What Is a Performance Budget?

What Is a Performance Budget?

Let me explain what a performance budget is—it's a results-oriented method of budgeting that puts desired outcomes at the center. You see, the goals and objectives of your project drive the budget, which accounts for the resources you input and the services you output for each part of your organization.

This budget identifies and scores performance based on how well you attain those goals for specified outcomes. Often, it involves quantifying factors that are usually qualitative or subjective so you can measure and account for them properly.

You'll find this type of budget commonly used by government bodies and agencies to demonstrate the link between taxpayer funds and the outcomes of services provided by federal, state, or local governments.

Understanding a Performance Budget

When you dive into the decision process for performance budgets, it focuses on the outputs—or outcomes—of services. In other words, you allocate funds and resources based on specific goals that budget committees and agency heads agree upon.

As the theory holds, performance budgets are designed to motivate workers, boosting their commitment to the project and increasing the chances they'll produce the desired results.

Consider a few examples of outcomes a performance budget might address: improving average test scores in a school district, decreasing mortality or morbidity rates in a health program, enhancing water quality in a county's drinking supply, reducing non-violent crime in a city, or cutting down on road pothole complaints. Each of these would come with numerical targets, and you'd develop the budget to identify those targets and evaluate performance against them.

Advantages and Disadvantages of a Performance Budget

In the public sector, the advantages include greater accountability of local authorities to taxpayers, clear communication about priorities, and quantifying specific goals. Taxpayers like you want to know exactly where and how their money is spent and what results it yields.

Nonprofit organizations also use performance budgets to connect inputs and outputs to their missions. Donors expect to see what societal return comes from their contributions.

On the downside, there can be disagreements over spending priorities, especially with multiple agencies or stakeholders involved. You might also face a lack of unified cost standards across agencies, the risk of departments manipulating data to hit targets—which could require spending on independent verification—and a lack of flexibility once inputs and outputs are set.

A notable disadvantage is that by setting target scores or numbers as benchmarks, those numbers can be gamed or become the sole focus. For instance, teachers aiming for a certain score might only emphasize the scored factors and neglect other important aspects of teaching.

Who Uses Performance Budgets?

Primarily, it's government agencies that rely on performance budgets, but almost any organization can implement them if it suits their needs.

How Do You Make a Performance Budget?

To create a performance budget, start by considering the outcomes or milestones you want your organization to achieve. It's essential to select the right metrics—use enough to cover key areas, but not so many that the system becomes overloaded.

What Is an Example of a Performance Budget?

In schools, teachers might earn bonuses or promotions based on aggregate test scores among their students, which is intended to reflect high skill and effectiveness, though it doesn't always work that way.

In a government agency or program, a performance-based budget could aim for outcomes like reduced spending, greater transparency, and increased accountability.

The Bottom Line

A performance budget, or performance-based budgeting, is structured with outcomes in mind. It operates by motivating workers to reach those outcomes, which are then measured and reported. Make sure each outcome is carefully aligned with your organization or agency's mission.