and rolling budgeting, incremental budgeting is way less expensive and less complicated to implement. Also the rolling budget is time consuming due to regular budgeting whereas incremental budgeting is done once annually. The rolling budgeting is updated regularly therefore making it more accurate compared to annual budgeting. It may not be suitable for all kind of organisation, but can provide value where appropriate. Companies have seen greater volatility in demand and might adopt rolling budgeting.

In conclusion, the main advantage of budgeting is to estimate and predict the future financial performances, although it is time consuming and very expensive. Incremental budgeting is simple, understandable and less complex to apply. It is suitable for all kinds of organizations, profit and non-profit organization. The major disadvantage of incremental budgeting is the incapability of meeting the demands of the new competitive environment. While rolling budgeting is reassessed regularly which makes it more realistic and accurate compared to annual budgeting. It main disadvantage is that it takes time and it is expensive as it requires a number of budgets to be produced during the year.


Chartered Institute of Management Accounting (2005) official terminology. Oxford Docshare (2009) The strengths and weaknesses of traditional budgeting. Available at: [Accessed: 1th march 2011] Drury, C. (2009) Management accounting for business. 4th edn. Cengage learning.

Drury, C. (2008) Management & cost accounting. 7th edn. Cengage learning.

Groves, N. & Genever, A. (2010) “budgeting after the crunch”, ACCA Accounting and business pp 40-42. [Online] Available at:$FILE/ACCA%20AB%2005%202010%20pp%2040-42%20Budgeting%20after%20the%20crunch.pdf [Accessed: 1st March 2011]

Hope, J. & Fraser, R. (2003) how managers can break free from the annual performance trap. Harvard business school.

Jarman, N. And Bibekar, S. (2009) “New era budgeting”, ACCA Accounting and Business pp 46-47. [Online] Available at:$FILE/ACCA%20AB%2007%202009%20pp46-47%20New%20Era%20Budgeting.pdf [Accessed: 1st March 2011]

Smart, C.J. (2004) Higher education of theory and research. California: kluwer academic publisher.

Stokdyk, J (2007) Traditional budgeting under the microscope. Available at: [Accessed: 1th march 2011]

Incremental Budgeting Essay

Citibank Budgeting Essay

Citibank Budgeting Essay.

1. Analysis of Budget Process at Citibank Direction and control of Citibank’s international branches are conducted via two formal management processes. Each year, top management sets sovereign risk limits for its independent branches based on proposals by country managers. Country managers may choose to operate with self-imposed limits below this upper guideline. Following, there is the budget setting process, where headquarters only provides administrative guidelines but not specific targets, with operating managers being responsible for budgets for the following year. Indonesia often set their targets above these long-term goals.

Performance is measured and compared against the budget each month, and a new forecast, which will be reviewed by the division manager, is drawn up each quarter for the remainder of the year.

This structure of bottom-up budgeting is appropriate for a decentralized firm like Citibank. This is evident from the freedom Mr Mistri has over Indonesia’s operations and the different business segments and divisions, as shown in Exhibit 2 & 3. Such a participative process is likely to increase management commitment to achieve the targets since country managers are responsible for influencing their own targets.

More importantly, country managers know the local business environment and culture better than group managers, therefore their targets are likely to be more accurate and realistic.

Furthermore, bottom-up budgeting is a form of action control while the frequent reviews of the budgets serves as preaction review. Both facilitate information sharing within the organisation, with long-term strategic goals of the firm being communicated downwards and local business potentials and risks conveyed upwards via the budgets and forecasts. They also encourage managers to think further ahead about what they want to achieve in the near future.

However, Citibank’s budgeting process appears to have an imbalanced focus with most of the emphasis placed only on financial measures. Although these measures can be easily obtained and are inexpensive because they are by-products of the accounting system, it does not fully represent all aspects of the organization’s strategies and goals. Instead, the budget could be restructured to include other non-financial aspects such as customer satisfaction and employee morale to obtain a balance, which will be vital towards the long term success of Citibank.

None of Citibank’s budget items extend beyond the next year; instead there is an emphasis on a fixed short horizon. This can result in managers developing a myopic focus instead of measuring the fulfilment of Citibank’s long-term goals or the local government’s societal expectations. Myopia is aggravated by the monthly performance reviews which reveals the focus on short term goals. Citibank should look at its budget with a longer horizon.

Moreover, the budgeting process in Citibank appears to be tedious and too time-consuming. The requirement for operating managers to conduct discussions and forecast all the line items shown on the submission form seems to take up significant time and effort. Such a process could be costly for the firm in terms of opportunity costs related to unnecessary time and resources spent. The benefits of such a tedious budgeting process must be high enough to justify the related costs.

Also, there seems to be no connection and a mismatch between the two management processes. It is only reasonable that these two processes should go hand in hand as higher returns may only be possible with a higher risk appetite. However, increase in profit goals is not matched by an increase in risk tolerance (sovereign risk limit). Moreover, sovereign risk limits is set yearly but not adjusted when budgets are revised each quarter. Citibank should consider allowing country/division managers to adjust risk limits to match any revisions in budgets during the year.

Use of the Budget for Performance Evaluation of Managers Performance is monitored every month against budgets, and incentive compensation for managers were linked to budget-related performance. Incentive compensation could range up to approximately 70% of base salary although awards of 30-35% were more typical. Assignment of bonuses were based approximately 30% on corporate performance and 70% on individual performance, primarily performance related to forecast.

This emphasizes results accountability as it involves rewarding the managers for generating good results that are aligned to the budgets. As such, it influences actions because it causes employees to be concerned about the consequences of the actions they take. However, the contradiction in this is that while these managers will not be constrained in what actions they can take to achieve their goals, they are also empowered to take whatever actions they believe will best produce these desired results. Hence, it is highly dependent on personnel controls with regards to the managers hired.

Provided that budgets were adequately set with appropriately extent of goal difficulty, these budgets act as results controls and affects a manager’s motivation since the targets are linked to performance evaluations and compensation. Furthermore, it is beneficial that manager’s compensation is tied directly to both individual(70%) and corporate performance(30%), allowing a larger perspective to be considered. Differentiation of base earnings from extraordinary earnings for which managers are not held accountable for is in line with the controllability principle. This is vital because setting performance targets to attain for each measure allows the managers to assess their performance and also get rewarded, encouraging behaviors that lead to desired results. As such, this will promise manager rewards that provide the most powerful motivational effects in the most cost effective ways possible.

However, performance evaluations based on budgeted information is backward looking (extrapolating past trends) while it is best that the evaluations be forward looking. It should be evaluated based on the future cash flow/profits that can be brought to the firm instead of historical performance to promote a higher performance in the future.

Furthermore, as their compensation is tied to meeting targets, it might promote game-playing and politics. As for Citibank, their culture encourages aggressive mark-ups to budget with managers constantly setting challenging budgets. For Mr Mistri, he will feel the extra pressure since the aggressive targets can barely be met with the deteriorating conditions in Indonesia.

In conclusion, the current budget and performance evaluation system, which is mainly bottom up with top down guidance, matches the decentralized structure of Citibank. Although there seems to be trade-offs and problems with Citibank’s current bottom up budgeting system, there is no perfect budget system to optimally serve all the different purposes of budgeting. What Citibank can do is to put in place measures to minimize some of these shortcomings.

2. Are managers at Citibank committed to achieving budget targets?

Yes, managers are committed as a result of their freedom to set their own budgets subject to guidelines provided by top management.

Mr Mistri can choose to operate with a self imposed sovereign risk limit which is lower than the one approved by the New York Headquarter if he thinks that the one set by the top management is too aggressive. The fact that he has control over this means that he will be less pressurised to set unrealistic goals or engage in budget slacks. These will garner higher commitment from managers since the budgets set are not restrictive and offer flexibility to managers according to the business conditions.

The commitment to achieve targets is augmented as incentive compensation for managers is linked to budget-related performance. Thus they will work towards getting more incentives for themselves through surpassing the budgeted forecast. On the other hand, the amount of commitment may be limited by the constant revision of budgets each quarter. Managers may be less motivated to hit their budget target if they know that those targets can be revised lower in the next quarter if performance was unsatisfactory. In addition, the frequent changes may make managers unfocused and reduce their motivation to work towards the goals set.

If so, are the budget targets too challenging?

The targets may prove to be too challenging. This can be shown by the fact that although incentive compensation could range up to 70% of base salary, awards of 30-35% were more typical, implying that it may be difficult to surpass the budgeted levels. Furthermore, Mr Mistri felt that the increased profit goal by $500K to $1mil set by Mr Gibson is too much as the budget he submitted is already very aggressive, judging by the bleak short term outlook due to the decrease in oil prices. This is supported by the self-imposed sovereign risk limit that Mr Mistri is operating at in order to minimise his exposure which will reduce the likelihood of the firm achieving higher returns due to the lower risk.

We also doubt the achievability of the budget set. Though the forecasts and budgets are set by the operating managers themselves, we have to take into consideration Citibank’s risk-taking culture. While challenging targets induce motivation, the aggressive year-on-year increase in targets might prove to be detrimental to the achievement of the firm’s strategic objectives. Firstly, this is especially so when targets are not adjusted in times of bad macroeconomic conditions. With the incentive compensation for managers linked to budget-related performance, it seems that managers might be motivated to set unrealistic targets and employ excessively risky methods to accomplish them. Such a system would eventually serve to promote short-term gains at the expense of long-term losses for the organisation. In addition, the practice of comparing actual performance to budgeted amount monthly is too short termed and may render managers to become myopic. This may encourage managers to engage in gamesmanship such as earnings management, manipulating data to receive additional bonuses especially towards the end of a quarter.

Is there any evidence of budget gaming?

Yes, there is evidence of budget gaming. The main reason Mr Mistri used to justify his less than ideal budget (as compared to Mr Gibson’s) is likely to be false and there are unhealthy motivations for him to engage in such behaviour.

Mr Mistri justified his budget by claiming that the Indonesian economy had slipped into a recession when oil prices decreased significantly. This is supported by the fact that Citibank’s Indonesian operations growth paralleled that of the Indonesian economy. However, evidence in Exhibit 4 suggests otherwise, revealing both the net and inflation-adjusted GDP of Indonesia to be increasing steadily over time. Even in 1983, GDP increased 5%. Moreover, a fall in oil prices will not necessarily lead to a recession. As such, Mr Mistri’s concerns are unlikely to be true and a simple check by the group managers would have allowed this to be uncovered. Moreover, even though Indonesia’s economy is highly dependent on oil prices, a fall in oil prices is also likely to affect Citibank’s other operations in different regions. The group managers will probably have considered this effect when setting the $4mil profit goal for South East Asia.

In our opinion, Mr Mistri is likely to be acting as a Sandbagger. By presenting less ambitious budgets, there will be higher likelihood of positive variances in actual performance. Given that compensation is tied to budget-related performance, such gaming behavior will probably increase Mr Mistri’s bonuses and salary.

Another motive for budget gaming could be to cover up the ongoing high staff turnover problem with the bad economic conditions. Mr Mistri just lost his chief of staff and two senior officers, and is concerned with constraints to growth due to his lack of experienced staff. This could in turn affect his bonus and salary. Since managers are not accountable for extraordinary earnings or losses at Citibank, by blaming the external economy (recession) for a less aggressive budget rather than on internal problems, his bonuses will not be affected.

Furthermore, Mr Minstri has the freedom to operate at a sovereign risk limit lower than the group’s since country managers are given substantial autonomy in deciding their country’s budget and risk limits. He is likely to be able to get away with a less than optimal budget if his group manager trusts him. This way, his budget gaming behavior will escape the suspicions of Mr Gibson and other group/division managers.

Citibank Budgeting Essay

Beyond Budgeting Essay

Beyond Budgeting Essay.


A concept may go through changes over time, being reconsidered, reviewed, improved or even forgotten. In an environment where changes happen often, it’s usual to observe concepts and models being worn out and new or adapted approaches being introduced. In the field of business administration, the budgeting process has proved to be fundamental and highly recommended as a successful way of planning and controlling. Nonetheless, the current dynamic corporate environment has shown signs that the traditional budgeting no longer fits a company’s aim or it could even be an obstacle to growth.

Considered to be an inflexible, a complex and a costly approach, the introduction of a new management instrument was charted (Frezatti, 2005).

In order to better understand how executives foresaw the need of a new tool to better manage their companies, this paper will begin by discussing the traditional method of budgeting itself, followed by an analysis of the downsides and flaws identified by such approach. Thereby, after highlighting the ineffectiveness of the traditional method, an introduction of the Beyond Budgeting will be presented, showing the definition and principles of such scheme.

Furthermore, in order to establish an in-depth investigation of the Beyond Budgeting, a comparative analysis with the previous approach will be provided along with the outcome, considering the benefits of such process as well as the possible pitfalls, leading to the conclusion of the paper.

The Traditional Budgeting

This section aims to describe the main aspects and downsides surrounding the traditional approach of a budget, thereby allowing the reader to understand the motives behind the trend of changes plotted in the previous decades. Frezatti (2005) mentions that the traditional method of budgeting consists in establishing and developing long-term goals for the company. One of the main purposes of such approach is to secure that the company’s goals, objectives and standards are met. In more details, there is the elaboration of an annual budget, which should apply the decisions made by the organization’s strategic plan. In a way, the budget plays a role in the planning process as well as to the style of execution. Further in this paper, one may observe that the Beyond Budgeting approach tries to abolish the annual budget step (Frezatti, 2005). According to Welsh (1983), mentioned by Krom (2003), the traditional budgeting process has its benefits since it forces an anticipated analysis of the basic policies and requires an adequate organizational structure. Consequently, it defines clearly the distribution of responsibilities, which align their plan according to the ones previously established by the company as a whole.

Moreover, the budgeting process allows the management to quantify what is necessary for an acceptable performance, thereby examining cautiously any possible opportunities before making any concrete decision. It also supports the controlling in a general way, since it shows the efficient and inefficient areas. Finally, it allows the company to measure it progress related to the previously established goals (Campos & Krom, 2006). All these aspects mentioned above might sound positive, but an in-depth analysis might show the contrary. According to Frazetti (2005), the traditional budgeting process centralizes the process where front line workers are told what to do by the head team office. It also focuses on cost reduction, not on creation of value, limiting the initiatives and keeping the planning and the execution separately instead of close (Frezatti, 2005). Complementarily, Hope and Fraser (2003) criticize the traditional budgeting given that such management no longer functions in an era when decision have to be made quickly by the front line in order to meet the needs of the customers.

Therefore, the authors disapprove of many beliefs that trigger the traditional budgeting process such as the one regarding fixed financial targets to maximize profit potential. They affirm that one cannot predict external factors nor could control them. Any strong external influence could turn the target into a pointless effort. Moreover, such belief is an obstacle towards creating capability to react fast to new circumstances. The authors consider this to be one main reasons of the traditional budgeting fallacy (Hope & Fraser, 2003). Additionally, Daum (2002) states the massive amount of time a budget requires. Some studies have proved this statement, as KPMG sustains that the budgeting process may take up to 20 to 30% of the management’s time. Moreover, consultants at Horvath & Partner affirm that 50% of the controller’s capacity is directed to planning and budgeting (Daum, 2002). As a consequence of a long and a slow process of elaborating a budget, Hope and Fraser (2003) mentions the high costs involved. Some companies have tried to come up with a cost of elaborating such a tool and it is surprising how high it can get. As an example pointed out by the authors, Ford Motor Company revealed an annual cost of 1.2 billion dollars with the creation and use of the budget (Hope & Fraser, 2003).

One may also highlight the possibility of manipulating numbers when dealing with a budgeting process. Frezetti (2005) uses the term “Budget Contract” created by the authors Hope and Fraser to better explain this issue: A subordinate or a team is committed to accomplish an established result, giving the chance for the superior to take control over the outcome against that result, allowing them to interfere or even change the terms if necessary. This may reach an unacceptable level, since sometime ethics are trespassed (Frezatti, 2005). In a way, the traditional method of budgeting is highly criticized since it may stimulate an anti-ethical behavior as well as due to the fact that we are living in a very dynamic environment subject to continuous changes. The market is unpredictable and highly competitive.

This model developed during the industrial times is no longer suitable for the current dynamic market. As Daum (2002) cites, the introduction of new management tools such as the Balanced Scorecard and the Value Based Management created “the framework for a more flexible performance management geared towards strategy and the capital market. Though what is often missing is a transition to flexible operational planning and measure management. The Beyond Budgeting model wants to fill exactly this gap (…). Beyond Budgeting, partly taken very far as managing and controlling without budgets, opens new possibilities for strategic enterprise management with the transition to flexible resource allocation.” (Daum, 2002, p. 1).

Beyond Budgeting: The Concept

To introduce the concept of Beyond Budgeting, this paper goes through the case of a Scandinavian Bank, Svenska Handelsbanken, which has abandoned for more than 40 years the traditional method of a centralized planning. Since the beginning of 1970, the Bank management has had no budgets and no targets. However it proved to be one of the most successful banks when it comes to performance ratios such as return-on-equity, cost-to-income ratio, customer satisfaction, among others (Daum, 2002). Daum (2002) points out the following characteristics about the Handelsbanken management: * More than half of the employees of the bank has some authority over procedures; * The business is strongly decentralized;

* Performance ratios takes into consideration the competition (benchmarking); * The goals are set relatively, considering the market as the major influence. The author concludes that the focus of this company is on the market, concerning the competitors along with the establishment of the right flexibility to obtain results, contrary to the conception of reaching an agreed budget from the past (Daum, 2002). Daum (2002) describes the 12 principles surrounding the Beyond Budgeting approach, which were identified by an investigation throughout many companies that have operated under the “no budget” scheme. The following table shows the principles divided into two categories. According to Krom (2003), the first refers to the principles of a decentralized power and the second to the principles of a flexible process: | The Decentralized Power/Leadership Principles|

1| Creation of a performance management climate that measures success against the competition and not against an internally focused budget| 2| Motivation through challenges and transferring responsibility within clearly defined enterprise values| 3| Delegation of responsibility to operational managers, who can make decisions themselves| 4| Empowerment of operational managers by giving them the means to act independently (access to resources)| 5| Organization based on customer-oriented teams, who are responsible for satisfied and profitable customers| 6| Creation of a single “truth” in the organization with open and transparent information systems|

| The Flexible/ Performance Management Principles|

1| The target setting process is based on the agreement of external benchmarks| 2| The motivation and reward process is based on the success of the team compared to the competition| 3| Strategy and action planning is delegated to operational managers and takes place continuously| 4| The resource utilization process is based on direct local access to resources (within agreed parameters)| 5| The coordination process coordinates the use of resources on the basis of internal markets| 6| The measurement and controlling process provides quick and open performance information for multilevel control| (Source: Adapted from Daum, 2002)

Beyond Budgeting: The Benefits and a Comparative Analysis

Hope and Fraser (2003) endure three arguments that support the Beyond Budgeting approach. First, the authors mention its simplicity, low cost and importance to the users. In order to explain these aspects, they highlight the following (Hope & Fraser, 2003): * The decentralized management provides authority and the ability to make fast decisions, creating the base for adequate reactions according to demand; * Not creating an annual budget exempts the personnel loads of work along with time and, consequently, cost. As a result, not having a budget allows the employees to put more effort on more effective and productive activities; * The leadership positions are improved, since they end up having more time to dedicate themselves in developing and managing more precisely their subordinates.

Second, Hope and Fraser (2003) argue that a sustainable growth relies on an innovative strategy that focuses on the creation of value in the long term. However, constant innovation would not be concrete in an environment that follows a fixed target, but in the other hand, it would definitely be enhanced in a place where autonomy and more freedom are observed. Additionally, the authors mention that the need to reduce costs should be permanent; therefore the intention of integrating and involving all levels of a company’s hierarchy would create a bigger commitment among the employees to achieve lower costs for the activities.

Finally, the third argument relates to the fact that the inexistence of pressure towards fixed targets and goals should improve an ethical behavior among the managers, whereas, as mentioned before, history has shown unethical attitudes from companies which tried to manipulate results in order to reach the established targets (Hope & Fraser, 2003). Frazetti (2005) provides a summarized comparative table created by Hope and Fraser (2003) which shows the differences between the traditional budgeting and the Beyond Budgeting related to six different approaches, such as Targets, Rewards, Plans, Resources, Coordination and Reporting. It is similar to the one presented above about the principles of Beyond Budgeting | Traditional Budgeting| Beyond Budgeting|

Targets| Targets are fixed annually.| They are not fixed, but constantly examined against a given benchmarking, preferably an external one.| Rewards| The management will be rewarded if targets are met.| The reward process relies on the evaluation of a group of managers that analyses the performance based on what should have been accomplished taking into consideration relative ratios.| Plans| Annual planning and budgeting is the best way to direct actions that maximize market opportunities and meet strategic objectives.| Any action might be required to achieve medium-term goals that fall under the company’s policies and strategic objectives.| Resources| The resources are allocated according to the established operational and capital budgeting process.| Resources are allocated whenever necessary.

| Coordination| Central planners and controllers can coordinate budgets throughout the business and ensure that one part knows its commitments to another part.| Managers and employees on the spot might coordinate activities according to market requirements and customer demand.| Reporting| Executive leaders and managers monitor the performance to keep it “on track” according to the established plan. Any relevant variation must be reported and forecasts are to be provided.| Forecasts provide open and quick performance expectations for a multilevel control. There would be only an interference performance indicators are not aligned with the strategic parameters.|

Rothberg (2011) complements this comparative analysis by mentioning three core differences. He points out two that have already been stated above in this paper, which refers to the seat of authority – the centralized bureaucracy against the decentralized teams – and to the performance measurement – fixed targets against relative targets. Nonetheless, only one has not been exactly explained before. It refers to the management style. He states that the two approaches (Traditional and Beyond Budgeting) are essentially different in how they deal with executive leadership; therefore he applies a short description for each approach. For the traditional one, he says Command and Control as a position of leadership and for the Beyond Budgeting, he says Empower and Coach as a leadership style (Rothberg, 2011).

Rotheberg (2011) cites as the core approach for the traditional budgeting the fact that “the executive team is best equipped to translate objectives into operational goals, plans, and initiatives for all business units and employees.” (Rothberg, 2011, p. 1). In a way, one can understand that the employees are not seen as trustworthy and capable of assuming responsibility to support the company goals. On the other hand, he cites that the core approach for the Beyond Budgeting process relies on the improvement of the results “when management relinquishes control and allows business units and teams to leverage customer proximity and act autonomously on goals, plans, and initiatives.” (Rothberg, 2011, p. 2). In an opposite way from the previous approach, the employees are seen as trustworthy and capable, as the executive leaders entrust the team with the execution of high-level objectives, with the necessary support.

They acknowledge their work as if they were partners, not mere employees, as they cooperate and collaborate on a high level. As a result, the business units are to act in a more responsible and ethical way to achieve growth and prosperity for the company (Rothberg, 2011). The Beyond Budgeting Round Table (BBRT) of the Consortium for Advanced Manufacturing International (CAM-I), mentioned by Daum (2002), provides a diagram of the Beyond Budgeting scheme, which shows the empowerment of local managers in order to allow the company to react fast and appropriately to new opportunities and risks in the market environment. The Consortium named this process as “devolution”, which is a framework where an adaptive management process takes place. In the contrary of fixed targets and resources, it enables a high level of flexibility in the company. The Following picture shows the functionality of both approaches of budgeting (Daum, 2002). Traditional Budgeting – “Industrial Age”

vs. Beyond Budgeting – “Information Age”

(Adapted from Daum, 2002)

Many wonder how an organization could get started with the Beyond Budgeting program. Fraser and Hope (2001) have answered a questionnaire about the main features and challenges concerning the Beyond Budgeting approach and they have talked about directions of leading and implementing such program in an organization. Firstly, the authors mention three different drivers of the change program (Fraser & Hope, 2001):

* Visionary Leader:

A leader joining the company that shares the philosophy that Beyond Budgeting is right for the organization and shows willingness for change. These visionary leaders tend to come up with top sponsors.

* High-level Sponsor:

A top executive in the organization who is persuaded by the outlook of the program and sees it as promising and effective approach to manage the company given the current market environment. They are usually people with the power to mobilize resources and people. They are generally the CEO or CFO.

* Change Advocate:

Before mobilizing resources and people to make the change happen, the “Change Advocate” must first persuade potential sponsors in order to obtain the acceptability required to forward the program in a sustainable way. The “Change Advocates” strongly believe the Beyond Budgeting approach is a good move and they need the consent of key managers, which are the one most influenced by the introduction of the new project. These key managers usually include directors and business unit teams.

However, the authors highlight that previous experience has shown that these people are not hard to convince, since they see the budgeting process as time consuming. Fraser and Hope (2001) also point out a phased tactic when implementing Beyond Budgeting, since leaders might not embrace the new program straightaway. In other words, why shift to a new management approach, which is more decentralized and flexible, if the leaders insist on the power control requiring fixed targets by the end of a year. For that reason, the authors propose a three-phase method to proceed with the Beyond Budgeting approach. The phases are (Fraser & Hope, 2001):

1. Set Out the Vision

It is challenging step to achieve, given that one must insert a vision to be accepted by the top management. As a result, the authors advice to first provide a case for change, allowing to gather enough resources to come up with an explanatory model that embraces the aims, principles, plans and resources surrounding the new project. In this case, it would relate to the specifics upon the 12 principles, the strategy and planning processes in a form of a document to be given to the key managers and board of the organization. Nonetheless, the authors highlight the fact that this template should not be sold as big change program and if a key figure, such as the CFO, does not embrace the vision, then the process should be reconsidered, since Beyond Budgeting needs support from the top.

2. Design and Implement the New System

Usually led by a key figure, such as the CFO, this phase, as the name suggests, consists in designing and implementing the new system as the old one is retired. Therefore, excluding the fixed target approach and getting everyone to learn the new one.

3. Progressive Devolution and Roll-out

Named as Progressive Devolution, the third phase measures the team performance externally and internally in order to build capacity through training and/or by changing people. Each company has its own approach, whether to go through an adaptation and integration process or just to rely on the training and let the things begin.


The Beyond Budgeting is an innovative management model which embraces principles that may contribute an organization with a competitive advantage and assist it to be more adaptive to changes. The principles are based on the decentralization of power as well as to a flexible performance management. However, is it a complete package? Daum (2002) cites that “rolling forecasts, flexible operational plans, continuous performance monitoring are the controller’s tools to support this management concept” (Daum, 2002, p. 2). Therefore, one may observe that the focus is on the managers and their flexibility, to empower them, as devolution defines it. Consequently, the need of building capacity and training is clear. A model that distributes its power and decision making would better meet the company’s demand, however it would also increase its risks, as they are inherent to the excess of flexibility created. The present paper considers different literatures and comes to a conclusion that the Beyond Budget does, in fact, go beyond the traditional scope of budgeting with the necessary tool to correct its downsides.

Nonetheless, this new approach also goes beyond in an opposite way. In other words, it does create new problems for the organization to cope with. First, it brings up questions that are not clarified in a concrete manner by the literature, such as the investor’s expectations. How does one know the expected return from the investor’s perspective and how would one coordinate the company in a longer term if there aren’t any established standards and targets? Furthermore, as Fraser and Hope (2001) shows, there is a strong indication between devolution (the empowerment of local managers) and shareholder value. The authors make use of example such as the Scandinavian Bank, which is considered to be the pioneer for implementing the Beyond Budgeting principles decades ago. However, one must highlight the fact that Scandinavian countries share the highest level of education in the world, where the people are, in overall, more qualified and prepared for the work environment, and, consequently, to accept high levels of responsibilities and challenges. As the authors point out, the Scandinavian are more likely to ask “why” to senior executives when they have questions and doubts (Fraser & Hope, 2001).

As a result, Beyond Budgeting might be more practicable in countries or cultures that share a lower level of centralization of power. This can be characterized by the cultural dimension of Power Distance introduced by Geert Hofstede, which conducted an in-depth study of how values in the workplace are influenced by culture. The Power Distance dimension is defined as “the degree to which the less powerful members of a society accept and expect that power is distributed unequally. The fundamental issue here is how a society handles inequalities among people (Hofstede, 2013). The companies mentioned by the authors as Beyond Budgeting case studies of success fall under the category of countries that score low on the Power Distance dimension. Therefore a management model with a decentralized approach should work better in a country or culture where society is not that disparate, such as the Scandinavian countries.

There could be a problem concerning the application of such approach in a country where there is a well-defined “hierarchical order in which everybody has a place and which needs no further justification” (Hofstede, 2013), such as countries belonging to Middle East and South America. Would such a model also work in the public sector, where the hierarchy is clear and the environment more bureaucratic? However, one should not to generalize companies belonging to different cultures and countries.

After all, we are living in a globalized world, with European companies in service in Middle East and Middle Eastern companies operating in Europe. Thereby, maybe the right question wouldn’t be which cultural is appropriate to the Beyond Budgeting scheme, but which company shares a cultural organization that fits better with the proposal of such model. But in overall, the benefits provided by this model are necessary and important to the management of an organization in the current competitive dynamic market. The implementation of this approach is slow and challenging, but the chances of being productive and profitable are high.


Campos, J. C., & Krom, V. (2006). Beyond Budgeting – Uma Alternativa de Gestão Financeira Além dos Orçamentos . X Encontro Latino Americano de Iniciação Científica, (pp. 3094-3097). São José dos Campos. Daum, J. H. (2002, July). Juergen Daum. Retrieved January 15, 2013, from Juergen Daum: Fraser, R., & Hope, J. (2001, October). Hpartner. Retrieved January 14, 2013, from Hpartner: Frezatti, F. (2005, April). Beyond Budgeting: Inovação ou Resgate de Antigos Conceitos do Orçamento Empresarial? RAE, pp. 23-33. Hofstede, G. (2013). Geert Hofstede. Retrieved January 16, 2013, from The Hofstede Centre: Hope, J., & Fraser, R. (2003). Beyond Budgeting: How Managers Can Break Free from the Annual Performance
Trap. Boston: Harvard Business Press. Rothberg, A. F. (2011). CFO Edge. Retrieved January 15, 2013, from CFO Edge:

Beyond Budgeting Essay