# Performance Budget: Advantages and Disadvantages

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## What Is a Performance Budget?

A performance budget is a results-oriented method of budgeting that revolves around desired outcomes. The goals and objectives of the project are at the center of the budget, which reflects the input of resources and the output of services for each unit of an organization.

The budget identifies and scores relative performance based on goal attainment for specified outcomes. Performance budgets often rely on quantifying otherwise qualitative or subjective factors so that they can be measured and accounted for.

This type of [budget](https://www.investopedia.com/terms/b/budget.asp) is commonly used by government bodies and agencies to show the link between taxpayer funds and the outcome of services provided by federal, state, or local governments.

### Key Takeaways

*   A performance budget, or performance-based budgeting, is a type of budget that uses inputs (resources) and outputs (services) for each department of an organization.
*   Performance-based budgeting is designed to motivate workers and to increase their commitment to produce positive results.
*   Disadvantages include the potential for disagreement over spending priorities and a lack of unified cost standards.

## Understanding a Performance Budget

The decision process for performance budgets focuses on outputs—or outcomes—of services. In other words, the allocation of funds and resources is based on specific goals agreed upon by budget committees and agency heads of services.

> **Important**
>
> Performance budgets, as the theory goes, are designed to motivate workers, increasing their commitment to the project and making it more likely that they will produce the desired 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
*   Reduction in road pothole complaints

All of these would have numerical targets attached to them. A performance budget would be developed accordingly to identify those target numbers. The budget would develop a method of evaluating performance.  

## Advantages and Disadvantages of a Performance Budget

The advantages in the public sector are an increase in accountability of the local authorities to the [taxpayers](https://www.investopedia.com/terms/t/taxpayer.asp), 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.

Similarly, [nonprofit organizations](https://www.investopedia.com/terms/n/non-profitorganization.asp) draw up performance budgets to link [inputs and outputs](https://www.investopedia.com/terms/i/input-output-analysis.asp) for their missions. Donors to these organizations also want to know what kind of [return](https://www.investopedia.com/terms/r/return.asp) society is getting from their donations.

Some disadvantages of a performance budget include:

*   The potential for disagreement on the spending priorities, especially when there are multiple agencies or stakeholders
*   A 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 (resources) and outputs (outcomes) have been set

One prominent disadvantage of performance budgets is that by assigning target scores or numbers that an organization uses as its [benchmark](https://www.investopedia.com/terms/b/benchmark.asp) for achievement, the numbers can be gamed or become the sole focus of one's task. For instance, teachers looking to earn a certain score may only focus on the factors that comprise that score and overlook or ignore other factors that may be important to teaching.

## Who Uses Performance Budgets?

It's primarily government agencies that use performance budgets. However, almost any organization can use them.

## How Do You Make a Performance Budget?

To make a performance budget, consider what outcomes or milestones you would like your organization to achieve. It's crucial to determine the correct metrics. Make sure to use enough metrics but not too many, or the system will start to feel overloaded.

## What Is an Example of a Performance Budget?

In schools, teachers may earn bonuses or promotions based on aggregate test scores among their students, which is supposed to show a high degree of skill and effectiveness (although this may not always be the case).

In a government agency or program, a performance-based budget may set the following desired outcomes: less spending, more transparency, and more accountability.

## The Bottom Line

A performance budget, or performance-based budgeting, is a budget that is designed with outcomes in mind. Its operation depends on motivating workers to achieve those outcomes. These outcomes are measured and reported. Each outcome must be carefully tailored to the organization or agency's mission.