Do you build your budget from the top, or build it from the bottom up? When it comes to budgeting, where does your organizations stand?
While there are plenty of ways to go about your corporate budget, and there's many different types of budgeting & forecasting, but most fall under two categories: Taking either a top-down or a bottom-up approach. The process you choose can affect your business in different ways--and each comes with its own pros and cons.
To make the right decision for your organization and to determine which will best enable you to execute on your financial operating plan, consider both models in turn.
Key Takeaways:
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Top-Down Budgeting starts with senior management creating a company-wide budget and allocating resources to departments based on overall goals and past performance.
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Bottom-Up Budgeting enables departments to create their own budgets based on their specific needs and initiatives, which are then consolidated into a company-wide budget by the finance team.
- Both approaches have benefits and drawbacks, top-down budgeting can ensure executive alignment and is generally faster but can lead to departmental disengagement and inefficient resource use. Bottom-up budgeting can be more accurate and aligned with departmental needs, however can result in over-budgeting and a longer, more complex process.
Top-Down vs. Bottom-Up Budgeting
While the end goal may be the same--a company-wide budget--both top-down and bottom-up budgeting approaches have different starting points and get to the finish line using distinctly unique routes.
| Top-Down Budgeting |
Bottom-Up Budgeting |
| Starts with senior management creating a company-wide budget based on objectives, past performance, and market conditions. |
Starts with departments preparing their budgets based on needs, initiatives, and hires for the next year. |
| Resources are allocated to departments, which build their budgets based on these allocations. |
Departments present budgets for approval, which are reviewed and consolidated into a company-wide budget by finance team. |
| Allows for final adjustments if departments need more resources to meet their goals. |
Company-wide objectives are shared with departments to ensure alignment and prevent siloed requests. |
| Focuses on budget allocation based on set amounts, requiring departments to plan within given resources. |
Example: Zero-based budgeting, starting with a clean slate to justify and prioritize expenditures. |
Now let's explore the differences between them in more detail.
What Is Top-Down Budgeting?
Top-down budgeting starts with senior management. It's up to them to create a budget for the entire company, allocating resources to each department according to company-wide objectives and organizational targets for the year ahead. Past performance and current market conditions are taken into consideration, while the previous year's budget and historical performance help determine which departments should get what--with an eye on how departments contributed to past goals.
Departments build their own budgets from there, based on the resources they've been allocated. Often, though, some funds will be set aside at the corporate level, allowing for final shuffles or extra calls for resources if departments feel they don't have what they need to meet their individual goals.
Top-down budgeting, in other words, is a form of "budget allocation." It starts with a set amount and allocates funding and resources accordingly across departments, leaving it to them to develop new plans or reduce their existing ones based on the resources they've been allotted.
What Is Bottom-Up Budgeting?
Bottom-up budgeting, meanwhile, begins exactly where you'd expect: the bottom.
Departments prepare budgets for their teams based on what they need for the next year: the initiatives they want to run, the programs they already have in place and the hires they want to make. To ease the process, company-wide objectives and expectations are often shared with departments first, to give them organizational-wide visibility as they make their plan and provide protection against siloed requests.
Departments present their budgets for approval, and the finance team or budget committee goes through each from there, to approve or disapprove line items according to those larger organizational objectives. A company-wide budget emerges from that work.
One example of a bottom-up budgeting approach is zero-based budgeting, which starts with a clean slate every time in order to justify and prioritize every departmental expenditure.
Top-Down Budgeting: Pros and Cons
Neither approach is inherently better than the other--and certain types of corporate budgeting, such as driver-based budgeting, will work with either model. The key is to understand how your own organization works and to make your budgeting process a natural extension of it. It's also critical to understand the advantages and disadvantages of each model before choosing one.
A top-down budgeting process, for example, empowers you to allocate resources based on company strategy and an overall picture of organizational performance and goals. As with any type of top-down management style, though, aligning your departmental teams behind the results may be more difficult.
| Pros of Top-Down Budgeting |
Cons of Top-Down Budgeting |
| Executive buy-in is built in: Management is involved early, aligning the budget with their goals and future growth plans. Departments are held accountable to overall objectives. |
Difficult to get departmental buy-in: Departments aren't involved in the budgeting process, leading to possible lack of motivation and intra-departmental strife if goals are perceived as deprioritized. |
| It can be faster: Top-down budgeting is generally faster than bottom-up, creating organizational transparency in business-wide spending. |
"If you don't spend it, you lose it" environment: Finance team's efficiency efforts may be seen as a threat by departments, prompting them to spend allocated resources unnecessarily to avoid future budget cuts. |
Bottom-Up Budgeting: Pros and Cons
A bottom-up process ensures that your budget contemplates the needs of every department so that they have the resources they require to achieve their goals and put your organization ahead on its larger strategic objectives. It's generally a slower process for your finance team, though, as you incorporate all of the departmental requests into a cohesive overall plan.
| Pros of Bottom-Up Budgeting |
Cons of Bottom-Down Budgeting |
| More efficient: Departmental teams have a closer eye on their resource needs, leading to more efficient and accurate resource allocation. |
Can lead to over-budgeting: Departments may pad their requests for wiggle room, potentially throwing off the entire organizational budget. |
| Aligned with departmental needs: Departments know how to allocate resources for the best results. Managers are more likely to support the overall budget as they are involved in its creation. |
Takes longer to create: Creating and combining smaller departmental budgets into a cohesive company-wide budget is time-consuming and resource-intensive. Traditional tools like Excel may be inadequate, requiring more sophisticated technology to streamline the process. |
Figuring Out What's Right for Your Business
Choosing which approach is most effective for your business means understanding the psychology of how your organization operates. Do teams work better when ideas are their own, or do they prefer your leadership to come to them with the best plan of action? And how is your organization at creating transparency in their goals and strategies so that you can pivot and reallocate resources faster?
In some cases, you may not even opt for one model or the other, instead approaching your budget from both directions as a way of ensuring you have visibility into both departmental and organizational goals or to meet specific objectives. You may introduce a longer-term plan that takes a more top-down approach, for instance, then implement either a rolling or traditional plan for the nearer term using a bottom-up method.
Or some years, you may choose to go into more detail on the cost structures of your goods or services--building a bottom-up budget from there. Other years, you may want to take the opposite approach.
After all, in the end, the point of both top-down and bottom-up budgeting approaches is the same: to make sure resources are allocated intelligently and in a way that gives everyone what they need to build towards your overall business strategy and goals. If everyone has an eye on that, either model is bound to be successful.
