Performance Budgeting (PB): Explanation

Performance budgeting involves the development of refined management tools (such as work measurement performance) so as to achieve the specific goals of the business over a period of time.

The emphasis in performance budgeting is on the improvement of internal management, keeping in view the volume of work and its cost, that has to be accomplished during a financial year.

Performance budgeting is a convenient tool in the hands of management to achieve the objectives of an organization. In the short run, it lays immediate stress on achieving the objectives as specified in the budget.

In the long run, it serves both as a tool for reviewing the efficiency of existing operations and their results and as a system of feeding the data for planning future services.

It helps in making the organization sensitive and adaptive to the dynamic needs of the organization.

Steps In Performance Budgeting

The first step in the technique of performance budgeting is the establishment, improvement, and extension toward the programs that help to achieve the specific and overall goals of the organization.

The resources to be used should be clearly specified so that financial responsibility at every level within the organization can be clearly specified.

The second step involved in performance budgeting is to develop a yardstick for work measurement and also for determining performance standards.

The most suitable metric for a given area of performance should be devised, and the aim should be to move toward higher levels of perfection.

Suitable standards should be determined because variances between the actual and the budgeted realities may suggest the need for remedial action, thereby increasing the value of budget control.

The final step in performance budgeting is to ensure that recordkeeping happens along functional lines. These records indicate the variance between budgeted and actual costs. This helps management take suitable corrective actions.

Conclusion

Performance budgeting helps to organize work in a systematic and scientific way. It helps to provide information for the effective and efficient working of the organization, thereby increasing the chance that its business objectives are achieved.

Frequently Asked Questions

What is a performance budget?

A performance budget is a statement of projected revenue and expenditure for a defined period of time. It includes expected income from different sources as well as the expenses incurred within that time limit.

What are the advantages of using a performance budget?

The main advantage is that it allows you to clearly see your financial position. You can then take action to rectify any problems, if necessary. For example, you may be able to increase your income with increased marketing efforts.

What is the difference between a performance budget and an ordinary budget?

A performance budget is usually more detailed than an ordinary one, which only shows expected revenue and expenditure in broad terms. A performance budget allows you to monitor the performance of your business more closely and see where potential problems lie.

What are the steps in performance budgeting?

The first step involves establishing management goals. The second step involves measuring work in much the same way as you measure physical objects, e.g., by using a stopwatch or other timing devices to determine how long specific activities take to complete. The third step involves setting targets for each activity, which are then converted into budgets. The fourth step involves analyzing the budgets and keeping track of any variances.

What is an example of performance budgeting?

A company that manufactures furniture may decide to focus on producing high-end, rather than low-end, products. Performance budgeting will allow them to devise a strategy for achieving this goal. If their objective is to increase revenue by 20% within the next year, they can devise means of achieving this goal, e.g., increasing advertising budgets, changing their product mix, or developing new products.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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