Performance-based budgeting

Performance-based budgeting is the practice of developing budgets based on the relationship between program funding levels and expected results from that program. The performance-based budgeting process is a tool that program administrators can use to manage more cost-efficient and effective budgeting outlays.

Today, when the management of money is more important than ever for public and private entities, budgeting plays an enormous role in controlling operations efficiently and effectively. Budgeting in itself is a familiar process to even the smallest economic unit – the household - but it needs to be divided into two different classes: budgeting for public entities and private entities.

This differentiation is important because public bodies need to go through many processes before moving into the budget execution phase and post-execution analyses; furthermore, the entire process involves the collaboration of different bodies throughout the government. This collaboration is not only for budget preparation, negotiation and approval processes, but also for the spending approval after the whole budget allocation is finalized. Compared to private sector, it is cumbersome.

Another factor is the increasing awareness of the policies of the World Bank in pursuit of restructuring the budgeting and spending processes of developing nations via the World Bank Treasury Reference Model. This new model has led the public sector to understand, digest and adopt a new style.

According to this new budgeting methodology, traditional methods of analyzing and utilizing budget figures are insufficient. In traditional terms, organizations start building up their long-term plans and break those plans into annual budgets that are formed as forecasts. At the end of the year, budget figures are compared with actual results and a simple actual-budget variance comparison is calculated. Since the analysis is simple, this analysis lacks any sophistication in terms of adjusting similar budget items for forthcoming periods by increasing or decreasing the expenditure estimates. Basically, variance results are generally used for revising monetary amounts for the next planning and budgeting cycle, and also for very simple departmental performance tracking.

This new approach to budget analysis and utilization is many steps ahead of traditional methods. As an example, a governmental project to enhance the social welfare of children in a remote area can help explain the performance-oriented approach. For such projects, which are generally composed of long-term plans, governments decide on objectives and the activities that are required to be accomplished to achieve them. Practical ways of enhancing social welfare of children in a rural area might include increasing the job skills of parents in the area.

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