A performance budget is a type of budget that reflects the input of resources and the output of services for each unit of an organization. Its main purpose is to improve the efficiency and effectiveness of services and to achieve the organization’s goals and objectives.
Unlike traditional line-item budgets, which only list the cost of specific items or services, performance budgets link the money spent to the outcomes or results expected. This type of budget is commonly used in public administration, although it can also be used in private businesses.
For instance, a government department that is responsible for education might not just budget a certain amount for “education expenses.” Instead, it would allocate funds for specific goals or objectives, such as “increase high school graduation rates by 10%,” or “reduce the number of students per classroom to 20.”
A performance budget helps to promote accountability and transparency since stakeholders can easily see what goals the organization is aiming to achieve with its budget. It also assists decision-makers in understanding the cost-effectiveness of different programs or activities, thereby allowing them to make informed decisions about where to allocate resources.
However, creating a performance budget can be challenging because it requires accurate forecasting and measurement of performance outcomes. It also may not fully account for the quality of services provided, focusing more on quantity or easily measurable outcomes.
Example of a Performance Budget
Here is an example of a performance budget for a hypothetical city health department that provides a clear understanding of how funds are linked to specific objectives.
Suppose the city health department has identified a few primary objectives:
- Decrease the rate of obesity by 15% over the next year
- Budget: $500,000
- This could involve implementing various health and fitness programs, organizing educational campaigns about nutrition, collaborating with schools for healthier lunch programs, etc.
- Increase the immunization rate among children under 5 by 10%
- Budget: $300,000
- This might include hosting immunization drives, providing free vaccinations, educating parents on the importance of immunizations, etc.
- Reduce the number of hospital admissions due to respiratory issues by 20%
- Budget: $700,000
- Actions here could involve conducting campaigns on the dangers of smoking, working on policies to reduce air pollution, raising awareness about early detection of respiratory issues, etc.
In each case, the city health department has outlined a specific goal, and they’ve budgeted funds towards achieving those goals. Throughout the year, the department would then track its progress towards each of these goals, helping the city understand the effectiveness of its spending.
A performance budget like this provides a clear link between the budget allocated and the results expected, thereby ensuring transparency and accountability in the use of public funds.