Performance-Based Budgeting (PBB) improves efficiency, effectiveness, and accountability in resource allocation toward firm goals by enhancing financial performance (FP). Yet, much uncertainty still exists about the relation between PBB and FP. The current investigation delves into the influence of PBB on FP. Moreover, the research also examines the mediating role of product and process innovation capabilities in the dynamics of this association. The data was collected by using questionnaires from 384 managers in Iraqi industrial companies, with a response rate of 70%. The hypotheses were analyzed using LS-SEM with SmartPLS 4.0. The results shows that PBB improves FP through product and process innovation capabilities. Moreover, the analysis conformed the mediating role of product and process innovation capabilities. The study contributes to the literature on PBB by demonstrating its direct and indirect influence on FP, mediated through PIC and PRIC.