Whether you are creating a budget for your home, small business, or large corporation, there are two major approaches: the top-down approach and the bottom-up approach. Some companies believe the top-down approach provides the most advantageous view, whereas others swear by the bottom-up approach. Which one is best?
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.