What is Performance Budget?
Performance budget is a budget which refers to programs, functions, and performance which reflects the estimated expenses and revenues of the companies, Government or Statutory bodies. It is a budget that provides the objective and purpose for which funds are being raised and proposed activities and programs to be accomplished.
It is aimed to improve the efficiency of the people involved in performing the budgeted task as per the budgets.
Performance budget is not just about the performance; it is much more than the evaluation of performance or providing the performance information in the budgets. The main characteristics of this budget is that to introduce the performance measurement in the budgeting procedure and to include the budget management system with the overall responsibility to compensate for the excellent performances and punish the poor performances.
Performance budget is a budget mainly aimed to evaluate whether the budgeted task is being carried out as per planned and measuring the performance involved in the budget procedure. The purpose is to ensure the performance is as per the budgets and workings are being done smoothly and the persons performing their task with utmost responsibility along with efficient utilization of the funds raised and achieving the objectives.
Characteristics of Performance Budgets
Following are the characteristics:
#1 – Improved Management
It helps in improving management skills and implementing the management processes more efficiently. It helps in identifying the organizational objectives, evaluate the program performances, understand the problems with the operations and structure of the program.
#2 – Higher Transparency & Accountability
The resources are categorized according to the programs and also provide the performance indicators. It finds solution-based accountability management, which is responsible for the objectives they have to achieve.
#3 – Enhanced Communications
It helps in enhancing the communications as there are personal responsibilities in performing their work, which will result in clear and improved communication to avoid any delay in achieving the objective of the program and also helps in the individual performances of the management.
#4 – Better Decision Making
It helps in making a decision, with the help of a better understanding of the processes. With the help of proper information, the management can implement techniques for improvement and can take appropriate actions to resolve the issues involved.
Performance Budget Process
Below is the step by step process which takes place:
Step #1 – Formulation of Objectives
It is the initial step to formulate the objective as to what to achieve. It is essential to set the objectives, and then only the designated tasks can be allocated to the teams based on their abilities.
Step #2 – Identifying various process and plans
It is the second stage to identify the process and plan, which will help in achieving the objectives—various processes and strategy which can be introduced to the program to achieve the objective.
Step #3 – Evaluation & Selection of the processes and plans
After identification, various processes and plans, the most profitable and easy to communicate and implement plan and processes should be evaluated and selected to achieve the objectives.
Step #4 – Development of Performance Criteria
It is another step to develop the criteria on which the processes and plans will be rolled out. It is also essential to develop a basis to measure the performances of the persons involved in the processes.
Step #5 – Financial Planning
After developing the processes, identifying the steps involved, it is required to plan for the financial requirement and prepare a financial budget for the processes planned.
Step #6 – Assessing Performance
After rolling out the processes, it is vital to measure the performance given by the persons involved in the process to initiate the actions accordingly. It is crucial to see whose performance was up to the mark and what changes are required to be made.
Step #7 – Correcting Deviations
It is the final step that corrects the deviations in the process and performances. Also, to make the required changes in both the process and performance to remove all those deviations.
Performance Budget Examples
- 80% reduction in the patients suffering from Malaria & Dengue by the end of 2020.
- 20% decrease in manufacturing waste by introducing staff training in the manufacturing process;
- 50% reduction in the infant mortality rate through the successful implementation of vaccination centers in different parts of the country by 2021;
There are the following advantages:
- Clear Purpose: It provides a clear purpose of budgeting and provides a clear understanding of the performance of the persons involved. It becomes easier to access the deviations and the performances and correct them.
- Improvement in Performance: It helps in improving the performance, as there will be a continuous check on the deviations and performances to remove the errors and correct the deviations, and therefore this will help in improving the performances.
- Sets Accountability: Since this budget provides a clear understanding of the roles to be performed and tasks to be completed by the persons, it provides accountability on every person for their roles and tasks, and they will be held accountable for there part of work.
- Transparency: It succeeds in making transparency in the budgeted task and their performances, as it is clear to all their roles and responsibility, and they are accountable for their jobs, which will help in providing clear transparency in the processes.
Following are the disadvantages:
- It is difficult for the long-term processes as there is a continuous update in the processes;
- There can be the possibility of manipulation of data;
- There is a requirement of a robust system of accounting;
- These budgets are subjective in nature.
Performance Budget is vital for the organization to access the performance of the persons handling the processes and to remove the deviations which they face while performing their tasks.
This has been a guide to what is performance budget and its definition. Here we discuss purpose characteristics, examples, and process of performance budget along with advantages and disadvantages. You may learn more about financing from the following articles –