Question

Discuss some of the challenges of performance-based budgeting? How can these challenges be met?

Answer 1

Performance based budgeting is a concept in which the budget is allocate as per the expected returns in terms of revenue or growth. The budget is based on the expected output and incurred input, higher the expected output higher the budget. Each department showcase the expected output and based on that budget is allocated to them.

Some of the challenges are:

• Too much dependency on expected output and at times the forecast is not that objective and this causes allocation of incorrect budget. To overcome this larger picture should be shown i.e. what can be the possible growth opportunity, what can be social benefit etc.
• Inadequate guessing of targets in this dynamic market. To overcome this several pans should be made and 1 pan should not be considered for working i.e. Backup pans should be there.
• Less flexibility i.e. once pan is fixed the company has ti follow that plan and any new ideas become difficult to get incorporated, to overcome this a fixed plan should be there having a scope of at least 20% innovative ideas during the course of the project.