Top-down budgeting and bottom-up budgeting are budgeting strategies businesses use to allocate resources between different departments. Depending on company size, these strategies are employed separately or in tandem.

Read on to discover how organizations distribute funds across different departments with these two strategies.

What is top-down budgeting?

The term top-down describes the process of senior management creating constraints on a budget and then sending the parameters to department managers to create a budget that will be implemented throughout the organization.

The Pros of Top-Down Budgeting

Generally speaking, top-down budgeting gives department heads and team members a clear picture of upper management expectations and the direction they want to take the business. Here are other benefits to consider: 

• Lower management is free to oversee the day-to-day operation of the company because top management is responsible for creating the budget's outline and splitting it into department budgets.
• Department budgets and goals align with company goals, strategies, and overall organizational performance.
• Time saved to create the budget—executives will buy into the budget because it reflects future company growth plans
• Departments are more efficient with spending because of constraints placed by their leaders. Future budgets can be cut if resources are not used optimally.

What Is Bottom-Up Budgeting? 

Bottom-up budgeting is a budgeting strategy that is created by departments. Department managers then send this budget to executive leaders for appraisal and approval – the term "bottom-up" denotes the fact that the budget originated internally from departments within the organization.

Bottom-Up Budgeting Pros

A bottom-up approach to creating a budget builds on the little details that a manager understands from the day-to-day operation of a business. This budgeting strategy can be called descriptive because of the knowledge that is added together to create the big-picture strategy that will drive a firm forward.

This strategy is suitable for large, complex and decentralized organizations that have competent lower-level managers who understand customer behavior and preferences.

Here are the pros that are associated with bottom-up budgeting:

• The budget is specific because departments that input resources into creating the company's products and services
• Increased efficiency that is a result of interdepartmental collaboration, synergy, and delegation
• Increased employee buy-in and budget ownership from middle management and staff
• The budget is data-driven because it is based on lower management's day-to-day operation experience

When Should I Do Top-Down vs. Bottom-Up Budgeting?

Businesses should use a top-down budgeting strategy when executive leaders have an intimate knowledge of each department's needs. This departmental knowledge should create budget constraints that do not impede the business's day-to-day operation.

A top-down budget might be beneficial for a small growing business that has less than 10 employees. An example could be an office moving company that needs to monitor its budget in order to reach strategic goals and deliver an exceptional service.

Bottom-up budgeting is ideal for companies that want to give employees ownership of their budget and the department's direction. These companies typically have a culture of transparency that has strong interdepartmental communication within the organization. The finance teams within these types of businesses usually keep track of the larger organizational goals. 

An engineering consulting firm that hires more than 3,000 consultants could use a bottom-up budgeting strategy because departments have expertise and employees can take ownership of the budget planning process.

An organization can combine these two popular budgeting approaches to create a custom budgeting plan. Read on to find out how you can combine the top-down and bottom-up methods.

Combining Top-Down and Bottom-Up Methods in Planning

An optimal budget follows a philosophy that incorporates a hybrid approach that involves all parts of an organization. The actionable plan can incorporate the executive leadership's parameters in combination with bottom-up expertise.

In other words, the budget will have a collective thought process that details the day-to-day choices available for an organization to create a realistic PNL for different departments. 

Here is a two-step process that you can execute that will combine both methods to create a hybrid budget:

1. Executives establish top parameters for the budget, such as target revenue, profit levels, marketing spending and HR investment.
2. The broad budget is allocated to middle managers so that they can create detailed budgets within the parameters.

In conclusion, both top-down and bottom-up budgeting are useful for a company. Bottom-up budgeting allows for input from all areas of the company and provides a realistic picture of the company's financial position. Top-down budgeting, on the other hand, is a necessary step when determining production, sales and costs.

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