Performance-Based Budgeting Issues - Term Paper Example

Performance based budgeting affiliation b Performance based budgeting Budgeting is an act whereby all units in the society have a proper organization in their financial expenditure. Budgeting has the longest financial history in the society. In the ancient days budgeting was based on immediate needs. Budgeting was in form of barter trade. When an individual was in need of a glass of milk, they would exchange another commodity for the glass of milk. This mode is different from the current budgeting where units base their budget on fixed requirements in a certain period of time. For instance, at the beginning of a financial year most organization budget for all requirements for the whole year. The requirements include procurement charges, maintenance charges, leisure and retreat activities. Once the budget is formulated and implemented only minor adjustment can be included in the budgets. According to Segal & Summers (2002) this type of budgeting has been used by organizations to ensure that they operate within a specific financial circle. However, budgeting tactics have advanced over the years as units are subjected to high costs of survival. Knaap (2007) argues that the modern cooperate environment does not provide room for an organization to finalize its budgeting at the beginning of a financial year. The author further argues that the specification of a finalized budget does not provide room for innovation and new operational strategies. It is advisable that units have budget specifications that allow for adjustment in case of emergencies without having a major impact to the unit. Financial analyst argue that performance based budgeting is the most significant trend that budgeting has undergone. Performance based budgeting is a budgeting process based on missions, goals and objectives. PBB is a defined by an organization short term goals. According to Marc (2007) before setting aside funds, the objectives should be set aside. This budgeting is based on the question why should we spend, is what we spend worth the project and is the objective being met by the financial allocations we make. Generally, performance based budgeting is result oriented. Every single financial allocation is aimed at achieving a specific objective. Each objective budgeted for is directed towards achieving the long and short term goals of an organization. Due to the tightened financial crisis performance based budgeting has been the most budgeting method most organizations use. Analysts argue that performance based budgets are more accurate when compared to other budgeting tactics. According to Marc (2007) any operational tactic based on results is accurate than any tactic based on assumptions or fixed rates. In PBB many organizations have achieved their long and short term goals. In this budgeting tactic achieving goals is made easier since all operations are clearly organized and placed in accuracy. The accuracy of the PBB can be easily measured by the achievements of the short term objectives. If the short term objectives are not achieved effectively then an organization is justified to stop the funding of a particular project. Knaap (2007) argues that budgeting in the modern world should be reasonable and proven for performance. This is a factor that performance based budgeting provides. Performance based budgeting is based on three elements; Results Strategies Outputs, operations or activities. The result is the final outcome. The accurate expected results from budgeted for projects. Strategies refer to the plans laid down to achieve the results. The activity element refers to the actual activities being undertaken to achieve the set aside results. The three elements form a basic arrangement for a performance based budget. The most significant element in this arrangement is the result. The result forms the determinant. A determinant of whether or not a project should be budgeted or not. In achieving performance based budgeting, first the organizational or departmental objectives are identified then tools and measurements of achieving this objectives are developed. When it comes to the execution of plans, an organization should be able to link the performance indicators and the resources available. This is aimed at knowing what to invest in. this creates the certainties an organization needs when planning its financial budget. The tactics used in performance based budgeting can be compared to the tactics used in corporate performance management (Marc, 2007). These two strategies work under the specification that planning and strategies are connected to execution and measurement. Additionally, the two frameworks argue that linking results and resources is an accurate way of determining the cost of a particular outcome. Segal & Summers (2002) argues that this reduces the risks involved in deficits and over expenditures. Many organizations fail to prosper in the current economic system because they cannot measure the cost of their outcome. These organizations still apply ancient modes of budgeting where there is indirect cost allocation. This is harmful to even the smallest unit in existence in the society. For instance, indirect cost allocation in a household may hinder the unit to reach it full potential in terms of saving and increasing their expenditure in more significant commodities. Aristovnik & Seljak (2009) argues that a company that suffers from indirect cost allocation cannot fully operate for more than three years before facing bankruptcy. In achieving performance based budgeting, the management of an organization needs an articulation that will run through all departments. The departmental alignment will be based on their objectives. Departmental objectives will be based on the strategy requirement of all organizations. For instance, the sales department may have an objective of raising the turnover figures by 30 percent. Before any financial allocation to aid this objective, the sales department will have the task of coming up with best strategies on how they tend to achieve this objective. Additionally, the department will be required to come up with the most appropriate tools to efficient the realization of this objective. If this format is adhered across an organization, it would be easier to provide the most accurate and appropriate allocation. The measurement of the cost of the results would also be easily established. According to Robinson & Last (2001) the measurement of performance at the departmental level makes performance based budgeting an easy framework to establish and implement appropriately. Achieving CBB is also high dependable on communication and accurate data provision across the organization. This means that the management of an organization should ensure that all departments and employees are often briefed on the performance measurements and finding of the organization. According to Bakuzoni (2007) an efficient PBB is one that is operated under a 360 degrees view by all employees. This ensures that the plan to the objectives of an organization is kept in check. Just like the corporate performance management, the management should keep in check that generated plans and strategies are implemented at the most appropriate way. In performance based budgeting the measurement of activities should be done by the top management. Aristovnik & Seljak (2009) argues that only the top management of an organization can be able to ensure that an organization sticks to the plan formulated to achieve the objectives. If the employees of any unit are left to implement the plans, it is unlikely for any plan to have to run for more than one financial year. Additionally, the data and communication circles provided by the top management are based on the overall performance of a unit. Another factor that ensures proper achievement of PBB is a proper record and project management system. In record management every transaction made in a particular quarter or year must be recorded. This enables for a proper comparison to the outcomes achieved. A proper record management system also allows for a proper allocation of funds. According to Aristovnik & Seljak (2009) a proper budget regardless of its framework greatly depends on financial record an organization has at the end of each financial year. A good record management system can also be very significant if an organization decides to base its measurement of performance of estimates and forecasting. In terms of project management, every budget plan is a project. In budgeting project management also refers to the management of the operations being undertaken by an organization. In PBB project management is crucial because it acts as a determinant of whether or not an operation is worth funding. This is determined either by forecasting, past referencing of a project and the measurement of performance of a project. In PBB all projects included in the budget should have an outcome that exceeds the money spent on them. This can only be determined if an organization has an outstanding project management team. From the essay it can be argued that performance based budgeting is the most applicable and reliable budget framework in the modern century. However, the implementation of this framework has not been perfected as many organizations struggle to find a proper operational team to implement the requirements of the framework. To cushion any organization from uncertainties, the performance based budgeting is the most appropriate budget framework. References Aristovnik, A. & Seljak, J. (2009). "Performance budgeting: selected international experiences and some lessons for Slovenia," Munich University Library of Munich. Bakaroni, K. (2007). Performance-based Budgeting AA Measures Outcomes in Florida Community Colleges Florida: University of Florida. Knaap, P. (2007). Performance management and policy evaluation in the Netherlands: towards and integrated approach. Ministry of Finance, The Hague. Marc, R. (2007). Performance Budgeting, Linking Funding and Results - Palgrave Macmillan, Nov 2007. Retrieved from http://blog-pfm.imf.org/pfmblog/2007/10/making-performa.html Robinson, M. & Last, A. (2009). A Basic Model of Performance-Based Budgeting. New York: International Monetary Fund Segal, G. & Summers, A. (2002). Citizens’ Budget Reports: Improving Performance and Accountability in Government. Reason Public Policy Institute, Policy Study No. 292, March 2002. Read More