How to Base Your Budget on Performance
Getting the required elements for a budget based on performance is very similar and often done concurrently with an overall strategic plan for use of the people and processes by the organization. Both use the plan and the budget to attain the predetermined goals.In almost every case, a process such as the following must be undertaken and the results shared with everyone holding a stake in the planning or execution of this overall plan.
When this process is completed in the private sector, it is often called a corporate performance management system, which was derived from the 1970’s management by objective movement. In short, such a system envisions a long-term vision for the organization, scopes out a mission for a shorter term, determines the goals to complete the mission, identifies obstacles and steps to overcome them and provides the rewards for completion and consequences for incompletion of those goals.
Here are ten steps toward the completion of a performance budget and the aligned strategy to make it real:
- Management and other stakeholders create a strategic plan.
- Management proselytes the plan and the vision of a successful outcome to inspire action and propagate throughout the rest of the organization a homogenous attitude to success.
- At each lower level, managers visualize the steps from completion of the successful outcome backwards to the present moment and identify and disseminate these steps as part of a strategic plan shared by the entire organization.
- Management conducts an assessment of the skills (what to do) and knowledge (when to do it) across all departments or cohorts of the organization. This is essential to ensure that the elements required for success by the people are in place.
- After completing any skills and knowledge training, management delivers development and motivational processes and measures the retention and application of the training and processes. Indicators of success in retention and application of these skills are determined and listed.
- Once the people, their attitudes, their skills and their knowledge are aligned with the strategy, the next step is to determine the specific measurable, attainable, results-focused, and time-bound goals that will capture the desired outcomes.
- All stakeholders, management and those who perform the organization’s processes identify any obstacles to these goals.
- In concert with management’s overall strategy, this group also determines the action steps to overcome the obstacles, researches how this activity is priced in the market place and budgets for it.
- Key Performance Indicators indicating success or at least forward progress in these steps are combined with the steps themselves to make up the procedure manuals and the budget "bucket" for that procedure.
- Managers routinely assess where, in regard to both time and progress toward the goals, the budget and plan has to adjust both the budget and action plan. The product of these assessments are periodic reports and more frequent summaries comprising a "dashboard" of key performance indicators which provide a constant presentation of progress toward goals and budget consumption.
It’s easy to see the difficulty in all this planning and assessment in getting to a budget. This explains the reason line-item budgeting has such entrenched support, particularly in the public sector, where within the relatively short-term of legislators, it’s easier to quantify spending than results with that spending. Those that spend the time on developing an effective strategy to employ all resources of their organization will find that the right funds are in the hands of the right people, doing the right things in the right way to achieve the right results.