What is a performance budget?
A performance budget is one that reflects both the contribution of resources and the result of services for each unit of an organization. The objective is to identify and rate the relative performances according to the achievement of the objectives for the specified results. This type of budget is commonly used by government agencies and organizations to show the link between taxpayer dollars and the outcome of services provided by federal, state or local governments.
Understanding a performance budget
The decision process for performance budgets focuses on the outputs – or outcomes – of the services. In other words, the allocation of funds and resources is based on specific objectives agreed by the budget committees and heads of agencies. For example, in schools, teachers can earn bonuses or promotions based on their students’ overall test results, which is expected to show a high level of skill and efficiency (although this is not always the case). case).
Performance budgets, as theory says, are designed to motivate employees, strengthening their commitment to producing positive results.
Here are some examples of results that a performance budget could address:
- Improvement in the results of the average tests of a school district
- Reduced mortality or morbidity rates from a health program
- Improving the water quality of a county’s drinking water supply
- Reduction of non-violent crime in a city
- Reduction in complaints related to road potholes
All of these would have numerical goals. A performance budget would be drawn up accordingly to identify these target figures and a method for assessing performance. Performance budgets are often based on the quantification of otherwise qualitative or subjective factors so that they can be measured and taken into account.
Key points to remember
- Performance budgets reflect the inflow of resources and the outflow of services for each department or unit in an organization.
- They are designed to motivate employee engagement in producing positive results.
- Cons include the potential for disagreement over spending priorities and the lack of unified cost standards.
Advantages and disadvantages of a performance budget
Benefits in the public sector are increased accountability of local authorities to taxpayers, communication of priorities to the public and quantification of specific objectives. Taxpayers want to know where and how their money is spent and for what purpose.
Likewise, non-profit organizations establish performance budgets to link the inputs and outputs of their missions. Donors from these organizations also want to know what kind of “return” society receives from their donations.
Some disadvantages of a performance budget include:
- Potential for disagreement on the position of spending priorities, in the case of a government with several agencies
- Lack of unified cost standards in several agencies
- The ability for a department to manipulate data in order to reach a target, which could lead to the need to spend funds for an independent party in order to verify the results
- A lack of flexibility once the inputs / outputs have been defined
A major drawback of performance budgets is that by assigning scores or target numbers that an organization uses as a benchmark for achievement, the numbers can be played or become the sole objective of its task. For example, teachers seeking a certain score can only focus on the factors that make up that score and ignore or ignore other factors that may be important for teaching, but not for the performance budget.