In these modern times, money management has a higher level of importance. Budgeting plays an important role in controlling operations efficiently and effectively. Basically, budgeting is divided into two different entities, namely public entities and private entities. It is important to divide the budget into classes, since the entire budget process involves different organs of the government system. The participation of different bodies is necessary for some stages of budgeting, namely preparation, negotiation and approval. In addition, it also plays an important role in the approval of spending once the budget allocation is completed. Compared to the private sector, this budget system is more complex.
The traditional budget system has made many contributions to the government. However, the methods are considered inappropriate as the business grows faster. For more than 30 years, the government has used many different budgeting approaches, such as the Line Budget, the Program Budget, and the PPBS Budget. These traditional budgeting methods offer advantages, but lately it has been found that they do not meet business demand. Traditional budgeting systems only present little information to decision makers; Generally, you estimate future expenses based on your previous budget plan. With the many weaknesses that traditional budgeting offers, organizations find that these tools cannot help them achieve their goals more effectively.
To help developing nations restructure their budgeting and spending process, the World Bank has created a new model budget system. The new model has prompted the public sector to understand and ultimately adopt a new budgeting system.
This new budgeting method arises to improve the traditional one. This new model assesses that the previous ways of analyzing and using budget figures are not enough. In the traditional method, budget analysis is considered very simple. Organizations only build their projects for the long term and divide them into the estimated annual budget. The budget figures are then compared to the project results. This method has some drawbacks, especially in how to adjust similar budget figures for the next periods.
This new approach to budgeting offers sophistication over the traditional one. To describe how this new method works, the government project to improve the well-being of children in a remote area can be the example. For this long-term project, governments must decide the objectives and activities necessary to achieve the goal.
To achieve the project’s objectives, the government can make improvements to schools and send trainers to make them successful in educational programs. Long-term projects are then broken down into annual budgets that combine monetary figures. When long-term projects are completed, the traditional method of measuring project success is to calculate the gap between budget and money spent.
The new budgeting approach offers more sophisticated methods, but the targets to be achieved are also more difficult. Governments must be sure that they have been successful in helping children in remote areas. In addition, governments should be able to determine the expected cost.
The new budgeting system that some nations are beginning to adopt is called the Performance-Based Budgeting System. This is a budgeting system that links the financing of public sector organizations with the expected goals. In other words, it can be said that the performance budgeting system is a way of allocating the budget to achieve the goals of certain projects. Therefore, the key to this new budget system is the “result.”
This new budgeting system has a few purposes. The first purpose is to communicate the expected result of a budget allocation. Meanwhile, the second purpose is to link the budget and the project results. There are five steps in performance-based budgeting: (1) establish expected results; (2) select the project outcome measurement; (3) define a goal; (4) to provide a written report of the project’s outcome; (5) carry out consequences.
This new budgeting system also offers some benefits:
1. Focus resources on the most important result. Therefore, the effectiveness of government operations increases.
2. The government would be more responsible in deciding the program that affects the outcome of the budget.
3. Improve understanding of important topics.
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 must understand the things that are important to them. In some organizations, the performance indicator selections are often similar to the techniques used to assess the current condition of a company and its core activities.
Performance-based budgeting links performance indicators set by an organization to resources. This process is almost the same as the Corporate Performance Management (CPM) framework in which project plans are measured. These two frameworks offer political similarities that are worth analyzing. Unfortunately, the CPM framework does not get much attention in the area of performance-based budgeting. The technical foundation of the CPM framework is actually a great means of explaining a better budgeting approach that targets the public sector and commercial companies.
Challenges of the performance-based budgeting system
This new budgeting method is considered a suitable initiative for all countries. However, countries must evaluate some aspects before implementing this new budgeting method. It is important to assess governance, human resources and the current state of public financial management.
The implementation of this budget system has just started in some developing countries; one of them is Indonesia. To facilitate the implementation process, Indonesia can learn about the experience of other countries in implementing this budgeting method.
In adopting the new system, there are challenges that Indonesia must face:
1. Parliament plays an important role in determining budget policies and designing the annual budget.
2. The government finds it difficult to measure performance indicators.
There are more challenges in the process, but the good news is that developing nations like Indonesia are beginning to reform their budget systems. Indonesia is in the early stages of implementing this system, but several advances have been made. Currently, this nation has been selected pilot ministries to assist in the implementation of this new budgeting method. A new legal framework has been established and the Directorate General of Budget of the Indonesian Ministry of Finance has been assigned to make the budget reform happen.