Performance Budget

A performance budget is a budget that refers to programs, functions, and performance that reflects the estimated expenses and revenues of the companies, Government, or Statutory bodies. It is a budget that provides the objective and purpose for raising funds 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 budget.

Performance budget is not just about the performance; it is much more than evaluating performance or providing the performance information in the budget. The main characteristics of this budget are introducing the performance measurement in the budgeting procedure and including the budget management system with the overall responsibility to compensate for the excellent performances and punish the poor performances.

A performance budget is mainly aimed at evaluating whether the budgeted task is being carried out as 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.

Following are the characteristics:

#1 - Improved Management

It helps in improving management skills and implementing the management processes more efficiently. In addition, it helps in identifying the organizational objectives, evaluating the program performances, and understanding the problems with the operations and structure of the program.

#2 - Higher Transparency & Accountability

The resources are categorized according to the programs and provide performance indicators. It finds solution-based accountability management responsible for the objectives they have to achieve.

#3 - Enhanced Communications

It helps enhance 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 program's objective and helps in the individual performances of the management.

#4 - Better Decision Making

It helps in deciding with the help of a better understanding of the processes. Then, with the help of proper information, the management can implement techniques for improvement and take appropriate actions to resolve the issues involved.

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

The second stage is to identify the process and plan, which will help achieve the objectives—various processes and strategies that can be introduced to the program to achieve the objective.

Step #3 - Evaluation & Selection of the processes and plans

After identifying various processes and plans, the most profitable and easy to communicate and implement plans and processes should be evaluated and selected to achieve the objectives.

Step #4 - Development of Performance Criteria

It is another step to developing 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 and 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. In addition, 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 performance. Also, to make the required changes in both the process and performance to remove all those deviations.

1. 80% reduction in the patients suffering from Malaria & Dengue by 2020.
2. 20% decrease in manufacturing waste by introducing staff training in the manufacturing process;
3. 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 for 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 improve the performance, as there will be a continuous check on the deviations and performances to remove the errors and correct the deviations. Therefore, this will help improve the performance.
• 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 to every person for their roles and tasks, and they will be held accountable for their part of the 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 for a robust system of accounting;
• These budgets are subjective.

A performance budget is vital for the organization to assess the performance of the persons handling the processes and remove the deviations 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 –

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