Every organization wants to maximize their operational potential — but that starts with an optimized budget that’s tailored to your organization’s performance and objectives.
Performance-based budgeting can do just that by allocating finances to the proper department operations to generate the most profitable results. A performance budget gives your organization an opportunity to marry financial planning to operational results, leading to financial savings and improved performance.
If your organization is due for a revamped budget, then here’s why you should consider implementing performance-based budgeting.
What is performance-based budgeting?
The International Monetary Fund (IMF) defines performance-based budgeting as a method designed “to improve the efficiency and effectiveness of public expenditure by linking the funding of public sector organizations to the results they deliver, making systematic use of performance information.” Implementing performance-based budgeting requires budget preparation based on each department’s productivity throughout each of your organization’s budget periods. Evaluating the results of each department’s operations will help you set achievable objectives and build a budget strategy that can be monitored and tailored as needed.
Having a clear strategy in place means you’ll be able to make informed decisions that contribute to the success of organizational performance objectives.
What’s the difference between performance-based budgeting and traditional budgeting?
Performance-based budgeting focuses on achieving operational goals and shows what each dollar will achieve through measurable results, such as growth rate or customer satisfaction. In contrast, traditional line-item budgeting concentrates on how money is being spent during the budget period, such as salaries, expenditures or equipment.
Implementing performance-based budgeting also provides significant advantages for your organization, including:
- Determining resource allocation throughout your organization
- Ensuring accountability among departments and teams
- Shifting budget focus to prioritize your organization’s goals
- Providing transparency throughout your budgeting process
How to successfully implement performance-based budgeting
Evaluate each department to determine performance objectives for your budgeting period and clearly communicate the strategy to your team or departments.
KPIs — or key performance indicators — are integral to implementing performance-based budgeting as they track the operational effectiveness of your organization. To be effective, your departments will need to have a detailed understanding of the KPIs and how their work can contribute to successful outcomes.
Adopt a Balanced Scorecard
The scorecard is a performance management tool that combines performance objectives with finance metrics to provide a balanced view of your KPIs’ performance. The scorecard aligns department work with your KPIs to provide insight and direction on how the KPIs may be achieved.
Performance-based budgeting is a great way to improve efficiency, transparency, and accountability in your organization, in addition to advancing progress on organizational objectives and priorities.