Difference between Performance & Traditional Budgeting

Performance budgeting

Performance budgeting is a budgeting approach that focuses on achieving specific outcomes and results. This approach prioritizes resources based on the expected outcomes of programs and activities, rather than simply allocating resources based on past spending patterns and political priorities.

The goal of performance budgeting is to ensure that resources are used in the most effective and efficient way possible to achieve specific outcomes. To do this, performance measures are used to track progress towards specific goals and outcomes, and managers and staff are held accountable for achieving these outcomes.

Performance budgeting serves several functions within an organization. Some of the main functions include:

• Prioritizing resources: One of the primary functions of performance budgeting is to prioritize resources based on expected outcomes. By setting clear performance measures and goals, organizations can allocate resources to programs and activities that are most likely to achieve the desired outcomes. This can help ensure that resources are used in the most effective and efficient way possible.
• Improving accountability: Another key function of performance budgeting is to improve accountability for achieving specific outcomes and results. By setting clear performance measures and goals, managers and staff can be held accountable for achieving these outcomes. This can help ensure that resources are used in a way that supports the organization’s overall mission and goals.
• Encouraging continuous improvement: Performance budgeting can also help encourage continuous improvement within an organization. By setting clear performance measures and goals, organizations can track progress over time and identify areas where improvements can be made. This can help drive innovation and enhance overall performance.
• Enhancing transparency: Performance budgeting can also enhance transparency within an organization. By setting clear performance measures and goals, organizations can provide stakeholders with a clear understanding of how resources are being used and what outcomes are being achieved. This can help build trust and credibility with stakeholders, such as taxpayers and donors.
• Facilitating decision-making: Performance budgeting can also facilitate decision-making within an organization. By providing clear performance data and metrics, managers and other decision-makers can make more informed decisions about how to allocate resources and prioritize programs and activities. This can help ensure that decisions are based on data and evidence, rather than on political considerations or past spending patterns.

Performance budgeting Types

There are several types of performance budgeting that organizations can use to allocate resources based on performance and outcomes. Some of the main types include:

• Program budgeting: Program budgeting is a type of performance budgeting where the budget is organized around specific programs or activities, rather than line items. This approach can help organizations focus on outcomes and results, rather than simply tracking spending by department or line item.
• Outcome budgeting: Outcome budgeting is a type of performance budgeting where the budget is organized around specific outcomes or results that the organization wants to achieve. This approach can help organizations focus on the end goals of their programs and activities, rather than simply tracking inputs or outputs.
• Performance-informed budgeting: Performance-informed budgeting is a type of performance budgeting where performance data is used to inform budget decisions. This approach can help organizations identify areas where resources are being used effectively and where they may need to reallocate resources to achieve better outcomes.
• Results-based budgeting: Results-based budgeting is a type of performance budgeting where the budget is based on the results or outcomes that the organization wants to achieve. This approach can help organizations align their resources with their strategic goals and focus on achieving measurable results.
• Activity-based budgeting: Activity-based budgeting is a type of budgeting where the budget is based on the expected cost of each activity or program. This approach can help organizations identify the true cost of different programs and activities and prioritize spending based on expected outcomes. Activity-based budgeting can also be used in a performance context, where outcomes and results are taken into account when allocating resources to different activities.

Traditional budgeting

Traditional budgeting is a budgeting approach that is based on past spending patterns and historical data. Under this approach, budgets are typically developed by taking the previous year’s budget as a starting point and adjusting it for changes in costs and other factors.

Traditional budgeting Function

Traditional budgeting serves several functions within an organization. Some of the main functions include:

• Establishing spending limits: One of the primary functions of traditional budgeting is to establish spending limits for an organization. By setting clear budgets for each department and program, organizations can ensure that spending is kept within reasonable limits and that resources are allocated in a way that supports the overall mission and goals of the organization.
• Supporting planning and decision-making: Traditional budgeting can also support planning and decision-making within an organization. By providing a clear framework for allocating resources, traditional budgets can help managers and other decision-makers make informed decisions about how to prioritize spending and allocate resources to different programs and activities.
• Allocating resources: Another key function of traditional budgeting is to allocate resources to different departments and programs within an organization. By setting clear budget amounts for each area, traditional budgets can help ensure that resources are allocated in a fair and consistent manner.
• Supporting financial reporting: Traditional budgets can also support financial reporting within an organization. By providing a clear framework for tracking expenses and revenue, traditional budgets can help ensure that financial reports are accurate and reliable.
• Supporting compliance and control: Traditional budgets can also support compliance and control within an organization. By setting clear spending limits and tracking expenses, traditional budgets can help ensure that resources are used in a way that complies with legal and regulatory requirements, and that financial fraud and abuse are prevented or detected in a timely manner.

Traditional budgeting Types

There are different types of traditional budgets that organizations use to allocate and manage their resources. Some of the main types include:

• Line-item budgeting: This is the most basic type of traditional budgeting, where expenditures are grouped into specific line items, such as salaries, supplies, and equipment. Each line item is assigned a specific dollar amount, and managers are expected to spend within that limit.
• Incremental budgeting: Incremental budgeting is a type of traditional budgeting where the budget for the next period is based on the current period’s budget, with adjustments made for inflation and changes in priorities. This approach assumes that past spending patterns provide a reasonable guide for future spending.
• Zero-based budgeting: Zero-based budgeting is a type of budgeting where managers are required to justify each dollar they spend, rather than simply assuming that past spending patterns provide a reasonable guide for future spending. This approach can help organizations identify inefficiencies and prioritize spending based on expected outcomes.
• Activity-based budgeting: Activity-based budgeting is a type of budgeting where the budget is based on the expected cost of each activity or program. This approach can help organizations identify the true cost of different programs and activities and prioritize spending based on expected outcomes.
• Program budgeting: Program budgeting is a type of budgeting where the budget is organized around specific programs or activities, rather than line items. This approach can help organizations focus on outcomes and results, rather than simply tracking spending by department or line item.

Difference between Performance & Traditional Budgeting

• Focus: The main difference between performance budgeting and traditional budgeting is the focus. Performance budgeting focuses on achieving specific outcomes and results, while traditional budgeting focuses on allocating resources based on past spending patterns.
• Measures: Performance budgeting uses performance measures to track progress towards specific goals and outcomes, while traditional budgeting typically uses financial measures such as cost centers and account codes to allocate resources.
• Prioritization: Performance budgeting prioritizes resources based on the results that programs and activities are expected to achieve, while traditional budgeting often prioritizes resources based on historical spending patterns and political priorities.
• Accountability: Performance budgeting holds managers and staff accountable for achieving specific outcomes and results, while traditional budgeting often lacks this level of accountability.
• Flexibility: Performance budgeting allows for greater flexibility in budgeting, as adjustments can be made based on changes in performance and outcomes. Traditional budgeting often follows a rigid process that is difficult to change.
• Evaluation: Performance budgeting includes ongoing evaluation of programs and activities to determine their effectiveness, while traditional budgeting often lacks this level of evaluation.