Against each of these we then developed a new tiered-approach to the agency budgets and fees to take into consideration the total level of investment for the model based on the top down approach. If you are still unsure of the bottom up or ZBB approach, we have created a Golden Minute video here that explains this in plain language. Clear limits can help you control your spending without the hassle of tracking it in detail. Then, the rest of your income can be allocated to discretionary spending. Since it concentrates on broad categories rather than detailed tracking, top-down budgeting is normal balance easier to maintain over time, freeing up time while providing a clear financial overview.

A Guide to the Strategic Budgeting Process

Flexibility in budgeting allows organizations to adapt to changes, reflecting circumstances and moods. On the other hand, top-down budgeting is often rigid because it is determined from the top. Bottom-up budgeting will, therefore, allow flexibility because adjustments are based on departmental feedback and the evolution of the market, resulting in more adaptable bottom up budgets. Bottom-up budgeting, however, calls for active involvement from the workers and department heads, thus promoting morale and a sense of commitment to the budgeting process. Senior management may take inputs from lower-level managers, which helps acknowledge the concerns of the regular staff who are tasked with implementing the budget.

• It may look something like this annual budget template from Google Sheets.
• Once the department budgets are completed and finalized, they are loaded onto the financial system to track monthly expenditures.
• Most companies don’t have the bandwidth to manage both approaches to the budgeting process — building one plan is hard enough.
• Still, this budgeting structure is time-consuming and makes lower management’s job more difficult.
• No matter what the scope of work, the agency was taking a top down approach – what was spent with them last year, plus a suitable increase.
• The departments receive monthly or periodic reports to show the amount of expenses incurred from the allocated budget, as well as the revenues generated vis-à-vis the department’s targets.

Lack of departmental insight

With this, all spending decisions and revenue decisions are reflected in the budget. This budgeting process eliminates much of the back-and-fork and guesswork, culminating in a much more rapid budgeting process that isn’t as lengthy or cumbersome. As the year progresses, you’re able to evaluate actuals and variance analysis to identify where’s my budget now, versus the established targets. The problem with the top-down budgeting process alone is that sometimes the executives are aware of the budget, but it really doesn’t filter down to be an actionable plan for the people involved.

• While top-down budgeting originates from above, bottom-up budgets are created in the individual departments.
• Executives will appreciate that bottom-up budgeting leads to more accurate estimates throughout the organization.
• With a better understanding of what top-down and bottom-up budgeting mean, let’s look at their pros and cons.
• Then Finance can review your initial proposal and assign individual budgets in line with the overall plan.
• The C-Level leadership focuses on the next steps for company growth, so this budget is designed for progression.
• This can lead to a more accurate and realistic budget but may create challenges in aligning these detailed budgets with the broader strategic goals.

Comparing Bottoms-Up and Top-Down Budgeting Approaches for Compensation

These funds can have a global or domestic focus, which also increases the complexity of the scope. Stakeholder levels also play a role, with top-down budgeting suiting high-level stakeholders and bottom-up budgeting aligning better with lower-level stakeholders. The budget proposal is then sent up the chain of command to the financing department or CFO, who will review it. The changes or suggestions they make are passed back to department managers, and so on, until an agreement is reached. The right tools not only simplify budgeting but also empower you to make smarter financial decisions. It’s strategic in making sure the entire organisation aligns with the company’s broader objectives and goals.

Many businesses use a hybrid budgeting model to get both strategic focus and on-the-ground detail. A unified platform like CandorIQ can significantly improve your budgeting process by enhancing accuracy, efficiency, and alignment across departments. Clearly define performance metrics that link directly to budget allocations. These metrics should QuickBooks Accountant be specific and measurable, helping ensure that financial resources are directed towards areas with the greatest potential for growth and efficiency.

In a hybrid budgeting method, you establish the broad parameters of a target for budget, with your executives and your board (top-down). Make sure that when you build this budget at a detailed level, that it’s going to be a budget that actually hits. It’s faster and ensures alignment with strategy but can miss operational realities if leadership isn’t in touch with day-to-day challenges.

When everyone participates in the budgeting process, it creates a sense of ownership that can boost motivation and engagement. As each department feeds its perceptions and needs into the budgets, bottom-up budgeting results in detailed and accurate budgets. The involvement of employees in the budgeting process leads to increased employee ownership and accountability for the company’s success. Resource allocation is important because it helps departments achieve their missions within available funds. Most teams don’t choose between top-down budgeting and bottom-up budgeting. Leadership sets strategic targets—cash runway, hiring velocity, revenue goals.

Budgeting Process: Steps and Best Practices for Planning a Budget

• Zero-based budgeting allows organizations to quickly identify wasteful expenses and focus funds on more resource-efficient uses.
• This top-down approach might overlook specific challenges faced by departments, leading to unrealistic goals.
• They discuss and determine high-level targets for the company in terms of sales, expenses, and profits.
• Another disadvantage is that employee engagement often suffers when this method is used.
• Prioritizing your financial goals ensures that your budget reflects what matters most to you.

Once approved, the estimates are then sent back to the finance department who will allocate resources to the various departments. Adjustments might be made depending on the needs identified by each department in the process. Rolling budgets, also known as rolling forecasts, is a dynamic budgeting approach since the budget process is updated based on current data and trends available at that point in time.

Key Highlights

If management devotes too many resources to one department, others might find they’re spread too thin to achieve their goals. As with bottom-up budgeting, top-down budgeting is not without its disadvantages. Because leadership is making the decisions, top-down vs bottom-up budgeting they might overlook resource requirements that the departments have more intimate knowledge of. After all, the teams in those departments understand their needs on a day-to-day basis.