Performance budgeting as the name suggests refers to that budget that is allocated based on the performance of the department, in simple words this budget is allocated to various departments on the basis of their performance or potential outcome which the department may achieve s opposed to other budgeting methods in which budget is allocated on the basis of past data or budgets. In order to understand more about this term, one should look at some of the advantages and disadvantages of performance budgeting –
Advantages of Performance Budgeting
Improvement in Performance
The first and foremost advantage of performance budgeting is that it helps in improvement in the performance of the department as well as employees working in the department because both department head as well as employees working in the department know that if they perform well then next year they will get more budget allocation in their department by the company which results in healthy competition between various departments of the company.
Helps in Motivating Employees
It also helps in motivating employees because when employees know that company is watching the performance for allocation of budgets then they will work hard because a higher budget would mean a higher scope of development of not only the department of the company but also the employees of the department working in the company. In simple words just when you do well in your exams and your parents give a party to the whole family then your siblings and family members also get to enjoy the party due to you doing well in exams same is the case with the company where the whole department gets to enjoy the benefits of increased performance budget from the company.
Increased Accountability
In case of the company giving or enhancing the performance budget of departments of the company then it will psychologically put more accountability in the minds of department heads as well as employees working in the department of the company which in turn will lead to them giving their best effort towards the achievement of set targets of the department by the company.
Disadvantages of Performance Budgeting
Biased
The biggest problem with performance budgeting is that chances of biases creeping in while allocating budget on the basis of performance are high which in turn can have an adverse effect on the morale of other employees who are working in the company and are more deserving. In simple words, if your child is participating in a debate competition and he or she has given his best performance but the judge announces someone else the winner not because he or she has done well but because he or she is known to judge then this is nothing but injustice same thing happens in companies also where sometimes top management favor their favorite department head and not the deserving department heads.
Performance is not Everything
The fact that in performance budgeting the emphasis is laid only on performance is a negative thing because in the case of companies while performance is important but other aspects like teamwork, creativity, interpersonal relations are also needed in the company which is ignored under this method of budgeting. Hence for example suppose the finance department head due to his or her contact has sent some leads to the marketing department and that lead has converted into sales than company following performance budgeting will reward the marketing department which is not right as the sales is the result of the joint effort of both finance and marketing department and not marketing department.
Needs Constant Monitoring
It requires constant monitoring and supervision on the part of the company so as to ensure that performance of each department is measured which in turn can be a quite complex process and may lead to a lot of expense as well as manpower on the part of the company.
As one can see from the above that performance budgeting has pros as well as cons and that is the reason why any company thinking of implementing this budgeting method into their company should carefully read the above points and then take any decision.