As in Shakespeare’s story of Hamlet, who contemplates whether to live or die, budgeting has for a long time been debated as a matter of “to be or not to be.” In our recent paper in the European Accounting Review, we wish to renounce this understanding.
The context
We studied a large Scandinavian bank and found that it had abandoned budgeting and reinstated it in a new form. Despite its listing on the stock exchange and demands for predictable financial performance, the bank operated without a corporate budget for almost two years. Therefore, during our case study, we were interested in understanding how budgeting changed upon reintroduction.
Beyond Budgeting: an alternative to budgeting?
For years, the bank relied on tight budget control at the corporate level. Executives were used to being evaluated on various performance measures encapsulated in the budget, which resulted from an aggregation of negotiated decentral budgets (i.e., a bottom-up approach).
However, the accounting department had become aware of the Beyond Budgeting framework. Originally proposed by Jeremy Hope and Robin Fraser, the framework entailed 16 principles for abandoning traditional budgeting and achieving better performance through radical decentralization. Since the bank was organized in a decentralized structure, the accounting department found this framework interesting, so when the opportunity for abandoning the corporate budget arose following a data warehouse structuring, they presented the idea to the Board of Directors.
Although they were skeptical at first, the Board of Directors came to see the forecasting model, which was developed to provide realistic macroeconomic projections on the bank’s revenues and costs, as an effective replacement for the corporate budget. This forecasting model was inspired by Beyond Budgeting, yet the new control element did not lead to a prolonged abandonment of budgets.
Budget reintroduction
The corporate budget was reintroduced after a couple of years, but budgeting had taken a new form in the bank. Realizing the benefits of the forecasting model, forecasts were used to create the corporate budget, which was established via macroeconomic projection and decoupled from the decentralized budgets. As a traditional budget, this budget was fixed for the calendar year and used to control costs. Meanwhile, the forecasting model continued to provide updated information each quarter within the fixed time horizon of the calendar year and was used to project revenues.
The takeaway
With our paper, we wish to bring attention to the important understanding that budgeting is not a question of either using budgets traditionally or completely abandoning budgets to move Beyond Budgeting. Rather, budgeting is a complex management control system encompassing various control elements, such as budgets and forecasts. When considering how budgeting best solves different purposes (e.g., planning, controlling, or performance evaluation), some control elements may be more appropriate than others. We found the forecasting model effective in controlling revenues and budgets effective in controlling costs, but more importantly, budgeting led to better planning and performance evaluation when forecasts and budgets were used at the same time.
Looking forward
In the future, we are excited to learn more about budgeting in other contexts. While we focused on the corporate level, budgeting may function differently, and for different places, in specific functions, or inter-organizational collaborations. We hope our paper can inspire
to unfold the dynamics of management control systems in theory and practice. Feel free to contact us if you have any questions or comments.
Per Nikolaj Bukh (pnb@pnbukh.com), Aalborg University Business School
Amalie Ringgaard (sofiear@business.aau.dk), Aalborg University Business School
Niels Sandalgaard (nis@business.aau.dk), Aalborg University Business School
This blog is based on the paper:
Bukh, P. N., Ringgaard, A., & Sandalgaard, N. (2024). Moving beyond Beyond Budgeting: A ase study of the dynamic interrelationships between budgets and forecasts. European Accounting Review. https://doi.org/10.1080/09638180.2024.2362681
