Performance based budgeting is the idea that each goal and objective within a company is identified and reported to determine where the budget should be spent. This is a particularly popular method of budgeting today in the public and private sector. There are several models that are used that used different markers in order to determine the link the results to the funding. These can be very basic or they can be complicated and require a supporting management system.
The Basic Model
In its most basic form, performance based budgeting looks at each expense and the result of the expenditure. This type of model is also referred to as performance informed budgeting. It uses a simple form of evaluation and looks at key performance indicators to determine if the system is working. The budget process uses this information for future budget funding decisions. It may help to break the different expenditures down into smaller pre-classified groups with the basic system to keep the information simple affordable and usable.
Use of Performance Based Budgeting within the Government
Many government organizations use performance based budgeting. This is because it is a results oriented method to achieving financial goals. This helps them determine the best way to use the money allocated in order to achieve the desired results. In addition, this form of budgeting provides accountability to the public and helps to highlight which programs are working and which ones are not. Taxpayers are often only willing to pay for results not for only the effort and the government is more effectively able to communicate these results when they are based on performance.
What Performance Based Budgeting can Show
Performance based budgeting can show many different outcomes. It may focus on the strategic planning or determine development measures. It also provides quantifiable data to determine success. This type of budgeting may also help to show ways to achieve the final desired outcome and show different activities that are being undertaken. Even a simple plan may help to evaluate expenditures in a review process. This can identify those that need to be cut back or eliminated, as well as those that should be expanded.
When is Performance Based Budgeting Inappropriate
Performance based budgeting is not appropriate for every situation. It should be used when there is a stable macro fiscal policy in place and the information data systems that are used are capable of providing timely accurate data. In addition, there should be an effective way of analyzing the data to determine which programs are meeting the established goals. The type of budgeting plan that is used should also be based on the needs of the organization in order for it to work properly.
Because it is important to provide results to the public, performance based budgeting is a tangible way for the government to show results. This also gives different departments an incentive for getting the best results possible. In addition, it provides a way to provide a transparency by showing a direct link between performance and resource allocations.
