Performance Budget : Meaning, Process, Characteristics, Advantages & Disadvantages

So, you can say that “A performance budget, also known as performance-based budgeting, is a method of creating a budget. That is based on the evaluation of an organization’s productivity. This approach allocates a larger part of the budget to divisions or operations. That has the greatest impact on profitability, leading to efficient use of resources such as finance, staff skills, and productive time.”

Performance budget is use when you look at how well different parts of a business are doing and decide how to use money in the next budget period. It’s a way to see how well the business is doing and make sure resources are being use in the best way.

Definition

A performance budget is a way of planning how the money will be used for different programs and activities in a company, government, or organization. It shows how much money is expected to be spent and earned, and what goals and plans the organization has for using that money.

Purpose of Performance Budgeting

The main purpose of performance budgeting is to make sure that the money of the government, company, or organization is using in the most effective and efficient way possible. So, This is done by looking at how well different parts of the organization are doing and using that information to plan how to use the budget in the future.

So that, it helps the organization achieve its goals and objectives. And to make sure that the resources are use in the best way possible. Additionally, it helps in evaluating if the budgeted tasks are carry out as planned and measuring the performance. This way it ensures that the money is spend in a responsible way and the objectives are being met.

Characteristics of Performance Budgets

• • Performance budgets are based on specific targets, objectives, and standards of performance

• • They include detailed plans for programs, activities, and time schedules to help in effective and efficient resource allocation.

• • They focus on management and policy, including personnel and finances

• They go beyond estimating future needs and include planning and forecasting at all levels of the organization

• • They help management to regulate and track activities to ensure they align with predetermined standards

• • They are not projections of trends and targets, but also include strategic planning at all levels

• • They are usually reviewed and updated, ensuring that the goals of the organization

• • They also hold individuals and programs accountable for achieving specific results and achieving desired outcomes.

Process of Performance Budgeting

The process of Performance Budgeting involves various steps:

• • Formulation of Objectives: The organization establishes clear and measurable targets for each department and employee.

• • Identifying Programs and Projects: The organization identifies various programs and tasks that will help get these objectives.

• Evaluation and Selection: The organization evaluates and selects packages and projects based on a cost-benefit analysis.

• • Development of Performance Criteria: The organization develops performance criteria for every program to measure development.

• Preparing Financial Plans and Budget: The organization prepares economic plans for each program and a final annual budget.

• • Assessing Performance: The company assesses the performance of every program and compares it to the budgeted performance.

• • Correcting Deviations: The company takes action right from the budgeted performance.

Success Performance Budgeting key points

The success of Performance Budgeting depends on several key conditions:

Work Measurement and Performance Standards

The implementation of work size and performance requirements is essential for the success of performance budgeting. Because, These requirements must be based on a thorough appreciation of the nature of the work and previous records, and ought to be bendy and ample to permit deviation.

Functional Record Keeping

Maintaining documents alongside purposeful strains is vital for monitoring the variance. Between budgeted and genuine costs.

Integration of Budgeting and Accounting

An adequate and desirable accounting guide is necessary, together with the integration of budgeting and accounting classifications.

Proper Classification of Public Expenditure

To be successful, performance budgeting requires an appropriate classification of public expenditure into two categories: capital fees and working costs. Capital prices are prices for the acquisition or enhancement of constant assets. Working costs are costs for everyday operations.

Clear and measurable objectives

Clear and measurable goals need to be set for every branch and employee, this way it will be handy to measure the growth and results.

Regular monitoring and evaluation

To make sure that the performance budgeting, everyday monitoring, and assessment must be done.

Communication and feedback

Regular verbal exchanges and comments are compulsory to make certain that all stakeholders are aware of the growth and effects of performance budgeting.

Scope of Performance Budgeting

• • Performance budgeting in India aims to ensure that the budget is being used and to achieve the goals of the organization

• • It uses performance data and metrics to check the effectiveness and efficiency of different areas of the organization

• • it allows for better prioritization of spending and resource allocation

• • It enables organizations to track progress toward achieving their goals and objectives

• • it enables to use of data to make informed decisions. budgeting, resource allocation, and performance management.

• • It holds individuals and programs accountable for achieving specific results

• • It is recommended by the Administrative Reforms Commission’s Study Team on Financial Administration

• • It is suggested by the Estimates Committee in its 20th report as an ideal system of budgeting for proper appreciation of schemes and outlays. So, it is included in the budget, especially in large development activities.

Advantages of Performance Budgeting

Accountability

In the public sector and non-profit organizations, a performance price range helps to increase accountability by requiring personnel to set and gain specific goals and justify the use of taxpayer or donor funds. This allows for reviews of the advantages accruing to citizens and society.

Clear Objectives

Performance budgeting defines the targets for which money will be use. making it easier to examine performance, track progress, and tackle any deviations.

Improved Efficiency

By measuring and evaluating program performance, and performance budgeting. it leads to general operational effectiveness and improvement in program outcomes. So, It also overcomes the barriers of typical budgeting methods.

Increased Transparency

Performance budgeting brings transparency to the price range instruction system. And helps to make higher economic choices for useful resource allocation. It additionally, approves for evaluation of the operational effectiveness of initiatives and programs.

Better Budget Control

Performance Budgeting lets companies measure the performance of applications and initiatives. And become aware of any deviations early which, leads to the higher management of the budget.

Prioritization of Programs

Performance Budgeting permits agencies to focus on programs and initiatives. Based on their performance and the advantages they convey to the agency and society.

References

Ashish Kumar Srivastav. Performance Budget. WallStreetMojo. Published May 20, 2020. Accessed January 14, 2023. https://www.wallstreetmojo.com/performance-budget/#h-purpose

Performance Budgeting – Features, Process, Advantages, Limitations. BBA|mantra. Published August 10, 2017. Accessed January 14, 2023. http://bbamantra.com/performance-budgeting-features-process/

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