A performance budget is a budget that reflects the input of resources and the output of services for each unit of an organization. This type of budget is commonly used by government bodies to show the link between taxpayer funds and the outcome of services provided by federal, state, or local governments.
The decision process for performance budgets focuses on outputs—or outcomes—of services. In other words, allocation of funds and resources is based on specific goals agreed upon by budget committees and agency heads of services.
Performance budgets, as the theory goes, are designed to motivate employees, enhancing their commitment to produce positive results.
A few examples of outcomes that a performance budget could address include:
- Improvement in average test scores of a school district
- Decreases in mortality or morbidity rates of a health program
- Improvement of water quality of a county's drinking supply
- Non-violent crime reduction in a city
- Drop in road pothole complaints
All of these would have numerical targets attached to them. A performance budget would be developed accordingly.
The advantages in the public sector are an increase in accountability of the local authorities to the taxpayers, communication to the public about priorities, and quantifying particular goals. Taxpayers want to know where and how their money is being spent and to what end.
- Performance budgets reflect the input of resources and the output of services for each department or unit of an organization.
- They are designed to motivate employees' commitment to produce positive results.
- Disadvantages include a potential for disagreement over spending priorities and a lack of unified cost standards.
Similarly, nonprofit organizations draw up performance budgets to link inputs and outputs for their missions. Donors to these organizations also want to know what kind of "return" society is getting from their donations.
Some disadvantages of a performance budget include:
- A potential for disagreement on where spending priorities should lie, in the case of a government with multiple agencies
- Lack of unified cost standards across multiple agencies
- The potential for a department to manipulate data in order to reach a target, which could lead to a need to spend funds on an independent party to verify results
- A lack of flexibility once the inputs/outputs have been set