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Top-down Budgeting Vs. Bottom-up Budgeting

A comment on a recent business forum posed the question as to whether a company should adopt a 'bottom-up' or a 'top-down' approach to budgeting. To us, the issue was that the person asking the question was mixing up two different processes. It's not a question of top-down or bottom-up budgeting, but both.  If an organisation just relies on a bottom-up process then it's very unlikely the result will end in competitive growth. If it relies on just top-down, then everyone has a great excuse to miss the budget as it is not their figures. Here is one way of combining both that we advise companies to adopt:
  • First, senior management should set an aspirational target on the performance they would like to achieve. This is done at a summary level with certain key figures such as revenue and total costs being 'pushed down' to a divisional level.  The targets will probably be driver-generated based on key relationships between costs and amount of work done, to produce key outputs. This is stored and communicated as a 'Target' version with some form of incentive for them to be achieved.
  • Next, operational managers create a budget that represents 'business as usual', ie the resources required to conduct the current department workload, including organic improvements, in line with company objectives. This is 'bottom up' but may be driver-based . This is known as the 'business as usual' budget. There will need to be a check on the results of this version to ensure the numbers are realistic and in line with previous trends and forecasts.
  • The third step is to look at the gap between 'Targets' and the 'Business as usual' budget. This is bridged through selecting a range of initiatives designed to improve or replace the existing business processes. These will have been proposed throughout the year and so this process is about assessing them in combinations to see how overall performance can be improved. It also means that a separate budget for the chosen initiatives will need to be established.
Ideally the initiative budget plus the business as usual budget should be able to meet the targets set by senior management. It also means that as well as measuring resources, the budget process needs to include workload and outcome measures. Hopefully the above is clear enough, given the limited space in this blog. In our blog 'Implementing a continuous budgeting process', we outlined how the above could be accomplished within Financial Driver.  If this approach is of interest to you, then get in contact and we'll show you how it could work within your organisation.