Bottom-up vs. Top-down Budgeting: Know the Difference

November 24, 2022
by Peter Fechter

When it comes to corporate budgeting, there aren’t too many ways to approach it. As the budgeting process is fundamental, you have to choose between a top-down or bottom-up budgeting process.

Both budgeting strategies have pros and cons, so choosing between the two can be challenging. What’s even more challenging is that one method isn’t better than the other.

So, how do you choose your budgeting planning process?

The trick is to choose your budgeting process according to your company. Taking into account the previous year’s budget, you should also consider your company’s structure, size, maturity, and long-term goals before you decide which approach suits your organization.

We’re here to help you figure out which budgeting approach might be ideal for your entire organization.

Here’s what you’ll know after reading this article:

What is top-down budgeting?
What is bottom-up budgeting approach?
What is the difference between top-down and bottom-up budgeting?
Pros and cons of top-down and bottom-up budgeting
Which budgeting process is right for your organization?

What is top-down budgeting?

Top-down budgeting is a type of budgeting process in which executive managers (senior management) decide on a budget based on company goals.

Here, the budget process is anchored by the top and then passed down to the various departments.

This process begins when the executive team meets to discuss year-ahead expectations, budgeting decisions, and the big picture of company plans. They consider current market conditions as well as market trends and predict how resources should be allocated.

Once the budget is decided, the finance department compares the numbers with company objectives, ensuring that the proposed budget is realistic and promotes growth.

Finally, department heads allocate budgets to their teams based on objectives set by the company.

📰 Check out the differences between scenario planning and business forecasting.

What is bottom-up budgeting?

Bottom-up budgeting is the polar opposite of top-down budgeting.

It’s a budgetary process in which lower managers and team leaders decide their own budgets based on their specific objectives.

For it to succeed, bottom-up budgeting must be a company-wide effort involving even lower-level staff.

The bottom-up budgeting approach begins with floor-level employees and lower-level managers. In this system, departments create their individual budgets. They consider past budgets, monthly expenditures, future spending, and anticipated revenue.

The budgets are pushed up the corporate ladder to department managers and the finance department. Once approved, upper management or executive management analyzes budgets, ensuring they align with company goals.

What is the difference between bottom-up and top-down budgeting?

Top-down and bottom-up budgeting sit at different ends of the spectrum. While one relies on the conventional chain of command and high-level goals, the other defies the traditional corporate structure, giving lower management a voice in budgeting.

Here are some of the key differences between the two:

Time consumption

In a top-down budgeting structure, setting a budget is simple and quick. Executive managers set budgets based on past data, market trends, and future objectives. With this budgeting structure, as well as the budgeting method, executives can set a budget in a couple of meetings.

Budget preparation in this method is organized, focusing on high-level goals.

In contrast, bottom-up budgeting is a company-wide effort that can take considerable time. Lower managers and team leaders must decide how much money they’ll need to meet their goals. It asks a lot from employees who are often not trained in making budgetary decisions, making the process slow.

This budgeting approach can be time-consuming as it involves more team members and often requires consideration of day to day operations.

Accuracy

Creating an accurate budget is difficult no matter which budgeting process you use. Still, top-down budgeting tends to be less precise than bottom-up budgeting.

That’s because, in a top-down budgeting structure, only a fraction of the company sets the budget. They look at company spending from a broad perspective, so it’s difficult to determine individual needs.

Bottom-up budgeting is more accurate because it allows teams to decide how much they need to optimize performance.

It takes into account previous year’s data and ensures that departments create their own budgets with more granularity.

Power distribution

Having a transparent chain of command is vital in any organization. The traditional structure is respected with top-down budgeting – the budget comes from above and trickles down the ladder, respecting the usual decision-making by top management.

With top-down budgeting, floor-level employees have no say in what resources they need to complete their tasks. In contrast, bottom-up budgeting gives more freedom and responsibilities to lower management.

And in turn, gives the little guys, or lower-level staff, a more critical role in the company’s overall growth strategy

Flexibility

Top-down budgeting often provides limited flexibility. Once senior executives set the budget, changes are typically minimal, and any adjustments can be challenging to implement.

It’s based largely on high-level objectives and broad company strategies.

Conversely, bottom-up budgeting tends to offer greater adaptability. Since lower-level managers determine their budget needs, there’s room for adjustments based on current market conditions and real-time feedback from ground operations.

Communication flow

As part of top-down budgeting, communication typically flows in one direction: from the executives to the lower ranks.

This often means departments may have limited opportunities to give feedback or voice concerns about the allocated resources.

On the other hand, bottom-up budgeting promotes a two-way communication channel. Departments not only draft their budgets but also communicate their reasoning and specific needs to higher management.

It can foster a more collaborative and transparent workplace.

Pros and cons of top-down budgeting

Top-down budgeting saves companies a considerable amount of time. High-level decisions are made quickly, and lower management doesn’t have to worry about making tough budgeting decisions. But, top-down budgeting may be inaccurate and unrealistic because it doesn’t look at granular spending or day-to-day operations.

🟢 Pros:

saves time
keeps the decision-making power at the top
easy to calculate

🔴 Cons:

doesn’t involve lower management
may not be accurate
may not be realistic

Pros and cons of bottom-up budgeting

Bottom-up budgeting gives many people across an organization a voice. It’s an excellent way to boost employee involvement and promote company culture. It’s also the most accurate way to predict future spending, making it highly accurate. Still, this budgeting structure is time-consuming and makes lower management’s job more difficult.

🟢 Pros:

highly accurate
realistic
promotes company culture

🔴 Cons:

time-consuming
overestimation
gives lower management too many responsibilities

Which budgeting process is right for your organization?

If you’re a startup, the budgeting process that makes the most sense is the top-down approach. Since you have very little past data, the bottom-up approach would be wasted on your startup. You want to be in complete control of your spending to focus on growth.

Mature companies can use a bottom-up budgeting strategy.

They can use past data to analyze how money is allocated per sector and get more granular on spending.

Still, the bottom-up budgeting process may prove ineffective for large companies. Knowing how a couple of thousand of dollars is spent would not benefit a company with a million-dollar budget. In this case, a top-down budgeting process seems more fitting.

📰 Learn more on marketing on a tight budget – how to make the most of limited resources.

So, what’s the best budgeting process?

It all depends on your company. You need to think about your organizational structure and decide if you need a granular view of your spending. If not, you’re better off with a top-down system that allows you to control the budget according to your objectives.

💡 Whether you choose one or the other, you need to track and analyze your process with MARMIND.

Our budget and spend management tools allow you to set spending limits across departments, track your budget across organizational sectors, and forecast spending based on your goals. You can forget about outdated spreadsheets and effortlessly monitor your spending in real time.

Last thoughts on bottom-up and top-down budgeting

Though you must choose top-down or bottom-up, it doesn’t mean you have no room to innovate. If your company can benefit from both budgetary processes, it’s possible to create a hybrid system that suits your organization.

For example, you can use a top-down structure where upper management works closely with lower management to set budget spending with a more granular perspective. The most important thing is to develop a system that works for you.

Whatever you choose, let Marmind keep an eye on your budgeting system in real time. Set limits, forecast spending, and optimize your budget across all departments.

✨ Join Marmind and take control of your financial future! Book a demo.

Author

Peter Fechter

Peter is Digital Marketing Manager at MARMIND and mainly responsible for website and lead management. When he's not busy creating content, he is developing new strategic approaches for campaign planning.

Deepdive: Budget- & Costs Module

In this video, we show you the 5 main features of MARMIND’s budget & cost module – and how it can be used in the best way for your marketing purposes:

Top-Down Budget Planning
Spend Management & Forecasting (Bottom-up Basis)
Set up reconciliations from actual costs to planned/committed costs
How to set up scenarios
How you can integrate budget forecasts, ROI and performance KPIs into other views and into reports

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