In traditional budgeting your company has a static budget divided between departments. Each department vigorously defends their piece of the budget, wanting to ensure they have the funds necessary to achieve their goals throughout the year. Performance-based funding is more fluid approach to budgeting, allowing for the designation of funds by department to match the expected results and considering spending patterns from previous years. Your budget is only going to be as effective and efficient as the data you have access to; cloud-based procurement software will allow you to maximize budgets through data, tracking, spend analysis, and other reports.
Utilizing eProcurement software makes it very simple to look at past spending and performance levels and look at the value provided to the company for each department. Using paper-based purchasing or older computer models will not give you the big picture and level of details needed for this approach.
According to Segal and Summers in Citizens’ Budget Reports: Improving Performance and Accountability in Government (Reason Public Policy Institute, Policy Study No. 292, March 2002, p. 4.), performance budgeting includes the following three elements: the result or final outcome, the strategy or ways used to achieve that outcome, and activity/outputs or the specific activities done within the strategy to achieve the desired outcome.
Since performance-based budgeting doesn’t just look at the money spent, but the results achieved, this requires the use of Key Performance Indicator’s or KPI’s. KPI’s utilize a set of values that go beyond just raw numbers. KPIs are beyond the scope of today’s post, but for a good general overview check out the Wikipedia article. The complexity and scope involved makes the use of powerful software such as Bellwether’s ePMX: a necessity.
The first step in setting up performance-based budgeting then is to establish what objectives your business is trying to reach. Establishing KPIs and other metrics based on these objectives is the next step. As your business goes on, tracking every expenditure through cloud-based purchasing software provides you the opportunity to take snap shots, analyze, and make adjustments as needed. It’s very important that all the data runs through the same program, giving you a central point to track, measure, and analyze.
