In this modern-day, money management has higher level of importance. Budgeting plays an important role in controlling operations in an efficient and effective way. Basically, budgeting is divided into two different entities namely public entities and private entities. It is important to divide budgeting into classes since the entire budgeting process involves different bodies in the governmental system. The involvement of different bodies is needed for some stages in the budgeting namely preparation, negotiation and approval. Furthermore, it also plays an important role in spending approval after the budget allocation is completed. Compared to the private sector, this budgeting system is more complex.
Traditional budgeting system has given a lot of contributions to the government. However, the methods are considered to be unsuitable as business grows faster. For more than 30 years, government has used many different budgeting approaches such as the Line-item Budgeting, Program Budgeting and PPBS Budgeting. These traditional budgeting methods offer advantages but lately it is found that they fail to meet business demand. Traditional budgeting systems only present little information to decision makers; usually it estimate the forthcoming expenditure based on the previous budgeting plan. With the numerous weaknesses that traditional budgeting offers, organizations consider that these tools are not able to help them achieve goals more effectively.
To help the developing nations restructuring their budgeting and spending process, World Bank has created new model of budgeting system. The new model has triggered public sector to understand and finally adopt new budgeting system.
This new budgeting method emerges to improve the traditional one. This new model evaluates that the former ways of analyzing and utilizing budget figures are not enough. In the traditional method, the budgeting analysis is considered to be very simple. Organizations only build up their long-term projects and break the projects into the estimated annual budget. Then, budget figures are compared with the project results. This method has some drawbacks especially on how to adjust similar budget figures for the upcoming periods.
This new budgeting system approach offers sophistication over the traditional one. To describe how this new method works, the governmental project in enhancing children welfare in a remote area can be the example. For this long-term project, governments have to decide the objectives and activities needed to reach the goal.
To achieve the project goals, the government may make improvement on the schools and send trainers to succeed the educational programs. The long-term projects then broken down into annual budgets that combine monetary figures. When the long-term projects are completed, the traditional method in measuring the success of the project is by calculating on the gap between the budget and the money spent.
The new budgeting approach offers more sophisticated methods but the goals to achieve are also more difficult. The governments should be certain if they had been successful in helping the children in the remote area. Besides, governments should be able to determine the expected cost.
The new budgeting system that some nations start to adopt is called Performance-Based Budgeting System. This is a budgeting system that links the funding of public sector organizations to the expected goals. In other words it can be said that performance budgeting system is a way to allocate budget to achieve goals of certain projects. Therefore, they key of this new budgeting system is “result”.
This new budgeting system has some purposes. The first purpose is to communicate the expected result of a budget allocation. Meanwhile, the second purpose is to link budget and project results. There are five steps in performance-based budgeting: (1) establish the expected outcomes; (2) select the measurement of project result; (3) define a goal; (4) to provide written account of project result; (5) perform consequences.
This new budgeting system also offers some benefits:
1. It focuses resources toward the most important result. Thus, it increases the effectiveness of government operations.
2. Government would be more accountable in deciding program that affects budget result.
3. Improve the understanding on important issues.
Performance-based budgeting requires Key Performance Indicators. KPI is a technique used by an organization to evaluate the success of certain projects. To choose the right KPIs, an organization should understand the aspects that are important for them. In some organizations, performance indicator selections are often similar to the techniques that are used to assess the current condition of a business and its main activities.
Performance-based budgeting links the performance indicators established by an organization to resources. This process is almost the same as Corporate Performance Management (CPM) framework in which the project plans are measured. Those two frameworks offer policy similarities that are worth to analyze. Unfortunately, CPM framework doesn’t get much attention in the area of performance-based budgeting. The CPM framework technical foundation is actually a great means to explain a better budgeting approach that is addressed for public sector and commercial companies.
Performance-Based Budgeting System Challenges
This new budgeting method is considered to be appropriate initiative for all countries. However, countries need to evaluate some aspects before implementing this new budgeting method. It is important to evaluate the governance, human resources and the current situation of public financial management.
The implementation of this budgeting system has just started in some developing countries; one of them is Indonesia. To make the implementation process runs easier, Indonesia can learn the experience of other countries in implementing this budgeting method.
In adopting the new system, there are challenges that Indonesia has to face:
1. The parliament plays an important role in determining budgetary policies and designing the annual budget.
2. Government finds difficulties in measuring performance indicators.
There are more challenges in the process but the good news is that developing nations like Indonesia is starting to reform their budgeting system. Indonesia is in the early stage of implementing this system but several progresses have been made. Currently, this nation has been selected pilot ministries to assist the implementation of this new budget method. New legal framework has been laid and The Directorate General of Budget of the Ministry of Finance of Indonesia has been assigned to succeed the budgeting reform.