In the business world, finding the right budgeting strategy can be crucial to success. A top-down budget refers to a budgeting process in which management makes decisions about the company’s expenditure. Traditionally, budgets were created according to a bottom-up method. Bottom-up is just a top-down method flipped on its head. This article will tell you what top-down budgeting is and how it can impact businesses:
What is Top-Down Budgeting?
Top-down budgeting is when management arranges the company’s budget. The company’s senior management will meet and arrange a budget based on their objectives and goals for the company. To come to a final budget, the company’s management will take the current market into considerations. They will also discuss the previous year’s financial budget, how it worked, and if any changes need to be made to it or if they can implement the same budget. Senior management will also take tax, inflation, and economic-financial conditions into consideration as part of creating a budget.
This budget will then be passed down the line to department managers for company-wide implementation. When the budget has been formulated, financial allocations will be made to the relevant departments, who must then form their own budgets with the original budget in mind. In some instances, the department managers may be able to influence the final budget prior to implementation.
How Does Top-Down Budgeting Work?
Top-down budgeting begins with senior management meeting to discuss the company’s objectives, goals, and long-term financial plans. They will also discuss what they want to see out of the company in the coming year, as well as what is realistic in terms of achievability. They will take into consideration sales, profits, expenses, and losses. When they work through these figures, they will come up with a budget. Once senior management has worked out this budget, this budget will be passed onto the finance department for allocation.
Once senior management has passed the budget onto the finance department, they will begin making allocations to departments. The coming year’s allocations may be made according to the previous year’s financials. If one department only incurred 15% of the overall expense, then that same department may receive 15% of the total expenditure for the coming year. However, the allocations may change according to the wishes of the senior management. If the company decides to make a change in its business strategy, budget allocations may be increased or decreased.
Department-level Budget Management
Once the allocations have been assigned to department managers, the depart managers are tasked with creating their own budget according to the company’s overall budget. The department manager will then try to reduce it further. They will be expected to develop a budget and create a plan, which they will have to then present to the finance department. Their budget will be expected to be lucrative and should yield profits for the company. Budgets at the department level can include the purchasing of technology, office equipment, and will include salaries. Department-level budgets may also include marketing and promotional costs.
Every single company department will be expected to submit and present its budgets to the finance department. The finance department will painstakingly review the budget proposals, and make sure that they are in line with the company’s overall objectives. If any departments are lacking in terms of budget, the finance department can send the budget back to them and ask them to revise it. When the budgets are completed, the financial department will load them onto their tracking software and will monitor monthly expenditure to ensure that it is in line with the budget.
Every month or every few months, each department will meet with the financial department to go over their monthly expenditure and discuss where some departments may be falling short. If any departments are overspending, then they will be questioned by the financial department.
The Advantages of Top-Down Budgeting
There are many advantages to top-down budgeting. Some of those are:
- A top-down budget helps with the company’s overall growth, which benefits every single area of the company.
- Departments are aware of what is expected of them from senior management. Before top down budgeting became popular, departments could never be certain about what management expected. Now, management’s desires have been demystified.
- It is a very quick, painless, and simple way of preparing a budget.
- Lower management (who are usually the busiest part of any company) are not burdened with creating budgets and can focus on more important immediate areas of the company that they are supervising.
- Senior management creates a single budget, which means that departments’ do not need to create their own budgets which may conflict with each other.
The Disadvantages of Top-Down Budgeting
Where you find advantages, you also find disadvantages. Here are a few of those:
- Because managers are not involved in the budget-making process, and if they are their influence is very little, they may not feel particularly motivated to ensure the budget’s success. Previously, lower management (as the creators of the budget) felt great passion to deliver their budget and prove themselves.
- Senior management rarely involve themselves in a company’s day-to-day operations. Because of this, they might set targets that are simply unrealistic. This creates more stress for lower-level management.
- Budgets created by senior management, who are not involved in the company’s daily operations, can be over or under-allocated.
Is It Worth It?
Ultimately, top-down budgeting appears to be much more successful than bottom-up budgeting. While it does have its disadvantages, there are more disadvantages to be found in bottom-up budgeting. With all of that said, there is also a great benefit to be had in bottom-up budgeting. By having lower management influence the budget, in some cases, the budget can be much more realistic and can take into consideration the company’s daily operations. With top-down budgeting, lower management does occasionally have an opportunity to give input and influence the budget. Often, the best way to decide which budgeting method to employ is to take the size and stability of your company into consideration.
Top-down budgeting can be very effective if employed properly. This article should have told you everything that there is for you to know about this method of budgeting. Thank you for reading.