When it comes to corporate budgeting, there aren’t too many ways to approach it. 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 process?
The trick is to choose your budgeting process according to your company. You should consider your company’s structure, size, maturity, and long-term goals before you decide which approach suits your organization.
But fret not. We’re here to help you find the right strategy for your company.
Here’s what you’ll know after reading this article:
- What is top-down budgeting?
- What is bottom-up budgeting?
- 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 decide on a budget based on company goals. In this process, budgeting decisions are made at the top and pushed down to different levels of the corporate ladder.
The top-down budgeting process begins with a meeting between executive managers. During this meeting, the protagonists analyze past budget spending and discuss future goals. They consider current market trends and forecast how much money they should allocate to each department.
Once the budget is decided, the finance department compares the numbers with company objectives, ensuring that the proposed budget is realistic and promotes growth. Finance will set budget limits for each department if it finds no issues.
Finally, department heads allocate budgets to their teams based on objectives set by the company.
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 budgets based on their objectives. For it to succeed, bottom-up budgeting must be a company-wide effort.
The bottom-up budgeting approach begins with floor-level employees. In this system, team leaders and lower managers consider their objectives and set budgets accordingly. They consider past budgets, future spending, and anticipated revenue.
The budgets are pushed up the corporate ladder to department managers and the finance department. Once approved, executive management analyzes budgets, ensuring they align with company goals.
What is the difference between top-down and bottom-up budgeting?
Top-down and bottom-up budgeting sit at different ends of the spectrum. While one relies on the conventional chain of command, 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, executives can set a budget in a couple of meetings.
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.
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.
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.
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 a more critical role in the company.
Pros and cons of top-down budgeting
Top-down budgeting saves companies a considerable amount of time. 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.
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.
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
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.
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.
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