Introduction

In some circumstances, the beyond budgeting approach (Hope and Fraser, 2003) can foster resolution of many of the perceived issues of traditional budgeting. The beyond budgeting approach, can promote better resource allocation within an organisation by introducing flexible planning; it can help reduce the potential for budgetary gaming and can move an organization towards greater accountability and both strategic and individual leadership. However, following the key principles of beyond budgeting such as the setting of relative goals or implementing a process of flexible budgeting is in no way guaranteed to amount to success in resolving the problems of traditional budgeting. Beyond budgeting has its own difficulties in that its success is dependent on the contingencies of the organization in question, it requires suitable management control systems to be in place, and an effective information system to cope with the demands of more appropriate performance measurement and business data to replace some of the functions (wrong or right) of traditional budgeting.

Benefits of Beyond Budgeting/Issues with Traditional Budgeting

1) Better resource allocation

One of the most prominent criticisms of traditional budgeting is that fixed budgeting numbers restrict the performance of an organization, constraining innovativeness and resulting in delayed investment decisions as resources are allocated on an annual basis. An example of this problem might be a firm who has determined a new market for a product, but requires capital investment in a new factory. Given traditional budgeting, the firm might have allocated much of its available capital to alternative projects at the start of the budgeting period, however waiting until the next period might mean first-mover advantages are lost. Flexible budgeting (a key focus of the beyond budgeting approach) creates a dynamic resource allocation process that can happen throughout the life of the organization, directing financial resources to the best projects available at that time. By allowing resources to flow to investment projects sooner than is possible with traditional annual budgeting, organizations can potentially achieve higher returns.

2) Budgetary gaming

Conflicts between target setting and forecasting, what Wallander (1999) calls “dysfunctional budget games” is a problem associated with traditional budgeting. Despite the fact that traditional operating budgets were not designed with performance measurement in mind, the problems of employee gaming often develop when budgets are used for evaluation as well as planning and control as highlighted in Reliance on Accounting Performance Measures literature (Hartmann, 2000). Staff may for example reduce forecasts for departmental budgets when they know that exceeding their forecasts will reduce their remuneration. Although this is arguably a flaw in budgeting implementation than of budgeting as a concept, a beyond budgeting ethos can combat the misuse of traditional budgets, by promoting separation of the processes of target setting, planning and resource allocation, in order to minimize the interaction and potential for gaming between each of these processes.

3) Greater accountability and strategic leadership

Issues of budgetary gaming connect well with the notion of accountability and leadership. Traditional budgets enforce an environment where organizational strategy is a stale and disconnected procedure, where employees strive for excellence through evaluation of budget numbers and where leadership and accountability is towards accomplishing targets therein. Beyond budgeting on the other hand, creates a dynamic business...

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