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Top-Down vs. Bottom-Up? What You Need To Know To Build Your Budgeting Process

October 20, 2020 |

When it comes to budgeting, where does your organization stand? Do you start at the top or build it from the bottom up?


 

While there are plenty of ways to go about your corporate budget, most fall under two categories, taking either a top-down or a bottom-up approach. The process you choose can affect your business in different ways—and each comes with its own pros and cons.

To make the right decision for your organization and to determine which will best enable you to execute on your financial operating plan, consider both models in turn.

  1. Top-down vs. bottom-up budgeting
  2. Top-down budgeting: advantages and disadvantages
  3. Bottom-up budgeting: advantages and disadvantages
  4. What’s right for your business?

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.

Top-Down Budgeting: Advantages and Disadvantages

Neither approach is inherently better than the other—and certain types of corporate budgeting, such as driver-based budgeting, will work with either model. The key is to understand how your own organization works and to make your budgeting process a natural extension of it. It’s also critical to understand the advantages and disadvantages of each model before choosing one.

A top-down budgeting process, for example, empowers you to allocate resources based on company strategy and an overall picture of organizational performance and goals. As with any type of top-down management style, though, aligning your departmental teams behind the results may be more difficult.

Advantages of Top-Down Budgeting

Disadvantages of Top-Down Budgeting

Bottom-Up Budgeting: Advantages and Disadvantages

A bottom-up process ensures that your budget contemplates the needs of every department so that they have the resources they require to achieve their goals and put your organization ahead on its larger strategic objectives. It’s generally a slower process for your finance team, though, as you incorporate all of the departmental requests into a cohesive overall plan.

Advantages of Bottom-Up Budgeting

Disadvantages of Bottom-Up Budgeting

What’s Right for Your Business?

Choosing which approach is best for your business means understanding the psychology of how your organization operates. Do teams work better when ideas are their own, or do they prefer your leadership to come to them with the best plan of action? And how is your organization at creating transparency in their goals and strategies so that you can pivot and reallocate resources faster?

In some cases, you may not even opt for one model or the other, instead approaching your budget from both directions as a way of ensuring you have visibility into both departmental and organizational goals or to meet specific objectives. You may introduce a longer-term plan that takes a more top-down approach, for instance, then implement either a rolling or traditional plan for the nearer term using a bottom-up method. Or some years, you may choose to go into more detail on the cost structures of your goods or services—building a bottom-up budget from there. Other years, you may want to take the opposite approach.

After all, in the end, the point of both top-down and bottom-up budgeting approaches is the same: to make sure resources are allocated intelligently and in a way that gives everyone what they need to build towards your overall business strategy and goals. If everyone has an eye on that, either model is bound to be successful.

Find out how Vena can help you build a better budget.

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