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The Role of Top-Down vs. Bottom-Up Business Budgeting in Modern FP&A

July 20, 2022
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Business budgeting is a crucial factor with the ability to impact a business’ long-term success or failure. Along with providing important information regarding day-to-day operations, an accurate budget better enables companies to predict revenue, trim costs, and make decisions regarding expenditures and opportunities. Although there are multiple ways to craft a business budget, most companies use one of the following methods: a top-down budget or a bottom-up budget. With a top-down approach, senior leadership sets the financial constraints, and departments create their budgets accordingly. On the other hand, with a bottom-up budget, estimates originate with individual departments before going to the company leaders for approval. Keep reading to learn how these budgeting approaches differ and determine which one is best for your company’s future goals.

Top-Down Business Budgeting

Conceived with the company’s future goals in mind, a top-down budget offers several advantages over a bottom-down approach. Because the targets are coming from above, there’s less of a burden on lower management to invest time and resources in budget creation. So, employees can focus on doing their jobs. Additionally, departments sometimes have an easier time aligning their goals with those of the company at large with a top-down approach.Of course, top-down budgeting does have its drawbacks. Because senior managers aren’t directly involved with daily operations in every department, they may lack the information and insight needed to draft realistic budgets. As a result, top-down budgets may be unrealistic or incomplete. Further, companies that don’t involve their employees in business budgeting may find their workers are less motivated to implement that budget moving forward. The end result is often resentment and workplace conflict.

Bottom-Up Business Budgeting

While top-down budgeting originates from above, bottom-up budgets are created in the individual departments. The end result is that budget estimates tend to be more accurate because they’re coming from the people performing the work on a daily basis. So, projects are more likely to succeed. Giving lower-level employees a role in decision-making also encourages them to take ownership of their jobs and motivates them to continue doing their best for the company in question.While bottom-up budgeting has many advantages, issues can occur. After all, leaving business budgeting up to individual departments may result in a lack of cohesion for the company at large. Additionally, companies may find that budgets created by less experienced team members are incomplete because they lack input from upper management.It’s worth noting that bottom-up budgeting takes more time than a top-down approach. After a department creates its budget, the information is forwarded to upper management for input. Ultimately, this approval process can slow down decisions. However, the fact that bottom-up budgets are coming from the people in the trenches means that they’re more likely to be accurate with regard to both resource allocation and costs. Plus, when employees are involved in budget preparation they’re more likely to adhere to those goals moving forward.

Why Bottom-Up Budgeting Is More Critical Than Ever

It’s no secret that the pandemic has made accurate business  budgeting more important than ever. And while the ease of top-down budgeting may sound appealing, handing down financial goals to departments can result in serious consequences including inaccurate results and employee resentment. Bottom-up budgeting tends to result in more accurate, detailed assumption models that employees are motivated to follow.For example, with a bottom-up budget, companies can get a better sense of how much they’re spending on marketing and use this information to evaluate whether they need to ramp up or ramp down lead generation activities. While assumption models based on bottom-up budgeting take more time and effort to create, the result is more detailed and functional. Ultimately, companies that don’t utilize bottom-up budgeting methods will lack critical insight into business performance and are less likely to succeed in today’s dynamic economic climate.In addition, using a top-down budgeting approach could mean missing crucial data and valuable opportunities for growth. Without accurate financial information, companies may be at a loss when it comes to the amount of cash they’re going to collect in the coming weeks and months and therefore make false assumptions about write offs, invoices, and more. In the long run, these companies may struggle to pay employees and suppliers, take advantage of expansion opportunities, and achieve their long-term goals.Business budgeting is complex, and companies need to deal with numerous moving pieces if they hope to stay competitive in the current financial climate. Fortunately, Centage offers everything modern corporations need to achieve their goals. A business budgeting software designed with the needs of today’s businesses in mind, Planning Maestro helps organizations in a wide range of industries prepare for the future. Utilizing financial forecasting and driver-based budgeting, companies can create flexible, agile plans. Forecast likely outcomes, analyze your results, and share information through multiple departments and areas of your business with ease. We look forward to helping your company survive and thrive.

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