A performance budget describes any system in which an organization ties the measurement of individual and departmental performance to the budgeting process. Theoretically, a department that meets its strategic goals and stays within its budget for the fiscal year will get the same level of funding or increased funding for the next fiscal year.
Cost Vs. Benefit
A performance budget's advantage concerns its rational approach to budgeting. Whenever an organization determines how many budget dollars to award to a department or activity, it will consider the costs vs. benefits of each funding level. If an organization cannot justify the money to be spent, it will reduce or eliminate the level of funding to the business department or activity.
Linking Objectives to Outcomes
An organization that uses a performance budget uses performance management. When an agency wants to justify its funding to budget makers, such as linking its objectives to its performance outcomes and showing how the budget funds were spent to achieve these outcomes, it's easy to do. A manager uses his own methods of collecting and presenting information to show how money was spent.
A disadvantage of a performance budget arises if the budget document is fixed for the entire fiscal year. A government or nonprofit agency might use a fixed document to organize business activities with a specific funding level. A fixed document doesn't provide for changing budget allocations mid-year in response to changed conditions. For example, a city bus division might be crippled mid-year in the face of a rapid increase in gas prices, forcing a reduction in its operating schedule in order to stay within its budget.
In a performance budget, an organization begins at the baseline and constructs a budget request for each department. When all of the departments and activities have submitted their budget requests, executives or even a lawmaking body must set budget priorities. This is a disadvantage for programs with less political power if they require additional funding to meet program objectives; they will be denied because extra funding will be given to programs with the most political influence.