In practice, it is very difficult for companies to function without a budget. The budget plays a key role in managing the company’s finances and allows you to plan, allocate and monitor financial resources. It is a tool that helps companies determine how much money they will be able to spend on various purposes and what financial possibilities they will have over a certain period.
Despite these reasons for the importance of budgeting for businesses, there are some situations where you can operate without a formal budget or operate with Beyond Budgeting. For example, in the case of very small enterprises with simple structures, the owner can make financial decisions on an ongoing basis, based on intuition and knowledge about the company. A business can function without a budget, just as you can function without a plan. The only question is how long and how effective such activities are, whether the condition of the company would not be better if we adopted some specific budget assumptions, e.g. headcount, resources, equipment, training, which are to serve the development of the company.
Operation without a budget introduces 2 main risks in company management: the lack of a budget means that there is no decision-making in the organization, but also, thanks to the budget’s incentive function, which sanctions the work of managers, it can lead to lower performance.
The concept of Beyond Budgeting
Beyond budgeting is a model described and initially implemented in the Scandinavian countries, mainly for cultural reasons resulting from the habit of independent, but also responsible functioning of society. The model of operating without a budget uses other tools to control effectiveness, e.g. cause and effect cost analysis, Balance Scorecard or forecasts as financial models. Beyond Budgeting is a management concept that assumes the transformation of traditional, centralized and annual budgets into a more flexible, decentralized and dynamic approach to managing the company’s finances and operations. The concept of Beyond Budgeting was created in response to numerous criticisms of traditional budgets, which are often considered rigid, time-consuming, inappropriately motivating and limiting innovation.
The basic principles of Beyond Budgeting are:
- Abandon traditional annual budgets in favor of more flexible and short-term financial goals. Instead of one annual budget, the company creates a budget framework that takes into account dynamic market changes and business conditions.
- Decentralization of financial decisions and greater responsibility at the operational level. Instead of relying on a centralized budgeting process, the company is giving greater autonomy to operating units that are responsible for making spending and resource allocation decisions.
- Dynamic planning and forecasting.. Rather than relying on a one-time budget for the entire year, the company regularly reviews its goals, adjusts plans to changing market conditions, and makes flexible financial decisions.
- Use of relative goals and benchmarks that are based on relative metrics and comparisons with competitors and others indoor units. This allows for greater flexibility and more objective evaluation of performance.
Beyond Budgeting does not mean completely abandoning financial control and management. There is still a need to monitor spending, track financial performance and control operational efficiency. However, the concept of Beyond Budgeting changes the approach to financial management, putting more emphasis on adaptability, flexibility and strengthening of operating units.
Implementation of Beyond Budgeting in the organization
It is worth noting that implementing Beyond Budgeting can be a challenge, especially in larger organizations where there are many structures and processes related to traditional budgeting. In practice, however, it may depend on the specifics of the company and the industry in which it operates. Some companies may choose to fully transition to Beyond Budgeting, while others may choose a hybrid approach, combining elements of traditional budgeting with the principles of Beyond Budgeting.
Beyond Budgeting allows for greater flexibility, decentralization of decisions and greater trust in operating units. Under this concept, financial goals are more dynamic and budgets can be set over shorter periods of time, allowing for better adjustments to market changes.
In practice, the implementation of Beyond Budgeting may depend on the specifics of the company and the industry in which it operates. Some companies may choose to fully transition to Beyond Budgeting, while others may choose a hybrid approach, combining elements of traditional budgeting with the principles of Beyond Budgeting.