Whether one is creating a home budget, large corporations or even a small business, there are two primary approaches to budgeting which include the bottom up and the top-down approach. Some companies believe that the bottom up is an advantageous approach while others think that the top-down approach is better. A top-down approach is whereby the top management develops a high-level budget for the whole organization. Once the budget is made, money is allocated to various departments which then take the figures to create their budgets corresponding to the executive budget (Ljungman, 2009).
Advantages of Top-down approach
Financial Control
When the top management evaluates the overall financial needs of the company and compares it with the annual revenues, it gets a clear picture of the amount of money that it can relocate to the different departments.
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Accountability of Staff
The top-down approach ensures that the employees make prudent decisions on how they spend the money allocated to their departments (Ljungman, 2009). As a result, the method enables the company to achieve financial accountability from all the staffs.
Faster Process
Top-down budgeting approach is more time efficient compared to the bottom-up view. It is less time intensive as it involves only the top decision makers.
Disadvantages of top-down Approach
Inaccurate Forecasting: Fundamentally, department heads understand the financial needs of their departments more than the top management (Ljungman, 2009). Making a budget without the input of departmental heads may lead to overfunding or underfunding of the departments.
Underperformance: If a department is underfunded, it may underperform in return. The departments may also use their exclusion to justify the failure of the employees to meet the goals and objectives of the company. Top-down budgeting may also make the departments to use all the allocated funds whether necessary or not to avoid the risk of being given less money the following year.
Bottom-up Approach
Bottom-up budgeting is an approach where the budgeting process begins with different departments where the heads make a budget and send it to the top managers for approval (Long & Franklin, 2004).
Advantages
The result of this approach increases the ownership of the budget
The staffs become committed since they are involved in the process directly. The plan enhances the understanding of the budget, and so everyone takes responsibility for it.
Disadvantages
The approach results in a higher target of spending compared to the top-down approach. In most cases, therefore, it requires reconciliation to produce an adequate budget (Long & Franklin, 2004). Sometimes the approach may result in budgets which do not correspond with the objectives and goals of the organization especially if the departmental managers focus too much on the departments.
References
Ljungman, G. (2009). Top-Down Budgeting: An Instrument to Strengthen Budget Management (No. 9-243). International Monetary Fund.
Long, E., & Franklin, A. L. (2004). The paradox of implementing the government performance and results act: top‐down direction for bottom‐up implementation. Public Administration Review , 64 (3), 309-319.
