Two of the most common budgeting practice – Activity Based Budgeting and Beyond Budgeting Approach shares a common thread that the inability to adequately plan in uncertain environments makes the budget useless.
While Activity-based planning suggests an improved albeit more sophisticated activity-based model to improve planning, it does not address its sharpest criticism of being unable to design a good performance evaluation system.
Beyond budgeting approach tries to do away with the dysfunctional practice of evaluating line managers or budget targets set without reference to a credible source. Beyond budgeting approach recommends replacing annual budget-based performance evaluation to that of performance evaluation based on benchmarked performance.
It suggests that one must evaluate performance using nonfinancial indicators aligned with the company objectives. Its main assumption is that by attaining appropriate levels of performance on the measures included, the desired financial performance will be achieved.
We have listed down below the top 4 benefits of this type of approach.
- Benchmarked Performance is difficult to argue against
If one sets budget targets using benchmarked performance either internal or external, it becomes nearly impossible for anyone to say the targets are not feasible because obviously they have been accomplished by other units or by competitors. In simpler terms, if others have done it, why can´t you?
- Relative Performance increases motivation
This approach increases the likelihood of perceived fairness of evaluation and can potentially increase motivation because the performance threshold naturally becomes challenging yet still attainable. The major flaw in traditional budgeting is that there is a huge disparity between what upper managers identify as desirable and what front line managers deem is realistic.
- Planning will become more accurate and useful
This approach allows for adoption to the ever changing circumstances. One is not anymore stuck at preset, obsolete targets that continue to dictate the organization´s decision-making.
- Empowers people to make decisions that are more aligned with the strategic goals
Beyond budgeting suggests that planning can only improve if it is disconnected from the performance evaluation system by changing how evaluation is done and by slowly decentralizing the organization. This approach claims that empowerment will be effective when it is accompanied by a shift from results control to controls based on employee selection, corporate visions and values, codes of conduct etc.
This approach is of course not free from criticisms. There are claims that say this type of approach is not feasible in practice. This is because some companies just don´t possess a good performance data to measure against. There is also the criticism of lack of incentive to go beyond the budget once it is achieved.
Regardless of criticism, it has its own advantages and it endeavors to improve planning in comparison to traditional budgeting.
If you are looking for ways to improve how you do budgeting today, Performance Canvas offers you a unified CPM solution that gives you a powerful, versatile, fully integrated, and enterprise-quality solution. To learn more about this breakthrough budgeting and reporting solution, book a free demo with us or email us at [email protected] today.
DSPanel offers cutting edge technology platform for business analytics, planning, and visualization. DSPanel designs, builds, and operates with the end users in mind. Performance Canvas was created by DSPanel to answer the unarticulated needs of the market not addressed by previous available solutions. With Performance Canvas, information is transformed into valuable business insights for the business executives to utilize in their decision-making process. DSPanel currently has over 2500 organizations deploying their solutions.