What is performance budgeting? In basic terms, it is simply a system of presenting a budget in the terms of its functions and programs. This allows for a reflection of the output a budget is able to provide as well as its cost. Instead of providing the resources to create an accomplishment like most other budgets, the performance budget places the emphasis on the accomplishment itself.
Performance budgeting certainly has its merits, but there are certain limitations that must be examined as well. Here is a look at the pros and cons of this type of budgeting.
The Pros of Performance Budgeting
1. It provides a comprehensive view of each department.
Performance budgeting can immediately show which departments are performing as they should and which ones are under-performing. This is because the planning process is much easier to integrate into this type of budget because everyone’s efforts are focused on the accomplishment necessary for success. Instead of focusing at the beginning of the process, performance budgeting focuses on the end result.
2. It provides clear information.
The problem with a budgetary presentation is that just about any action can be justified. After all, the idea has just been formed so it has yet to come to its fruition. In performance budgeting, there are far fewer excuses available. It provides clear information that can be examined and understood by the general public. You will know immediately if a department or a company is being responsible with their budgetary habits.
3. It ties in results with funding.
Instead of creating estimates that may be able to receive funding, performance budgeting weaves together the expected results through evidence-based observations to create the next proposals for program funding. You already know if something will work or if it won’t work because you’re focused on the end of the journey.
4. It creates consistency in classification.
Instead of having every business classify costs in a way that best suits their bottom line, performance budgeting creates financials that are remarkably consistent across the board. This occurs because each budget is based on a real metric that is being tracked.
5. It creates accountability.
People will know if you’re meeting your goals. They can see what improvements, if any, are being made. Because of this, there is a greater level of public accountability on all levels.
The Cons of Performance Budgeting
1. It requires specificity in order to operate efficiently.
The fact is that not every action a business takes has a definable metric. Sometimes you’ve got to take a risk and go where your gut is leading. Performance budgeting would discourage this process because there is no evidence or metric that can be measured to determine financial success. In many ways, this type of budgeting is more about maintaining the status quo instead of growing, so it may not always be the right choice to make.
2. There is no qualitative evaluation.
This is because performance budgeting is goal orientated. It is a black and white system of evaluation. You either met your goal or you didn’t meet your goal. It doesn’t matter that you got 95% of the way there on your first go at it. Because of this, it can be difficult to get a real measurement on how well a team, a department, or an organization is actually performing.
3. It is usually implemented in a way that is inefficient.
In order for performance budgeting to work, a company must be willing to decentralize their accounting process. They must also decentralize their systematic reporting mechanisms. This usually doesn’t happen because it is seen as too big of a change, which means more red tape ends up being added to the mix instead of less.
4. What looks good on paper doesn’t always transition into the real world.
The fact is that many goals are easy to create on paper, but not so easy to create in the real world. Many departments tend to overlap responsibilities and there are always unexpected political or structural issues that come up that have costs associated with them. This can make it particularly difficult to come up with the defined metrics that are necessary for success.
These performance budgeting pros and cons show that transitioning to a system that is goal-orientated can be highly beneficial. It can also be highly inefficient if the right steps aren’t taken. There is no right or wrong answer when it comes to budgeting – each business must simply decide what to use on their own. By looking at these key points, it becomes easier to decide if performance budgeting is the route to take.