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An Introduction to the Concept of Incremental Budgeting and Beyond

Budgeting

Technical Report  in  SSRN Electronic Journal · January 2018

DOI: 10.2139/ssrn.3140059

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An introduction to the concept of
Incremental Budgeting and Beyond
Budgeting

Mr Ibrahim Ouassini
BSc, MSc Finance and Accounting with CIMA
University of the West of Scotland
United Kingdom
 Page |1

Table of Contents

Introduction 2
1. Definition of budget 3
2. Incremental budgeting 4
2.1. Definition 4
2.2. Advantages of incremental budgeting 4
2.3. Disadvantages of incremental budgeting 5
3. Beyond Budgeting 6
3.1. Definition and purpose 6
3.2. Examples of companies adopt the BB approach 8
3.3. Principles of beyond budgeting 8
3.4. Merits of beyond budgeting 9
3.5. Drawbacks of beyond budgeting 10
Conclusion 11
List of references 12
 Page |2

Introduction:

Today`s knowledge and needs result in high dynamic environment for companies, that

why the corporations should compare their methods with the requirement of success for

the future.

In this report, I will discuss the advantages and disadvantages of incremental budgeting,

the merits and the drawbacks of beyond budgeting.

 Page |3

1. Definition of budget:
Budgets are plans, normally revealed in monetary terms for the future (generally a year

divided into months or quarters), it should take into account the strategy of the company,

the policies of the country they work in, economy environment, inflation, etc.

Budget give the entity the chance to:

▪ Create a strategy for the future

▪ Coordinate the activities and communications between the departments of the

organisation

▪ Provide a way to control activities and evaluate the performance of the managers

(or budget holders)

2. Incremental budgeting:

3.1. Definition:

Incremental budgeting or traditional budgeting or annual budgeting is a way of making the

budget on the basis of the previous budget with adjusting it (adds or subtracts) based on

sales forecasts, market demand, new developments, capacity of production, etc.

This method assumes that the previous budget allocation considerate the priorities of the

entity and had justification for the allocation of expenses.

The stages of the preparation of incremental budget are:

1. Establish the bases: determine what the changes in the expenses, then make

adjustments to reflect the inevitable modifications.

2. Adding to the implications of the new budget to show proposed savings and growth.

3. Producing the new budget.

 Page |4

3.2. Advantages of incremental budgeting:

The incremental budgeting has clear benefits:

• The process of elaborating budget is non-changeable so it will be easy for the

budget holders to demand the same costs plus any additional cost required for the

next year.

• The costs and time dedicated to create the budget is low.

• Allow the managers to focus on the main areas of change as the changes in the

costs can be seen immediately.

The use of incremental budgeting in United Kingdom

75-

60-

45-

30-

15-

0-

<50 50-250 250-10000 >10000

Number of Employees

Source: “Management Accounting tools for today and tomorrow”. CIMA, 2009, page15 .
 Page |5

Furthermore, the survey who was inducted by CIMA in 2009 to weight the use of

incremental budgeting in companies in different industries and different sizes show that

this approach is still popular among the managers of companies; approximately 47% of

them use these approach.

3.3. Disadvantages of incremental budgeting:

The main problem is that incremental budgeting assume that the next period profit will

increase or stay stable. However, in reality, it is probably that some changes occur in the

company activity, in the industry, or even in the economy, which will require significant

modifications in the budget.

In addition, the incremental budgeting has other drawbacks:

• This method has weakness at scrutinising the costs and effectiveness of existing

expenditures.

• Incremental budgeting could hinder the entities from implement a detail plan for the

medium and long term because the organisations will usually then focus only on the

next year budget, this will have a negative effect on the existence of the

organisation, as this approach will not create a sustainable ground for the

development of the organisation.

• The performance of the budget holders will not be possible control as there are not

any incentives to reduce unnecessary costs or for develop and establish new ideas,

which they are very important for the continuity of the entity in the future.

• This kind of budget encourage the managers to spend their budgets even if they do

not need that so they could maintain the same amount of budget or with an

increase for the next year which result in wasting the resources of the company,

also they could overestimate their needs in order to achieve favourable results.
 Page |6

Moreover, this budgeting system tend to be disconnected from the actual results as the

budget will be based on a prior year benchmarks not on projected requirements.

4. Beyond budgeting:

4.1. Definition and purpose of beyond budgeting:

Beyond budgeting is a new concept founded by Jeremy Hope (1948-2011), Robin Fraser,

and Peter Bunce (1947-2015) in 1998.

The implementation of beyond budgeting begin after that Robin Fraser (2003) realise that

“incremental budgeting was doomed to failure and that success depend on using a

transformational process to build a coherent radically decentralized model, followed by

long term continuous improvement”.

The CIMA (2005) define the beyond budgeting as “an idea that companies need to move

to it because of the inherent flaws in budgeting especially when used to set contracts. It is

argued that a range of techniques, such as rolling forecasts and market related targets,

can take the place of traditional budgeting”.

This method replaced the traditional structure by a new structure where decision making

transfer to employees where more freedom of making suggestions about the budget is

encouraged.
 Page |7

The intention of beyond budgeting is to rise the adaptability of enterprises, for that, the

managers have to make the required control tools, and enhance relevant management

culture by supporting responsible and positive behaviour, this promote new possibilities for

enterprise by making resource allocation more flexible and adaptive.

4.2. Examples of companies adopt the beyond budgeting approach:

There are many companies that are adopting this approach in their elaboration of budgets,

which are particularly Scandinavian companies:

Svenska Handelsbanken: the biggest bank in Sweden, eliminated budgets from 1970, it

has had the best result in the return on equity ratio than any other direct competitors.

Borealis (Denmark-based): created its last budget in 1995, now it uses rolling forecasts to

manage the future and a balanced scorecard to keep track of its performances.

Also, there are other big companies who use this method such as the German ALDI

Group, the Swedish furniture IKEA, the French chemical company Rhodia, the British

retailer Boots, and the Swedish financial services Skandia.

 Page |8

4.3. Principles of beyond budgeting:

There are 12 principles in beyond budgeting divided into two categories: Leadership and

Management performance.

Leadership principles:

1. Purpose: a company should provide a performance management climate based on

inspire and noble causes not on financial targets.

2. Values: an organisation should manage and direct by shared values and

motivations through challenges not rules and orders.

3. Transparency: informations about an entity should be open to the public interest,

employees, so the employees essentially front line managers could make decision

based on the information they have.

4. Organisation: derive from three keys: -the decision power is decentralized. -Support

of free talk and discussions of employees in the organisation. -Teams have the right

to coordinate and establish activities.

5. Autonomy: to maintain the high performance of employees, the managers should

give the trust and faith.

6. Customers: the customer’s needs have to be the main goal for the organisation.

Management performance principles:

7. Rhythm: management processes should be based on the forecasts, targets, not

only on the year.

8. Targets: organisation have to let the teams to establish their relative goals not fixed

goals.

9. Plans and forecasts: they have to be the most likely outcome that will happen.
 Page |9

10. Resource allocation: entity must ensure the optimum use of company resources

and decrease the bad costs that do not add value.

11. Performance evaluation: the corporation should into account values, peers

feedback, not only financial results.

12. Rewards: the ultimate factor is to beat the competitors, and make a profit shares, as

is lead to better performance than individual targets.

4.4. Merits of beyond budgeting approach:

The essential benefits are as follows:

• It changes the aim from defeating other managers to beating the competitors,

which will create a sense of belonging.

• It rises the motivation of employees by giving them clear challenges and

responsibilities.

• It rise the motivation of employees by giving them clear challenges and

responsibilities

• Creation of a shared information space throughout the organisation.

4.5. Drawbacks of beyond budgeting:

Some negatives identified in the implementation of the beyond budgeting approach are:

• Without a budget there is no general cadre of control which the corporation to plan

and control their activities.

• Absence of a map, which details what a business is and what it want to achieve.

• Budget could a huge aspect in the organisation basics.

• Some companies will be difficult for them to adopt the culture of decentralisation,

which beyond budgeting philosophy depends on.

In addition, the CIMA (2009) survey indicate that this approach is less common in practise.
 P a g e | 10

% The use of beyond budgeting

5-

4-

3-

2-

1-

0-

<50 50-250 250-10000 >10000 : number of employees

Source: “Management Accounting tools for today and tomorrow”. CIMA, 2009, page15.
 P a g e | 11

Conclusion:

This report show that a change must happen in the financial planning of organisations,

however, many of companies, councils, agencies, governments, still choose to solve the

problems of 21th century by the procedures of 20th century.

The challenges that the entities face nowadays have force them to direct their policies into

the new approaches of implementing the strategies, values, targets. However, the

changes should not be in one instance but a continuous improvement and evolution must

be undertaken within a considerably period.

 P a g e | 12

List of references:

• Alexa Michael and Technical Information Service, (2007), `Beyond Budgeting: Topic

Gateway Series No.35`, by Chartered Institute of Management Accountants

(CIMA),[Online] Available:

http://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_beyond_budgeting

_oct07.pdf

• Andrew Goddard, (2004), "Budgetary practices and accountability habitus: A

grounded theory", Accounting, Auditing & Accountability Journal, Vol. 17 Issue: 4,

pp.543-577, [Online] Available:

http://www.emeraldinsight.com/doi/pdfplus/10.1108/09513570410554551

• Andy Neely, Mike Bourne, Chris Adams, (2003) "Better budgeting or beyond

budgeting?", Measuring Business Excellence, Vol. 7 Issue: 3, pp.22-28,[Online]

Available: http://www.emeraldinsight.com/doi/pdfplus/10.1108/13683040310496471

• Anne Abraham, John Glynn, Michael Murphy, Bill Wilkinson, (2008), `Accounting

for Managers`, Part 2: Chapter 7, 4th edition, by Cengage Learning, United

Kingdom.

• Beyond Budgeting Round Table organisation (BBRT),[Online] Available: https://bbrt.org

• Catherine Gowthorpe, (2005), `Business Accounting and Finance for non-

specialists`, 2th edition, by Thomson Learning, United Kingdom.

• Chartered Management Institute (CMI),` A selection of Useful Resources: Setting

budgets with Managementdirect.` published by Chartered Management

Institute,[Online] Available:

http://www.managers.org.uk/~/media/Files/PDF/CMI%20ManagementDirect%20-

%20Budgets.pdf
 P a g e | 13

• Claire Mansfield, Maia Beresford, (2014), `Smart Budgeting Integrating Financial

and Strategic Planning for Outcomes`, by New Local Government Network

(supported by ACCA and MAZARS), [Online] Available:

https://secure.accaglobal.com/content/dam/acca/global/PDF-technical/public-

sector/smart-budgeting.pdf

• Colin Drury, (2012), `Management and Cost Accounting`, 8th edition, Chapter 16,

by Cengage Learning, United Kingdom.

• Colin Drury, (2012), `Management and Cost Accounting: Student Manual`, 8th

edition, Chapter 16, by Cengage Learning, United Kingdom.

• Juergen H.Daum, (2005), `Beyond Budgeting`, published in SAP INFO.net, [Online]

Available: http://www.juergendaum.com/bb.htm

• Jürgen H. Daum, (2002), `Beyond Budgeting: A model for Performance Management

and Controlling in the 21 century?`, published in the German newsletter :”Controlling &

Finance”.[Online] Available:

http://www.juergendaum.de/articles/beyond_budgeting.en.pdf

• Kaplan Financial Knowledge Bank, `Beyond budgeting`, by Kaplan Financial

Ltd,[Online] Available:

http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Beyond%20Budgeting.aspx

• Kaplan Financial Knowledge Bank, `Incremental Budgeting`, by Kaplan Financial

Ltd,[Online] Available:

http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Incremental%20Budgets.as

px

• Peter Atrill, Eddie Mclaney, (2012), `Management Accounting for Decision Makers`,

Part 6, 7th edition, by Pearson Education Limited, United Kingdom.

• Pr. David Dugdale, Falconer Mitchell, Rebecca Ryan, Deloitte DMCS Ltd, Ivan

Kovachev, Louise Rose, (2009), `Management accounting tools for today and
 P a g e | 14

tomorrow`, by Chartered Institute of Management Accountants (CIMA), [Online]

Available:

http://www.cimaglobal.com/Documents/Thought_leadership_docs/CIMA%20Tools%20

and%20Techniques%2030-11-09%20PDF.pdf

• Sanjay Bulaki Borad, (2017), `Incremental budgeting-Meanings, Advantages and

Disadvantages`, publish in efinancemanagement, [Online] Available:

https://efinancemanagement.com/budgeting/incremental-budgeting

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