What Is Top-Down Budgeting?In its most basic form, a top-down budget (or top-down planning) is a budget that is created by senior management and then “pushed down” to department managers for implementation. The name “top-down” reflects where the budget originated and where it goes within the organization. The top-down approach to planning is common in many organizations. Show
The Top-Down Budgeting ProcessThe process begins with senior managers meeting to outline the objectives for the coming fiscal year. While doing this, senior leadership typically utilizes the previous year’s budget and financial statements and reviews the information in conjunction with market conditions and changes in the business model. While developing the objectives of the business, management will often take into consideration feedback from department heads and the various contributions made by each department in the prior year. Once the objectives are clearly identified, the finance department works to integrate them into a financial plan in the form of a budget. A finance department creates the budget by making allocations to various departments based on the previous year, adjusted for the current year’s goals. Once allocations are made, they are delivered to each department, putting the onus on management to prepare a budget specific to their department. Each department level budget should aim to illustrate how the allocated expense estimates will be used to meet revenue or earnings goals. The department-level budget should be made specific and outline each expense to the best of its ability. At the end of the process, the finance department will aggregate each department-level budget and review them to ensure they are properly aligned with meeting the goals laid down by management at the beginning of the process. Adjustments might be made depending on the needs identified by each department in the process. Once the budget is finalized, the finance department should monitor the financial performance of the business to ensure it is within the constraints of the budget. Management should use it as a guide for implementing the change or deploying resources. Top-Down vs. Bottom-Up: What's the Difference?The Investopedia Team
Updated June 01, 2021 Samantha Silberstein
Top-Down vs. Bottom-Up: An OverviewTop-down and bottom-up approaches are methods used to analyze and choose securities. However, the terms also appear in many other areas of business, finance, investing, and economics. While the two schemes are common terms, many investors get them confused or don't fully understand the differences between the approaches. Each approach can be quite simple—the top-down approach goes from the general to the specific, and the bottom-up approach begins at the specific and moves to the general. These methods are possible approaches for a wide range of endeavors, such as goal setting, budgeting, and forecasting. In the financial world, analysts or whole companies may be tasked with focusing on one over the other, so understanding the nuances of both is important.
Key Takeaways
Top-Down vs. Bottom-Up BudgetingWhile the end goal may be the same—a company-wide budget—both top-down and bottom-up budgeting approaches have different starting points and get to the finish line using distinctly unique routes. So what are the fundamental differences between them? Top-Down BudgetingTop-down budgeting starts with senior management. It’s up to them to create a budget for the entire company, allocating resources to each department according to company-wide objectives and organizational targets for the year ahead. Past performance and current market conditions are taken into consideration, while the previous year’s budget and historical performance help determine which departments should get what—with an eye on how departments contributed to past goals. Departments build their own budgets from there, based on the resources they've been allocated. Often, though, some funds will be set aside at the corporate level, allowing for final shuffles or extra calls for resources if departments feel they don’t have what they need to meet their individual goals. Top-down budgeting, in other words, is a form of “budget allocation.” It starts with a set amount and allocates funding and resources accordingly across departments, leaving it to them to develop new plans or reduce their existing ones based on the resources they’ve been allotted. Bottom-Up BudgetingBottom-up budgeting, meanwhile, begins exactly where you’d expect: the bottom. That is, departments prepare budgets for their teams based on what they need for the next year: the initiatives they want to run, the programs they already have in place and the hires they want to make. To ease the process, company-wide objectives and expectations are often shared with departments first, to give them organizational-wide visibility as they make their plan and provide protection against siloed requests. Departments present their budgets for approval, and the finance team or budget committee goes through each from there, to approve or disapprove line items according to those larger organizational objectives. A company-wide budget emerges from that work. One example of a bottom-up budgeting approach is zero-based budgeting, which starts with a clean slate every time in order to justify and prioritize every departmental expenditure. What is Top-Down Budgeting?Building on what we introduced, the top-down approach as top-down budgeting is much similar. Here, 'the big picture' refers to historical data, market trends, and the direction that the C-level management wants the corporation to take. With top-down budgeting, senior management sets the goals and objectives for the entire organization, whether they be financial, social, or directional. The budgeting activity need not be any different. Since the senior management has to disburse the funds to the departments at the end of the day, it makes sense that they evaluate the projects and milestones each department is responsible for and allocate their budget pool accordingly. In this manner, each department gets a certain percentage of the total corporate budget. It always adds up to 100% of what the management initially set aside in their budgeting activities. This budgeting – or rather budget allocation – activity takes into consideration historical data about the performance and needs of each internal department. It may also deliberate on the market trends to perhaps shift from the historical perspective. For instance, the human resources department may be allocated a more significant portion of the budget than their previous performance or requirements warrant, perhaps if the employee retention policies need a competitive nudge. Each department then further categorizes the budget allocated to them to optimize spending to maximize performance and returns to the organization. Each team within the department could also reclassify the funds allocated to them from their department manager. Thus, the budgeting activities trickle down from top to bottom in a waterfall or cascading manner. The budgeting decisions taken by the senior management following the top-down approach need not be set in stone, however, and some funds may be set aside in case any department comes forward with a justified need for additional allocation. Top Down or Bottom Up Approach to Budgeting – Which one is Best?By George Braun Whet This week we are looking at the advantages and disadvantages of each so that you can better determine which is the best approach for your business to take. Top-Down Budgeting In corporate budgeting, this approach involves the senior management team developing a high-level budget for the entire organization. Once created, amounts are then allocated to individual departments, and then the departments take those numbers and build their own corresponding budgets within the given confines. Advantages:
Disadvantages:
Bottom-Up Budgeting With a bottom-up approach, the budgeting process starts in the individual departments, where managers create a budget and then send it upwards for approval. The proposed budget is then approved, revised or sent back for modifications. After this is process is completed by each department, a master budget is then created for the organization. Advantages:
Disadvantages:
At the end of the day, it doesn’t matter which approach your organization business ends up taking. What does matter though, is understanding the pros and cons of each method, the objectives of your budget, and what level of detail your organization requires. Regardless of the approach your organization takes for corporate budgeting, the True Sky corporate performance management (CPM) system can make it easier for all involved. For more information, please visit www.truesky.com today or call 1 855 878 3759. IntroductionAll organizations work in hierarchical set up, approached differently according to each one’s needs. The top-down and bottom-up approach in budgeting are two approaches of decision making in an organization. These approaches can apply to any planning and decision making process e.g. forecasting, budgeting, and financial decision making. The choice between these two approaches is simply the style of managerial and control issues. A Top-down budgeting process is in which the top management takes all the decisions without any participation from departments or the middle management. Bottom-up budgeting is a process where the budgeting input starts from the operational level, moves up to the middle, and top level management with full participation in decision making. Budget Flexibility is EssentialCreating a budget gives you the agility to prioritize expenses and understand financial strengths and weaknesses. Budgets also help you monitor and balance your financial health. Additionally, comparing actual costs with budget estimates helps you pinpoint areas of income leak that wouldn’t be possible without a target financial figure. The only way to improve the efficiency of your company is to have financial goals to measure progress against. Yet, while you will want to outline a budget and try to maintain it, don’t be afraid to adjust it. Whatever budget you use, its purpose is to help you monitor and adjust your financial strategy to achieve key targets. Remember, the purpose of a budget is to guide you, not necessarily restrict you. The structures top-down budgeting and bottom-up budgeting help you do this, but in different ways. |