What is Performance-Based Budgeting?

Performance-based budgeting is a process that involves evaluating the productivity of different operations within an organization and allocating a larger share of available resources to the operations that are contributing the most to the overall well-being of the organization. This approach to allocating resources is designed to encourage the wise use of time, finances, and skills so that the entire organization benefits. As with most types of budget strategies, performance-based budgeting is not a static approach, and requires that the productivity of each operation be evaluated from one budget period to the next.

In order to initiate the process of performance-based budgeting, it is necessary to consider how the organization has functioned in the past, how that history relates to present conditions, and what goals or objectives are envisioned for the upcoming budgetary period. This part of the evaluation makes it much easier to understand what did and did not work in the past, and how those efforts ultimately shaped the current condition of the organization. Once this data is confirmed, the process of determining how the organization can set and achieve its goals for the upcoming budget period can commence.

The foundation of any attempt at performance-based budgeting is identifying the results produced by each department, division, or sector of the organization. This often means looking closely at not only the ultimate objectives that each department plans on achieving by the end of the budget period, but also how those objectives related to the goals for the entire organization. Defining strategies makes it easier to assess the value of those anticipated results to the organization as a whole, and determine what percentage of available resources will be provided or allocated toward the achievement of those objectives.

It is important to note that performance-based budgeting does not tend to focus on individual activities that are necessary to initiate the strategies that lead to the achievement of the objectives. Instead, the focus is on the broad approach that everyone within a given department will work with in order to reach departmental goals. This approach allows the leaders or managers of a department some degree of latitude in how to organize specific tasks within the greater framework of the departmental strategy.

By engaging in performance-based budgeting, all sections or areas of the organization have access to the resources they need. At the same time, this judicial allocation of resources prevents the possibility of time, talent, and money being allocated to an area that can operate at optimum efficiency with a smaller budget. As a result, the organization is in a much better position to work toward its goals for the period covered by the budget, and has a higher chance of ending the period as a considerably stronger entity.