Most budgets are not based on a rational, causal model of resource consumption, but are often the result of protracted internal bargaining processes. The benchmarking in traditional budgeting sets lower standards, and the managers look as far as the targets are set Rhythm: This Principle states that management processes should be directed around business rhythms and cyclicality. It should not always be focused on particular calendar years. After the budget was approved, the middle and low-level staff will strictly follow it even they found some error. They are unlikely to go against the budget and cause other issues, they just keep silent and follow. It will encourage a centralized culture, and everybody will blame the top management who approve the budget. Budgeting is a key performance management tool; it sets benchmarks in the operations. It provides valuable analysis for target sets and variance in the results. Different budgeting techniques serve different purposes, for instance; Beyond Budgeting vs Traditional Budgeting.

Beyond budgeting is often considered to be time-consuming, because it is often difficult to implement it across organizations. These rules (expressed in the financial regulations of public sector organisations) will be consistent with the policies of the organisation and are designed to prevent expenditure on items such as permanent staff where such costs would go beyond the budget year and represent a commitment of future resources.So in effect the success or failure of Beyond Budget Model itself depends on how it is implemented and whether the managers perceive this as another method imposed by the senior management and how senior management can overcome such behavioral constrain. If this can be done given the managers profiles in terms of their entrenched management practices and the senior managements effectiveness and their leadership qualities to change behavior Beyond Budget may become a more adaptive process and may overcome some grave disadvantages of the traditional budgeting system. That is in other words to be a workable model the Beyond Budget Model must have the appropriate culture and structure introduced effectively. In practice it is not an easy task and there is no silver bullet. However in practice it has been implemented in some organizations particularly in large, small and medium organizations. The rationale behind the Beyond Budgeting framework is that traditional budgeting processes carry a number of flaws. Some of the flaws include the following: We encourage the company to manage costs but not to minimize costs. Only the cost which does not add value should be eliminated, and other necessary expenses will keep as normal or even increasing. The company should open for innovation, self-control, and regulation. It will send a strong message to all employees that we are doing the right things and had nothing to hide. The front line employee will be able to act faster when they receive enough information. They do not provide strict guidance to do their work. Budgets favour a rigid top-down control mechanism, often at the expense of the organisation’s potential.

The performance of the company’s managers is measured based on external benchmarks rather than their past performance. Traditional budgets create a reference point for the activities of the business. This helps the managers of different departments or activities within a business understand their roles better and understand what the business expects from them. The managers and employees of a business are likely to understand traditional budgets better and do not require any specific training to adjust to traditional budgets. 2) Promotes decentralization It is not applicable to all organizational types – particularly those organizations that have a fast-paced culture. Particularly, for those organizations that need to have a centralized organizational culture, this might be practical. In some organizations non-financial performance indicators are more valuable to stakeholders than the conventional financial ratios, beyond budgeting allows measuring these NFPIsOnce both the revenues and expenses of a business are estimated, the profits of the business can be estimated. The business will subtract its estimated costs from its estimated revenues to calculate the profit.

The desire to generate improved performance - essentially considered the driver for the beyond budgeting model - is present in the public sector evidenced in initiatives such as key performance indicators and 'best value' plans. But this is not matched by a desire for the flexibility inherent in the model. In terms of beyond budgeting, managers in such organisations are likely to remain constrained by the inability of their organisation to change. Traditional budgets are also more suited to smaller businesses as compared to larger businesses. This is mainly because traditional budgets do not require any expertise to prepare and can be easier and cheaper to prepare as compared to other types of budget. Traditional budgets, as discussed above, also rely on the previous period’s data and may, therefore, not be suitable for startups. Similarly, businesses going through unstable periods may also find that traditional budgets are not suitable for them and should use zero-based budgets or activity-based budgets instead. However, these budgets will have to be reviewed by senior managers for any possible errors by the department managers. After the departmental budgets are ready, the business aggregates those budgets to get a budget for the business as a whole. Who should use traditional budgets?

12 Fundamentals of Beyond Budgeting 

The two pillars of the Beyond Budgeting framework are decentralized leadership and adaptive management processes. Each dimension of the framework consists of six principles, as shown in the image below: We encourage the company to decentralize, free communication, persuade the employee to initiate a new idea. It will lead to high engagement, a strong sense of belonging and accountability throughout the whole organization. The business operation has nothing to do with the calendar year. There is no point in setting the target sale and profit for each year. We recommend the target, resource allocation, and performance evaluation should base on business rhythm, event-driven, and less calendar-driven. Purpose: This involves motivating and inspiring people to direct their energies towards noble causes that are largely beneficial for everyone, not around short-term financial goals. Budgets prepared under traditional processes add little value and require far too much valuable management time which would be better spent elsewhere.