Would you prefer the bottom-up or top-down budgeting approach for project cost control and why?

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.

The Top-Down Budgeting Process

The 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 or Bottom Up Corporate Budgeting – Which One is Best?

By George Braun

This week, we are taking an in-depth look at the advantages and disadvantages of both top-down budgeting and bottom-up budgeting so you can better determine the best approach for your business.

Top-down budgeting. In corporate budgeting, a top-down approach involves the senior management team developing a high-level budget for the entire organization. Once these budgets are created, amounts are allocated to individual departments, and those departments must then take those numbers and build their own corresponding budgets within the confines of the executive-level-created budget.

Advantages: With top-down budgeting, only the executive team is involved and thus lower management does not have to take time to prepare the budget. This can represent significant time-savings for those who are more involved in the day-to-day rather than the overall strategy for the organization.

Disadvantages: With the top-down approach, those creating the budget may not be involved with the day-to-day and as a result may not be aware of some of the specific expenses required. This may result in problems for departments looking for resources that just don’t fit into the top-down budget.

Bottom-up budgeting. With a bottom-up approach, the process starts in the individual departments where managers create a budget and then send it upwards for approval. That budget is either approved, revised or sent back for modifications, and a master budget is created from the various departmental creations.

Advantages: Usually the outcomes of this approach are increased ownership of the budget, more information since employees familiar with each department are creating the budget, and increased understanding, communication and commitment on behalf of managers because they are directly involved in the process.

Disadvantages: Typically, the bottom-up approach will result in higher spending targets compared to the top-down approach, and thus a reconciliation process will be required in order to produce an organization-wide budget in which all the parts add up correctly. Also, sometimes bottom-up budgeting can result in budgets which are not in-line with corporate objectives if managers focus too much on department, rather than organization, concerns.

No matter the approach you take to corporate budgeting, be it a top-down or bottom-up, the True Sky Excel-based corporate performance management system can make it easier. For more information, please visit www.truesky.com today or call 1 855 878 3759.

Top-Down vs. Bottom-Up Budgeting

While 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 Budgeting

Top-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 Budgeting

Bottom-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.

Question:

Would you prefer the use of bottom-up or top-down budgeting for project cost control? What are the advantages and disadvantages with each approach?

Budget Flexibility is Essential

Creating 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.

Top-Down Project Management

The top-down approach is the more traditional of the two project management approaches. A top-down strategy calls for all key decisions to be made by the project manager or senior organizational leaders. When a project is managed from the top down, the work breakdown structure and project plan are usually completed by the project manager alone, after which team members are told which tasks they will be completing and when their tasks are due.

The Pros and Cons of a Top-Down Approach

Top-down project management remains very common, and it is well suited to projects in which there are few unfamiliar tasks and few unique challenges to be met. Its pros include:

• Straightforward planning phase because decision-making is centralized
• Expectations are unified while roles and responsibilities are clear

However, many organizations have begun to find that the top-down approach has its limitations in some modern projects. Possible cons include:

• Demoralizing and demotivating team culture in which members have little control over their responsibilities and methods
• Risk of surprises and issues down the road due to gaps in leaders’ expectations and team members’ capacities