## **Learning Outcomes**

By the end of this article, you should be able to:

- Distinguish between traditional and modern budget approaches.
- Explain and evaluate beyond budgeting, rolling forecasts, and agile budgeting methods.
- Identify behavioural impacts of different budget systems.
- Assess how these approaches affect performance management and decision making, in line with ACCA exam standards.

## **ACCA Advanced Performance Management (APM) Syllabus**

For ACCA Advanced Performance Management (APM), you are required to understand advanced budgeting techniques and their behavioural impacts, with a focus on how these influence planning, control, and organisational agility. Review these syllabus areas during your revision:

- Evaluate the strengths and weaknesses of alternative budgeting models, including fixed, flexible, rolling, activity-based, zero-based, and incremental.
- Assess the increased use of non-traditional profit-based performance measures, such as beyond budgeting, in controlling organisations.
- Appraise how different budget approaches align with changing business environments and drive adaptive decision making.
- Analyse the impact of budgeting models on motivation, behaviour, and performance evaluation.

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following best describes the main aim of beyond budgeting?  
   a) Reducing overall company costs year on year.  
   b) Removing hierarchical control in favour of empowered, adaptive management.  
   c) Tightly controlling all divisions to meet budget targets.  
   d) Limiting the number of rolling forecasts performed.

2. What is a key behavioural challenge posed by annual fixed budgets?  
   a) Encouraging managers to pursue innovative opportunities.  
   b) Creating a rigid mindset and possible demotivation.  
   c) Increasing responsiveness to market changes.  
   d) Focusing on external benchmarks only.

3. True or false? Rolling forecasts are static and only used for annual planning.

4. List two ways in which rolling forecasts can help organisations respond to environmental uncertainty.

## **Introduction**

Budgeting is central to organisational planning and control. However, the limitations of traditional annual budgets have become clear in today’s fast-paced business environment. Companies require increased flexibility, faster decision-making, and greater empowerment at all levels. Non-traditional approaches—like beyond budgeting and rolling forecasts—aim to address these needs.

This article compares conventional and modern budget systems, explains the concepts and application of beyond budgeting and rolling forecasts, and explores their behavioural impacts, especially on motivation, accountability, and organisational agility.

> **Key Term: beyond budgeting**  
> A management approach that replaces fixed budgets with decentralised, adaptive processes, focusing on empowerment, external benchmarking, and continuous planning.

## **Traditional Budgeting Approaches**

The most common traditional budget systems—fixed and incremental—begin with historic figures and add changes to obtain new targets. While this provides structure and control, it often reduces adaptability.

Annual budgets tend to be top-down, setting targets centrally for the year and holding managers accountable for achieving them. While straightforward, this process can create inflexibility, demotivate teams, and encourage short-term thinking.

> **Key Term: rolling forecast**  
> A continuous planning method where the forecast period is updated regularly—such as monthly or quarterly—so that a set time horizon is always projected into the future.

## **Beyond Budgeting: An Adaptive, Decentralised Approach**

Beyond budgeting (BB) rejects the concept of fixed annual budgets. Instead, it uses adaptive planning, continuous improvement, and external benchmarks. Core principles include:

- Empowering teams with decentralised decision rights.
- Using external benchmarks to guide performance.
- Focusing on relative performance and continuous feedback instead of meeting preset targets.
- De-emphasising traditional command-and-control processes.

This agile approach allows organisations to respond quickly to change, improve innovation, and better align objectives with strategy.

### **Worked Example 1.1**

Woodford Ltd operates in a fast-moving retail sector. Its old approach used strict annual budgets, with store managers appraised solely on meeting these targets. This led to missed opportunities—such as not stocking trending products outside the plan.

The company switches to beyond budgeting. Managers gain authority to respond to customer trends, are assessed against peer store performance and external market data, and collaborate on forecasts.

**Question:** Explain how this change is likely to impact managerial behaviour and company performance.

> **Answer:**  
> Managers are incentivised to focus on long-term value and customer needs instead of simply “making budget.” Motivation increases as they see their actions have genuine impact. The company becomes more innovative and responsive, supporting better performance against competitors.

### Main Features of Beyond Budgeting

- Decentralised teams: Decision-making authority is transferred closer to operations.
- Relative targets: Success is judged against competitors or best-in-class performance, not static internal budgets.
- Continuous planning: Resources are allocated as needed, not based on arbitrary annual cycles.
- Transparent information: Open, real-time data replaces hierarchical reporting structures.

### Advantages and Disadvantages

#### Advantages

- Greater responsiveness to changing conditions.
- Improved motivation and empowerment for managers.
- Focus on long-term performance, not only short-term targets.

#### Disadvantages

- Can be challenging to implement in deeply hierarchical or risk-averse cultures.
- Success depends on high-quality, timely information.
- External benchmarks may be difficult to obtain for some industries.

> **Key Term: external benchmarking**  
> The practice of comparing organisational processes or performance with those of leading competitors or best-in-class companies outside the organisation.

## **Rolling Forecasts: Continuous Planning Made Practical**

Rolling forecasts update future projections at set intervals (for example, every month or quarter), always maintaining a constant time horizon. Actual results are compared to the latest forecast, not a static budget.

Key benefits:

- Enables rapid response to new opportunities or threats.
- Reduces the risk of outdated or unrealistic targets.
- Facilitates better alignment between long-term strategy and short-term actions.

### **Worked Example 1.2**

Nexa Services prepares a twelve-month rolling forecast. Each quarter, an extra three months are added, and forecasts are updated based on latest sales, costs, and market data.

**Question:** What impact might this have on planning accuracy and team engagement compared to annual budgeting?

> **Answer:**  
> Forecasts are more accurate and relevant, aiding operational planning. Teams can adjust goals based on current realities, improving engagement and ownership of results. There is less pressure to “game the numbers” at period-end.

## **Behavioural Impacts of Budget Approaches**

Budgeting systems have a direct effect on management motivation, collaboration, and creativity.

Traditional annual budgets can:

- Focus effort on meeting or manipulating fixed targets.
- Lead to “use it or lose it” spending.
- Reward short-term achievement at the expense of long-term objectives.

In contrast, beyond budgeting and rolling forecasts:

- Encourage innovation and risk-taking when appropriate.
- Build trust, autonomy, and a sense of ownership among employees.
- Increase accountability for outcomes, not just compliance with plans.

> **Key Term: budgeting slack**  
> The practice of intentionally underestimating revenue or overestimating costs when preparing a budget, in order to make targets easier to reach.
>
> **Key Term: budget-holder**  
> The person responsible for controlling and achieving budget targets in a specified area of the organisation.

### **Worked Example 1.3**

A division is evaluated only on meeting its budget, with bonuses tied to this metric. Managers deliberately overstate cost projections in the budget and stall spending until year-end to “secure” their allocation.

**Question:** How might a rolling forecast or beyond budgeting approach address this dysfunctional behaviour?

> **Answer:**  
> Rolling forecasts and beyond budgeting reduce the incentive for slack by focusing on continuous improvement and transparent comparison with best practices. Performance is not tied to arbitrary budget numbers, so gaming the system becomes less rewarding.

### **Exam Warning**

> In ACCA exam scenarios, always consider how the choice of budgeting system can create either positive or negative behaviours. Be prepared to discuss both technical and behavioural impacts, especially the risk of short-termism or demotivation.

## **Summary**

Traditional budgets provide stability but often at the cost of agility and accurate performance measurement. Beyond budgeting and rolling forecasts help organisations adjust to rapid change, increase managerial motivation, and focus on continuous improvement and relative performance rather than static targets. These methods support better decision-making, improved staff engagement, and robustness in dynamic environments.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the limitations of fixed and incremental budgeting.
- Describe beyond budgeting, including its key features and behavioural impacts.
- Discuss the role and advantages of rolling forecasts for continuous planning.
- Assess behavioural effects, such as gaming, slack, and motivation, resulting from different budget approaches.
- Compare and evaluate how beyond budgeting and rolling forecasts improve organisational agility.
- Recognise common exam pitfalls regarding budget systems and behaviour.

## **Key Terms and Concepts**

- beyond budgeting
- rolling forecast
- external benchmarking
- budgeting slack
- budget-holder

Budget approaches and behavioural impacts - Beyond budgeting rolling forecasts and agility