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Why Beyond Budgeting Delivers in Good Times and Bad

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Aug 2nd 2016
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In the accounting profession, much like value pricing beyond budgeting remains a controversial concept and while there’s a growing consensus that the traditional budgeting process is obsolete, not everyone is willing to ditch it altogether…yet.

Many finance executives and accountants feel uneasy about the idea of no annual budget at all. Yet, in the words of Steve Player, program director, Beyond Budgeting Round Table North America, “You rarely find a passionate defender of the traditional budgeting process.” Think back: when was the last time you heard someone give a heartfelt speech defending the budget? You probably can’t recall.

Studies show that it takes 35 years for a truly innovative concept to take hold. So the Beyond Budgeting movement continues to germinate. Player runs Beyond Budgeting workshops. He says executives attend a training session and they get excited about the possibilities. Yet it may take them going through one or two or even three more painful budget cycles before they convert.

Does Beyond Budgeting Work in a Recession?

It’s one thing to sing the praises of this flexible management technique when profits are growing and results outperform forecasts. But what happens when recession hits or the economy slows down? Does this looser approach to planning still allow companies to manage their costs successfully?

When finance executives and accountants face economic hard times they intuitively reach for tools of control. We all know the budget is the most common one. You look for whatever levers you can get your hands on to tighten the belt and focus on cost.

But what you may well find is that pulling those levers only works if all the assumptions that went into those plans were correct. When those planning assumptions turn out to be wrong, the budget actions fail to have the desired effect.

“In economic downturns, the P&L is not as critical as cash flow,” Player says. As a result, the budget may be only a mirage. It gives you the illusion that you’re operating within your means, while you may simultaneously run out of cash or fail to reach your goals.

Staying Agile

The Beyond Budgeting approach maintains the connection between the volume of work and cost per output; it doesn’t have a set budget allowance for a department. It allows management to find better ways to use resources.

This is in sharp contrast to traditional budgeting, which creates an entitlement mentality, Player explains. Managers think that as long as they remain within the budget they’re okay. But during a downturn, the budget may become obsolete very quickly. Beyond Budgeting allows management to be more prudent in how it spends its resources and to truly evaluate operating expenses, investments, and capex opportunities by employing a proactive and constant planning approach.

For example, San Antonio-based-HOLT CAT, the largest Caterpillar equipment dealer in the U.S., started 2008 using a traditional budget. Like the rest of the country, HOLT had little idea of what would occur in the back half of the year.

Going into 2009, management, led by CFO Paul Hensley, decided to eliminate budgeting, as they had no idea what the next year would be like. The management team asked everyone to do their best. Working as a team, the company made it through 2009 and the results were a lot better than expected.

The company did the same in 2010 and again had results much higher than anyone expected. By 2011, managers asked when they’d get their budgets back. The response was, “Never.” The company had performed so much better with business units doing the best they could that budgets were deemed irrelevant.

“Targets can become negotiated stopping points,” Player points out. “They are the minimal acceptable stopping point. Performance is better when you constantly focus on doing the best you can do.”

Beyond Budgeting Tested by Oil Price Crash

Here’s another example. With oil prices plummeting over the last 18 months, AFP turned to one champion of Beyond Budgeting, Norway-based energy company Statoil, to check how the methodology performed as the company’s market environment headed south.

Bjarte Bogsnes, vice president of performance management development, likes to compare Statoil’s budgeting process to having the “bank open” all year. Instead of setting a static budget ahead of the start of the fiscal year and locking in resources, funds are allocated to worthy projects year round, and projects are continuously evaluated for potential ROI given changing market conditions.

That process is supplemented with a dynamic forecasting approach that allows the company to stay on track and foresee what’s coming down the road so it can course-correct and understand the financial capacity ahead. It’s a lot like steering a supertanker: it needs plenty of advance notice to stay away from any oncoming danger.

Bogsnes reports that the agility afforded by Statoil’s flexible management process became even more important as oil prices dropped. “It has definitely helped us be more agile than our competitors,” he says, adding that Statoil has outperformed the average of a group of its peers. “It was a great test of the whole concept.”

While the company faced some doubters, even from within, “everybody is very happy we didn’t revert to a traditional budgeting process,” he explains. Had it done so, the 2015 budget would have been based on oil prices in the summer of 2014—well over $100. “This approach has given us the agility we needed, especially with regard to investment and CapEx,” Bogsnes says.

By allowing the “bank” to stay open throughout the year, Statoil was able to allocate funds continuously, which made it easier to turn down the activity level. “We keep asking two questions: Is this a good investment? Can we afford this investment?” he says. “We ask them more frequently and we can ask them when we have more information vs. our peers who have to make those decisions earlier in the investment cycle.”

The upshot: Beyond Budgeting allowed Statoil to steer clear of the rocks and could for your clients as well.

Nilly Essaides will be presenting the session, How to Shorten the Budget Process & Merge Financial and Strategic Planning, at Accountex 2016 , Nov. 15-18 in Las Vegas.The original post appeared on the Sleeter Group blog. AccountingWEB and Accountex have partnered to bring you this content as we share a belief in the furtherment of the profession through greater insights.

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