To hear it from the campaigners at the Beyond Budgeting Round Table(BBRT), traditional budgeting is not only inflexible and

inefficient, it is a borderline evil that contributed to notorious corporate scandals such as Enron and WorldCom. One anonymous WorldCom executive described the culture of instant financial gratification that the budgeting process perpetuated: "You would have a budget, and [WorldCom CEO Bernie Ebbers] would mandate that you had to be 2% under budget. Nothing else was acceptable." In a recent AccountingWEB case study, Bjarte Bogens of Norgewian oil company Statoil did not dismiss budgeting as evil, but took every opportunity to dismiss the old fashioned approach as "stupid". He continued: "A traditional budget is not the way to manage a global oil exploration company. The world has changed. Our business environment is much more turbulent, dynamic and demanding than even five years ago. We have to change the model because the world has changed." This article will draw on experiences and opinions of AccountingWEB members to explain current theory and practice, and identify strategies for taking budgeting forward in the 21st century. What is the purpose of a budget? CIMA's Official Terminology of Management Accounting defines a budget as: "a quantitative statement for a defined period of time, which may include planned revenues, assets, liabilities and cash flows. A budget provides a focus for the organisation, aids the co-ordination of activities and facilitates control." The budget's role as a tool for formulating strategies and planning their implementation, allocating resources, monitoring expenditure, and assessing performance were all acknowledged by the financial managers who listened to the presentation from Bogens about "blowing up the budget" at Statoil. "The problem is to trying to do these three things at the same time and produce one number," Bogens commented. He described the game-playing and wasted effort that took place before Statoil abandoned traditional budgets. Budgets gave executives a "one-eyed view of the world", led to the implementation of stupid KPIs and rewarded those who knew how to manipulate the system. Instead, Statoil reconfigured its planning, forecasting and evaluation processes in a programme called ambition to action, where operational forecasts are used to set targets, but are not the sole basis on which individuals or units are evaluated. What's wrong with traditional budgeting? Not fit for purpose The Statoil case provides some tangible evidence that budgeting is an outmoded and inflexible discipline. In a web article entitled, 10 reasons why budgets cause problems BBRT argued that budgets tend to focus on targets based on incremental changes from the previous period. "The result is a target that is inwardly comfortable to you, yet appears outwardly difficult to your superior. There is no focus on the maximisation of customer or shareholder value."

Dean Meyer, one of the proponents of performance-based budgeting (see below) adds that within project-based and service industries, budgets cannot support sound financial decision making, because they do not accurately reflect the full cost of individual projects and services. Rather than driving strategy forward, budgets are said to be a barrier to change and innovation. Entrepreneurial managers tend to find themselves under fire for incurring costs on projects that were not included on their budgets. In the case of Statoil, an exploration executive received bonuses for coming in under budget - even though this meant he was not looking for reserves in new fields. Time, cost & resource The next charge against budgets is that they use up an inordinate amount of time and energy. Despite the advent of powerful computer networks and "self-service" software tools, budgeting is a protracted and expensive process. According to research published in 2005 by ALG Software, it takes an average of 12.9 weeks to sign off the budget and 91% of respondents reported that it went off track during the year. The BBRT reckons budgeting takes up to 20-30% of senior executives' and financial managers' time, and the estimated annual budgeting costs for Ford Motor Company are $1.2 billion. AccountingWEB member Haroon Bashir put his criticisms of the "budget ritual" very succinctly: "It takes far too long. It is designed by accountants with no buy-in from budget managers." One reason for the amount of time wasted is the game playing that surrounds the process. Bashir admitted the BBRT's charge that most line managers "add a little flab" in the knowledge that later in the year, they'll have to cut back in some areas. Bogens described a similar situation in which budget figures "rode the elevator" several times between the board on the top floor and line managers below. Inflexible and inaccurate Playing games around budget figures gives rise to another flaw - an almost immediate divergence between the figures budget managers use and those used by the corporate centre. Even in large companies, spreadsheets are the most prevalent tool for budgeting - in spite of well documented weaknesses in version control and accuracy. With so much time absorbed in agreeing and processing the numbers, Bashir warned that one of the main purposes of a budget can be undermined because changes are not communicated properly. Inter-relationship of planning, forecasting and budgeting Management theorists and AccountingWEB members have expended a lot of energy and thought in defining the role budgets should play in strategy management. Planning, budgeting and forecasting are interdependent, but there appears to be no strict formula to guide how they should be sequenced and linked. Nick Bowles, of Rugged Logic draws on experiences supporting customers who use the company's online spreadsheet system for business modelling, planning, forecasting and budgeting. Responding to a recent article on forecasting, he highlighted the difference between "more forward looking"

forecasts that focused on business drivers, and budgets that catalogued the resources needed to achieve the targets. In its guide to Planning, Budgeting and Forecasting, PA Consulting Group explained: "Planning differs between budgeting and forecasting in intent. While the budget is used to control, the forecast is used to predict, the plan sets out desired outcomes and expectations usually over a longer-term period. In essence plans are used to affect change." AccountingWEB member Alastair Harris summarised the relationships as follows: "Done properly [planning] is a strategic view of the organisation, placing it in context in its environment, and setting goals that are only superficially linked to internal processes and constraints... It is aimed at senior management and they should be seeking to rebuild the organisation to fit the vision contained in the plan." Budgets are annual creatures which, according to PA Consulting, form the the day-to-day operational control reference. The budget therefore sets the baseline aim and the parameters the organisation needs to stay within to ensure it has the means to meet its objectives. Harris put the case more bluntly: "[Budgets] are about internal political control, and they are more often than not about costs. They are about as far devolved from planning as it is possible to get." Forecasts typically present a short term view of profitability or contribution, based on internal and external constraints. They can provide a reality check for planning and budgeting assumptions. PA urged that budgets should never be adjusted if actual performance is not meeting expectations: "Instead the organisation should prepare forecasts to track expected performance against budget." These theoretical distinctions match up with findings from a survey published in a joint CIMA/ICAEW Better Budgeting report published in 2004. The Bristol Centre for Management Accounting Research (BRICMAR) surveyed 40 managers and found that while annual budgets were the norm, they were frequently supplemented by regular forecasts and other sources of non-financial data. Particularly for those in fast-moving environments, such as oil, forecasting has superseded budgeting. But new techniques do not always cure old habits, Harris noted: "In practice at least as much (if not more) management time is spent in arguing about the validity of the result as in working out what to do about it." Current budgeting theories Research undertaken by the Bristol Centre for Management Accounting Research (BRICMAR) and quoted in the CIMA/ICAEW Better Budgeting paper found that majority of the 40 companies surveyed saw value in the exercise, but 55% had implemented some kind of change in their budgeting processes in the preceding five years.

UK businesses may not be prepared to go beyond budgeting, but there is widespread acceptance that some of the inherent problems need to be addressed. Here are a few contenders for ways to improve budgeting - although an enthusiast would no doubt be able to spot numerous alternative theories:

Activity-based budgeting (ABB) - This approach presents a budget in terms of costs associated with an organisation's deliverables - products and services - rather than the traditional technique of describing cost factors in terms of their nominal account expense codes. Performance-based budgeting (PBB) - Derived in response to US government regulations for its contractors, performance budgets seek to allocate resources based on goals and measured results. Consultant and PBB promoter John Mercer comments: "A real performance budget gives a meaningful indication of how the dollars are expected to turn into results." Balanced scorecards As propounded by Robert Kaplan and David Norton, a balanced scorecard links performance indicators to the underlying business indicators in four categories: financial, customer, internal operations/processes, and learning and growth. With the right software tools, the performance indicators can be linked to budget hierarchies - in essence, the balanced scorecard becomes a real-time representation of the underlying actual v budgeted figures, in both financial and non-financial areas. Corporate performance management - A model popularised by Gartner Group and many software companies, CPM integrates budgeting into a "closed-loop" strategy management cycle that also incorporates business modelling and planning, forecasting, analysis and feedback to the underlying model. Adaptive and devolved planning - Adaptive planning is the solution embraced by the Beyond Budgeting Round Table and its supporters. Budgets lead to central control and inhibit people from improving, they argue. Strategic planning becomes a continuous process, aided by rolling forecasts looking forward beyond the financial year. A rolling forecast typically takes the most recent acutal figures as a base and projects them forward over 1218. When the next forecast is prepared - perhaps after three months - the first three months are dropped and become the actual baseline, with the forecast extended for another three months.

"Companies shouldn't do budgeting," argues Robin Frasier of the BBRT. "In a competitive environment companies can perform much better if they give more autonomy to line managers. Lord Browne, the recently departed CEO of BP, lent his support to the BBRT view, commenting: "The process of management is not about administering fixed budgets, it is about the dynamic allocation of resources." Technology to support the new budgeting paradigm Many of the suggested enhancements share a common feature - a strong reliance on new computer

technologies for collecting, analysing and sharing budget data. Excel, the most commonly tool, is a personal productivity aid; budgeting, however, is a collaborative process. As different people enter their figures, or attempt to construct alternatives, worksheets proliferate and unwanted changes can slip in, making it difficult to achieve the single model that guides the organisation towards unambiguous common goals. Version-control systems such as ComplyXL address the consistency issue, and similar controls are built into specialist planning/budgeting suites such as Cognos/Adaytum, Cartesis and CP Planning. These applications are designed for networked environments and the world wide web has been a boon for online collaboration. Brower-based data collection forms and reporting tools make it relatively easy to retrieve figures from line managers and share and discuss the results with them. Microsoft is very keen to expand its share of the financial applications market and is aware of Excel's inherent weaknesses for many of these tasks. The latest version of the spreadsheet, Excel 2007, has been enhanced with better access and version controls and a web services facility that makes it possible to post a spreadsheet on a web server and allow different users to view or enter data, depending on their security settings. The opportunity exists for software resellers and finance managers to take what's available from Microsoft and construct their own collaborative budgeting environments. This, of course, is the territory of the performance management software industry, which has spent decades and millions of pounds creating some very complex and sophisticated financial analysis and management tools. Closed-loop planning-budgeting-reporting systems connect into the organisation's operational and financial software and draw out in near real time the figures showing actual revenues and expenditures. To preserve data integrity - and prevent transactional systems from melting down under the extra workload - the business model and source data are generally siphoned off to a separate database designed for online analytical processing (OLAP). These financial data warehouses allow you to play around with business models and drivers and apply different mathematical formulae and scenarios to your budget structure. Even if you do not invest the thousands of pounds needed to construct and maintain this kind of strategic infrastructure, computerised tools still make it faster and easier to collect, process and report budget numbers. Being able to construct and complete a forecast in days rather than weeks makes it possible for finance teams to run regular rolling forecasts to spot variances at an early stage and assess the potential impact on the annual budget. To illustrate how prevalent the basic concept has become, the 2004 BRICAMAR study found that 90% of participants reported month and year-to-date figures showing budgets, actual results and variances. Three quarters said they also provided estimates of the out-turn for the current financial year.

For all the benefits technology has conferred, the survey participants raised some negative sideeffects. Centralised enterprise resource planning (ERP) systems delivered the one true view of the organisation they sought, but the single view undermined the bottom-up, participative nature of the budgeting process. And while better tools make it possible to carry out more iterations, they also create more opportunities for managerial gaming. AccountingWEB member Simon Lindsey summarised the case as follows: "The tools you use shape how you see the world, and if you use a tool which is grounded in the principles of centralised command and control, your business is going to look like that." And the central data model remains the fundamental flaw at the core of the beyond budgeting argument. On behalf of the BBRT, Robin Frasier explained, "These kinds of software can help with looking forward. Most companies do it with the intention of getting better decision-making going forward, but then use it for control, which leads to gaming and dysfunctional behaviour." What evidence is there that this new model works? In a 2006 article for the Harvard Business Review, Michael Mankins and Richard Steele concluded that managers who adopt rolling forecasts over formal budgeting make twice as many strategic decisions a year. In a script that could have been drafted by the beyond budgeting campaigners, Statoil budgeting project manager Bjarte Bogens said: "We have moved from annual command and control to something more dynamic. We do this because it gives better performance." Another Scandinavian organisation, Sudswenka Handelsbanken, abandoned budgets in the 19070s and consistently comes out top in comparative league tables for cost-to-income and costs-to-totalassets ratios. "That puts a hole in the budget myth," says Bogens. There is strong element of corporate culture - and even faith - in the budgeting process that is very deeply ingrained within British finance managers. There are compelling theoretical arguments why the process is flawed, and many examples of companies that did not spontaneously combust when they abandoned traditional practice. But so far, only a heretical minority are willing to make the jump. As is the case when many business processes are debated, designing new procedures can be achieved in the time it takes to knock out a decent MBA paper. But effecting and sustaining cultural change is a far more difficult proposition, and this is what continues to inhibit root-and-branch reform in corporate planning and budgeting.