Who knows best: The frontline workers on the ground, or the executives upstairs? When it comes to the corporate budgeting process, there may not be a clear answer.
Choosing whether to adopt a top-down or bottom-up budgeting approach (where targets are set by executives and the C-Suite, or by department heads) is one of the most consequential decisions for annual planning.
Our own data shows that a majority (55%) of businesses use a bottom-up approach. But that doesn’t necessarily mean that it’s the correct approach for your business.
We’ve brought together advice from finance experts to explore both top-down and bottom-up budgeting methods in depth, discuss the advantages and disadvantages, and help you choose the approach that’s the best fit for your organization. But know this: There isn’t a one-size-fits-all approach. There are numerous variables to consider.
Top-down and bottom-up budgeting differ in some fundamental ways—from how long they take, to how accurate they are, to who does the heavy lifting.
Here's a side-by-side look at the key factors that should inform your decision:
|
Factor |
Top-Down |
Bottom-Up |
|
Timeline |
3–6 weeks |
2–6 months |
|
Starting Point |
Strategic objectives |
Departmental plans |
|
Accuracy |
Directionally correct |
Highly detailed |
|
Buy-In |
Lower (imposed) |
Higher (participative) |
|
Risk of Status Quo |
Lower |
Higher without guardrails |
|
Finance Workload |
Lower |
Higher |
|
Department Workload |
Lower |
Higher |
|
Best for Efficiency |
Yes |
Requires active management |
Let's start by breaking down how each approach works, beginning with top-down budgeting.
With a top-down budgeting approach, company leadership lays out strategic objectives to kick off the process. From there, a plan filters down to individual departments. In other words, executives or company leadership set the budget and then allocate portions of it to different departments.
A top-down budgeting process looks like this:
Company leadership develops an overall budget framework
Budgets are allocated to department heads
The Finance team consolidates department heads’ plans and makes allocation decisions
In a recent LinkedIn post, Melissa Howatson, Vena's CFO, emphasizes that this approach requires clarity on organizational direction before allocating resources. “Once you know where you want to go and how you’re going to get there,” she says, “what does that mean as you come up with a budget and start thinking through some of the trade-offs you’re going to make and what the investments are going to be?”
The main advantage of a top-down approach is speed. Company leadership doesn’t need to spend months collecting feedback or input from various departments before they can start outlining their objectives and creating a budget framework. Relatedly, who owns the process and has final say is clear.
This enables swift decision-making, especially valuable during turbulent or volatile situations. Additionally, with a top-down view, costs are better controlled, and budget creep is stymied.
On the flip side, a top-down budgeting approach doesn't always reflect the realities of day-to-day operations. Leaders developing the framework might not know about challenges specific departments face. This means they might not account for these issues in their planning.
That could lead to missed insights from the frontline and perhaps missed opportunities to innovate or streamline processes, which can create friction with department heads, says Igor Stelea, Director of Strategic Finance, Analytics & Business Transformation at CFGI, on an episode of The CFO Show podcast.
“If department leads are asked to find risks and opportunities in their budgets, there’s a lot of blame-sharing that goes around, and nobody wants to take ownership,” he says. Further, there’s the potential to demotivate teams and team leaders, who may feel they’re being dictated to or imposed upon rather than having their feedback taken into account. Ultimately, that can lead to “disconnected budgets,” Igor says.
The top-down approach tends to be the most impactful for small, early-stage firms, usually with 100 or fewer employees. That’s because it enables quick, decisive action (such as addressing immediate cost-reduction needs), and smaller companies tend to have fewer departments and more centralized structures.
Top-down budgeting may also be a better approach for organizations operating in industries with relatively stable or predictable costs, making the need for additional input from departments less necessary.
Bottom-up budgeting strategies start at the departmental level. Specific departments share their plans and needs, which executives then take into account to identify business-wide strategic objectives.
A bottom-up budgeting approach looks like this:
Departments receive guidelines from the finance team or the CFO
Department heads build detailed budgets
Department heads submit those budgets, with corresponding justifications
Finance team reviews and negotiates with department heads
Cross-functional reconciliation
Executives approve and implement budgets
Advantages
The primary advantage of a bottom-up approach is that it can achieve a far greater degree of operational accuracy, with budgets more closely reflecting the real costs and resource needs of various departments. As such, managers or department heads own their budgets, giving them more skin in the game.
“Individual managers effectively ‘own’ their budgets, so they won’t feel like it’s being imposed” by leadership, says Melissa Howatson, Vena’s CFO.
A bottom-up planning approach, with its additional level of detail, can help improve forecasting accuracy, surface more frontline insights and opportunities for potential cost savings, and keep employees and team members more engaged, as they know their feedback is being taken into account.
In stark contrast to the top-down approach, a bottom-up approach’s primary disadvantage is that it can take up time and resources.
Gathering input and feedback from multiple departments can take months, and perhaps longer when accounting for revisions and negotiation.
“It can be challenging to support people through that,” says Thomas Krolak, Vena’s Director of FP&A, during a keynote speech at Excelerate Finance 2024. But the extra effort digs up a more authentic vision of the realities for departments, he says. “Beyond the numbers, there are real, human implications, targets to deliver, risks to mitigate, and teams to lead.”
But when departments set their own budgets, they may tend to build in buffers for unknown costs, just in case, leading them to ask for more than they need. That could lead to misallocation of budget and, on a broader scale, inefficiency. Additionally, there’s also a chance that departments could get a bit too comfortable with the status quo. “You could end up defaulting to doing things the way you always have,” Melissa says, which means missing opportunities to become more efficient.
On top of it all, the entire process can be daunting and resource-intensive for department managers and the finance team. There’s a lot to take in and digest.
The bottom-up approach is usually a better fit for larger, more mature organizations with established hierarchies and processes, and many autonomous departments or units.
In this scenario, department leaders may have a better idea of their specific needs than executives overseeing many departments, who lack detailed visibility into day-to-day operations.
While the bottom-up approach may yield a more accurate budget once all is said and done, the challenges associated with it may give executive teams pause. There are, however, ways to overcome those challenges.
Most leaders’ hang-up with the bottom-up approach is that it’s time-consuming. Not only does company leadership need to wait for feedback from each department, but there’s also a period of revision and negotiation. It can take months.
“There are various moving parts and phases to the budgeting process, and each of those phases requires coordination between department heads,” says Devendra Kalwani, Associate VP of Finance at Capstone Infrastructure, during a Vena livestream. “Getting them all on the same page can definitely prove to be a challenge.”
A possible solution is to implement a robust system and workflow to streamline the process of collecting budget inputs. That might include sharing key assumptions and operating plans with department heads or contributors in advance, providing some top-level guardrails as starting points, and a brief description of how those guardrails support the broader vision.
It’s also reasonable to think that the bottom-up approach could lead to resource misallocation, as departments grapple over the resources they’ll need.
To counter that problem, both Finance and HR teams can act as partners to ensure there’s a degree of consistency across departments. That, again, could take the form of some simple guardrails from up top that can keep department heads in check and prevent open-ended budget requests.
For example, the marketing team might need additional resources for a major campaign, while the product team wants to hire more people to speed up development. Without input from these teams, leadership might allocate resources in ways that don't match actual needs.
Leadership is faced with a decision between two competing departments and may need to set budget thresholds to make it clear that budgets are not open-ended. There can be an order of operations to allocation logic, too, as leaders may not want to allocate the resources to marketing until after the product team has finished the product development cycle.
Departments may be tempted to request more than they need in anticipation of unforeseen problems. Too much padding eats into other areas, such as developing new initiatives, and can also lead to too few leaders taking responsibility for sticking to their budgets.
A possible solution is to set aside an overall strategic budget for new initiatives and make sure departmental padding doesn’t encroach.
To set expectations around everyone’s roles in a bottom-up approach, here’s what you might expect out of different teams and organizational layers:
To get a better idea of how each approach works in practice, here are some real-world examples.
Consider a SaaS startup experiencing rapid growth. It has 75 employees, and its leadership is currently focused on extending its runway amid economic headwinds. Accordingly, the CFO and CEO huddle and decide that the firm needs to reduce costs by 30% based on its cash position.
With that high-level goal in mind, the finance team takes the reins and allocates 30% budget cuts across departments based on certain strategic priorities. For instance, it wants to preserve spending for product and engineering teams while reducing marketing outflows.
Starting at the top, executives outline a strategy and high-level plan, instruct the finance team to create departmental budgets accordingly, and the finance team then makes those allocations and requests. The budget process is completed in three weeks, making for quick, streamlined execution.
Consider a sprawling hospital system with multiple service lines–including cardiology, oncology, ER, and other departments. These departments have varying needs, and the heads of those departments propose budgets based on metrics such as patient volume forecasts, staffing requirements, and equipment or material needs.
Those proposals go to the finance team, which works with each department head to align with the broader organizational budget. That means looking at what resources are available and the realities of how they’re likely to be allocated. Finance chisels away at the proposals and plan, eventually taking it to company leaders, who can then outline strategies and top-level goals accordingly.
While the approach results in a more operationally realistic budget for each department, complete with some of the clinical complexities that executives are unlikely to see or be aware of, it requires considerably more time and effort for the process to play out.
That, in short, is the trade-off: a more detailed and realistic result versus a faster, more streamlined process.
You could also look at using a hybrid approach, which ropes in elements of both a top-down and bottom-up approach.
This could be used by, say, a mid-market manufacturing company that uses a top-down strategy for outlining revenue and margin targets, but then also solicits input from various departments to build out more detailed expense budgets that can meet those targets. This approach can be useful when departments need guidance, while still giving them the flexibility to give input.
“The business wants to have an idea of what the stakes in the ground are going to look like, so starting with a top-down approach (here’s where we want to go, and this is what aligns with our long-range plan),” Melissa explained in the livestream, “is at least a way to start herding the cats.”
“From there, I like to look at a hybrid approach: We know where we want to go, and now bottom-up, let’s build this up,” she says, getting input from departments to put the plan all together.
Now that you understand the differences between top-down and bottom-up budgeting approaches, how do you choose one?
Start by asking some questions about your organization to better understand which approach could prove the most fruitful.
Consider:
If you’ve decided to go with the bottom-up approach, here are some best practices to help your organization get the most out of it.
Don’t forget the big picture. Your budget should be part of a larger, comprehensive annual operating plan. So, align your budget with other business plans to reduce organizational friction.
Make decisions beforehand. A lot of decisions need to be made—particularly related to business strategies, product roadmaps, or market research—before the process kicks off in earnest. Making those choices early can inform the decision to come and streamline the whole process.
Lean into technology. Use technology to your advantage—especially if you’re using a platform that’s easy for non-technical contributors to pick up and use.
Don’t assume anything. Always question existing assumptions to avoid the “status quo trap” and unnecessary spending or resource allocation.
Talk to each other. Communicate frequently with budget owners and leaders to prevent veering off course.
If you’ve chosen a top-down approach, here are some guidelines to help you succeed.
Explain yourself. Be sure to communicate the "whys" behind budget allocations to make sure team members and departments understand why certain decisions are being made. “Communicate often, communicate early and get buy-in from your CEO and CFO, because they’ll really set the tone for the upcoming budget season,” says Devendra.
Solicit feedback. When building out processes and budgets, create feedback loops, even if those loops are non-binding. Making sure there’s a chance to communicate issues or concerns can put team members at ease and make sure that executives aren’t siloed off.
Measure and monitor. Monitor variances in operational data or results, and adjust quarterly to stay on track, or further zero in on pre-established goals.
Think in “what-ifs.” Use scenario planning to test assumptions, and consider what could go wrong (or right), and what you might do about it.
Technology plays a critical role in the corporate budgeting process, no matter which approach you choose. But be aware that if you choose a bottom-up approach, there may be some limitations in the mix—especially if you’re using Excel alone to manage the process (e.g., consolidation delays).
With that in mind, modern, comprehensive FP&A platforms—such as Vena—can help make the budget process (no matter which approach you embrace) much smoother. That includes template distribution, submission tracking, setting budget thresholds, automating consolidation, workflow management, and more.
Vena helped Mark Raley, the Head of Finance at footwear retailer Schuh, create a superior budgeting process for his company. A flexible, collaborative approach to budgeting helped reduce Schuh’s budgeting cycle time by half. It also helped Mark realize that his organization was better served by a bottom-up approach, rather than a top-down one.
“We have a regional field team who are looking after a number of stores. Because they're in the field, that kind of cloud environment is ideal for them. They can give their input at a station, at an airport, in the back office or in a store. It's very flexible and gives them the ownership that they probably felt they didn't have previously,” Mark says. “Our old top-down approach to budgeting has been turned on its head the way it should be. They’re owning the store.”
The right budgeting approach depends on your organization's unique needs, culture, and circumstances. Your approach might also evolve over time. What works for a 50-person startup might not work when you've grown to 500 employees. Stay flexible and willing to adjust your process as your business changes.
The right tools can support you through these changes. Vena supports top-down, bottom-up, and hybrid budgeting approaches, giving you flexibility to adapt your process as your business grows. Whether you're just starting to formalize your budgeting process or managing complex, multi-departmental plans, Vena scales with you.
Ready to see how Vena can streamline your budgeting process? Request a demo today.