Performance Based Budgeting

By: EconomyWatch   Date: 30 June 2010

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Performance Based Budgeting (PBB) is done for the public sector companies. Performance Based Budgeting is neither mere information about the program-related performances of an enterprise, nor information about the decision of resource distribution. Rather, it is a process of assessing the overall performances of a company.

A Performance Based Budget comprises an annual, integrated performance plan, indicating the relationship between the levels of program funding and the anticipated outcomes. It refers to a single or a set of performance target(s) which must be achieved at a given expenditure level. On an official level, Performance Based Budgeting relates the appropriations or expenditure targets with the performance targets. The jurisdiction passes on the implementation of Performance Based Budget to organizations like:

  • Department Reallocation "Crosswalk" Clinics
  • Reallocation Workshops
  • Accounting and Budgeting Systems Design
  • Reallocation Project Design
  • Accounting and Budgeting Systems Assessments
Performance Based Budgeting: Some views

From the comprehensive definition of Performance Based Budgeting, as provided by Segal and Summers, the process considers three different elements prior to the formulation of the budgetary document. They are as follows:

  • The ultimate outcome of a particular performance
  • The strategies, that is, the diverse means of attaining the final result
  • The activities performed, in order to achieve the final outcome

From the above-mentioned elements, one may notice a link existing between the principles of specific actions and the final outcomes. The cost-effectiveness of the various actions can also be understood and judged, to attain a desirable budget. Hence, as per the definition, Performance Based Budgeting is one of the best methods of distributing financial resources, for attaining certain specific objectives.

Nature and process of Performance Based Budgeting:

As a fresh and somewhat different budgeting method, Performance Based Budgeting considers all conventional methods of scrutinizing and using the budgetary documents as insufficient, time-consuming and obsolete. Moreover, the Performance Based Budgetary approaches are also far more superior and contemporary in nature than the traditional ones. For instance in case of governmental projects, the Performance Based Budgeting system facilitates the government to decide the objectives of the projects undertaken, determining the type of activities required to accomplish them. All such activities or performances have considerable expenses involved with them. Hence the long-term projects are disintegrated in the form of annual Performance Based Budgets, which incorporate the financial figures.

Functions of a Performance Based Budget:
  • A Performance Based Budget informs the public about the total expended amounts on various services, as well as the anticipated benefit which the buyers will derive. It informs the people about the possible destinations where their expenses go, along with the cost of the expected benefit.
  • A Performance Based Budget permits the policy and decision makers like executives, elected officers, budget officers, managers and others to have a transparent view of the trade offs between alternative expenditure plans, thus, making more up-to-date, beneficial and effective allocation of the financial resources.
How to accomplish Performance Based Budgeting successfully?

Performance Based Budgeting is of course an advanced budgeting process. To successfully accomplish such budgeting, one should go through a systematic procedure, which begins with getting explanations from the Key Performance Indicators (KPIs), which relate the performance indicators with the available resources. This is followed by an approach called the Balanced Scorecard approach, where the Key Performance Indicators are examined and connections are established between the causes and effects of the Performance Budgeting system. It is this established connection which is integrated with the existing commercial system, for tracing out activities like acquisition, sales, finances, etc. Today, the concept of Balanced Scorecard is widely practiced in the private commercial sectors, and less in the public sectors, owing to the advent of Performance Based Budgeting. In fact, Scorecard can be regarded as the nascent stage of the concept of Performance Based Budgeting, which follows a similar, but far more advanced procedure.

How is a Performance Based Budget beneficial?
  • Shortens the lengthy, traditional budgeting and reporting procedures (e.g. feeder applications, multiple spreadsheets, etc.) which save money and time simultaneously, with fresh regulatory necessities
  • Managers in the public sectors are empowered for effective promotion of resources.
  • Makes the agencies more focused, on a constant basis, on the reduction of resources, as being their highest priority activity
  • There is a remarkable alignment in the data collection and reporting procedures of the agencies involved.
  • Improves performance on a continuous basis in the public sectors

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