Performance BudgetA budget that focuses on outputs or outcomes of services

A budget is a very helpful document that guides the future performance of a business.

Most budgets will contain targets for revenue and expenses.

And to make them more understandable, they are presented in dollar amounts.

For example, a budget may contain a $350,000 figure for its projected revenue and $178,000 for its expected total expenses.

This gives the business a quantitative measurement of its performance.

It will know that it’s relatively performing well if it can hit the targets in its budget.

The thing is, a traditional budget is only fully effective for businesses that focus on profit generation.

For organizations such as nonprofits and government agencies that focus on goal attainment, a traditional budget may not be that useful.

Sure, they can use a traditional budget to put an expected limit on their spending.

However, that doesn’t answer the need for a way to measure the success of goal attainment.

Fortunately, there exists a budget that caters to such a need: the performance budget.

In this article, we will discuss what a performance budget is.

What can a performance budget do for an organization?

What are the advantages and disadvantages of implementing a performance budget?

How does it work?

We will try to answer these questions as we go along with the article.

What is a Performance Budget?

A performance budget is a type of budget that focuses on the output and outcomes of services.

It provides information regarding the input of resources and the output of services for each unit or function of an organization.

The goal of a performance budget is to provide a way to measure the success of goal attainment for the output and outcomes of its services.

It does this by first identifying the desired output or outcomes of services.

It helps in putting quantitative measures on qualitative or subjective factors which makes them easier to account for.

Government bodies and agencies use a performance budget to reflect the link between taxpayer funds and the output or outcome of the services they provide.

Likewise, nonprofit organizations use a performance budget.

They do so to reflect the link between the donated funds and the output or outcome of their services.

If done properly, a performance budget can provide an organization with a way to quantitatively measure the success of its goal attainment.

It can help the organization in evaluating whether or not a specific output or outcome is achieved by the end of the period.

This potentially increases the efficiency of the organization in performing its services.

By assigning a quantifiable goal for each of its units, there can be a proper guideline to which the assigned personnel can measure his/her performance.

It also provides a justification for the utilization of funds.

All in all, a performance budget is not just about the performance of the organization.

It provides a way to evaluate performance.

It promotes accountability for the units and people in charge of attaining the desired output and outcomes of services.

A performance budget can inspire people to work more efficiently as there is now a quantifiable way to measure their performance.

How Does a Performance Budget Work?

Unlike a traditional budget that focuses on target profit, a performance budget focuses on the outputs or outcomes of services.

As such, the allocation of the organization’s funds and resources will greatly depend on the specified goals agreed upon by the members of the budget committee and the unit or agency heads.

After all, the funds and resources of an organization are limited.

A performance budget helps the organization properly allocate its limited resources.

It also provides a justification as to why the allocation is done as such.

As an example, let’s consider a school setting.

To measure the skills and effectiveness of its teachers, the school may base the teachers’ performance on the aggregate test scores among their students.

Teachers who attained the specified goal of aggregate test scores may earn bonuses and promotions.

This does two things: (1) provide a quantifiable way to measure the effectiveness of teachers, and (2) incentivize the attainment of specified goals.

In theory, a performance budget is designed to incentivize people to do well in their jobs.

By being accountable for the goal attainment of the organization, there is more reason for assigned people to produce positive results.

Here are other examples of output or outcomes that a performance budget could address:

• Reduction of a non-violent crime in a city
• Increase the reach of feeding programs
• Improvement of average test scores for a particular school district
• Reduction in vehicular accidents
• Increase responsiveness to distress calls
• Improvement of water quality of a city’s water supply

As one would notice, most of the outcomes above are qualitative.

A performance budget can provide a quantitative way to measure their success by attaching numerical targets to them.

This way, the organization has an easier way to evaluate the success of its goal attainment.

The Advantages of a Performance Budget

A performance budget provides the following advantages:

Sets Accountability

A performance budget assigns quantifiable goals to the units and personnel of an organization.

It provides a clear understanding of the roles and tasks the units and personnel have to perform.

This sets accountability to them. As such, they become accountable for the attainment of their assigned goals.

Provides Transparency

A performance budget will reflect the link between funds and resources and output/outcomes or services.

For government agencies, this will provide transparency on how they utilize the taxpayers’ funds.

For nonprofit organizations, this will show how they utilize the donated funds to further their advocacy.

Additionally, a performance budget provides transparency to the units and personnel of the organization.

It does this by assigning specific tasks and goals for each unit.

Incentivizes Improvement in Performance

An organization may provide incentives to personnel who attain their assigned goals.

It also makes it easier as there is a quantifiable measure of success.

But even without the promise of a bonus, a performance budget can still improve performance.

By having numerical targets, it’ll be easier to check goal attainment.

Tweaks to the numerical targets can be done to help improve the performance of the organization.

The Disadvantages of a Performance Budget

Even with the numerous advantages that a business performance provides, it still has its downsides.

Here are some of them:

Performance Budgets Are Subjective

While it’s easier to attain targets with numerical goals, assigning them to qualitative factors can be quite a challenge.

This is amplified by a lack of unified cost standards among different units of the organization.

This results in performance budgets being subjective.

The subjective quality of performance budgets may potentially lead to disagreements on the spending priority of the organization.

Potential for Manipulation of Data

Perhaps the biggest downside of a performance budget is the potential for manipulation of data.

By assigning numerical targets to goals and using them as benchmarks for success, the assigned personnel might game the system to achieve them.

Alternatively, they might become laser-focused on achieving the numerical targets that they disregard anything else.

This can result in the overall degradation in the quality of the services of the organization.