Top-down vs. bottom-up budgeting: which should you use? (2024)

Top-down vs. bottom-up budgeting: which should you use? (1)

Jake Ballinger

FP&A Writer, Cube Software

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Key takeaways

  • Top-down budgeting is centralized, quicker, and FP&A-driven but typically lacks employee buy-in.
  • Bottom-up budgeting leads to higher employee buy-in and more accurate budget but might lead to over-budgeting or lack a focused directive.
  • Neither approach is strictly better or worse than the other; they both have their own strengths and weaknesses.
  • The best companies use both approaches and iterate until there's a cohesive story.

What is top-down budgeting?

Top-down budgeting is when senior management prescribes a budget for the entire organization.

Each department then has to allocate that amount for their own needs. But they're restricted by the number that senior management gives them.

Advantages to top-down budgeting

There are a few big advantages to top-down budgeting:

  • Time savings: Since only senior management is involved in the budgeting process, lower management can keep the business running without making time for the (often extensive) budgeting process.
  • Highly strategic: Senior management has access to the entire company's finances. They can use that data to make highly strategic monetary decisions that departments without the big picture might not see.
  • Unified direction: Since the budget comes from a unified source, it accomplishes an objective.
  • Guaranteed executive buy-in: Since executives are the ones who agree on the budget, there's no need to worry about whether upper management will have issues with the budget.
  • Easier to manage: Since the budget comes from upper management, it's easier to manage: upper management can make changes without needing outside buy-in or approval.

In general, top-down budgeting is a central, strategic method.

Disadvantages

That said, there are plenty of disadvantages of top-down budgeting:

  • Lack of on-ground knowledge: The employees doing the business's day-to-day tasks know what will make the biggest impact for them. Senior management might not always know or understand that.
  • Communication Mishaps: The above problem results from poor communication, which is sometimes unavoidable, (especially during the busy budgeting season). Regardless, communication mistakes can lead to teams not getting the money they need to make strategic changes.
  • Lack of employee and lower/middle-management buy-in: If employees aren't actively involved in the budgeting process, they might feel like their input isn't valuable; this can lead to lower engagement and frustration on the job, neither of which is the intent.

In general, top-down budgeting isn't perfect and has some serious pitfalls to watch out for.

Top-down vs. bottom-up budgeting: which should you use? (2)

What is bottom-up budgeting?

If top-down budgeting is prescriptive, bottom-up budgeting is descriptive.

With a bottom-up approach, the lower management and employees create a budget and send it up the management chain for approval, where it finally gets to the Office of the CFO.

Then, in an iterative process, the Office of the CFO suggests changes to the budget and sends it back down, and so on, until everybody reaches an agreement.

In other words, the Office of the CFO creates a master budget with input from the entire company.

Advantages

Bottom-up budgeting has a few unique strengths:

  • Employee enrollment in the budget: Since employees are so involved in the budgeting process, companies that use bottom-up budgeting see more employee buy-in into the end product.
  • Empowers employee ownership and stewardship of the budget: Employees feeling more ownership of the end product means more conversations about how to use the funds in the budget best.
  • More communication: Since bottom-up budgeting is an iterative process involving employees and senior management, it requires more conversations between all parties.
  • Still centralized: At the end of the day, the Office of the CFO still has the power of the purse to allow or deny items in the budget. So bottom-up budgeting allows companies to have a central strategy in mind while including employee knowledge.
  • More accurate budgeting: Because employees and the ones who know what individual items cost, bottom-up budgets are typically more accurate.

Generally, bottom-up budgeting companies will be more satisfied with the end product overall.

Disadvantages

That said, there are a few things that might make bottom-up budgeting less than ideal for you:

  • Higher spending, probably: When departments can ask for what they want, the Office of the CFO will likely end up with an asking total higher than what they're willing to give. After various compromises, the spending will probably be more than the Office of the CFO initially set out to spend.
  • More time intensive: Because of all the communication and the various inputs, employees and senior management will need to spend more time on the budgeting process as a whole.
  • Potential mismatch between departmental vs. organizational objectives: Because bottom-up budgeting is decentralized, it's possible to lose sight of organizational objectives if departmental asks don't lead to them.
  • Can create a "spend it or lose it" mentality: If departments don't use all the budget they asked for, that can signal to upper management that they'll repeat that next year. This means departments might waste any excess funds in their budget just to hit their number.

Top-down vs. bottom-up budgeting: which should you use? (3)

When should I do top-down vs. bottom-up budgeting?

You might be wondering: which approach is the best for me? What will give me the best results?

And the answer is: it depends.

Top-down budgeting is ideal when running a tight ship and using your funds to serve a few strategic goals.

Visionary companies with FP&A teams highly attuned to each department will do well with top-down budgeting.

Bottom-up budgeting is ideal for companies who want to give employees ownership of their budget and the department's direction.

Companies with a culture of transparency, strong interdepartmental communication, and a finance team that keep track of the larger organizational goals will do well with bottom-up budgeting.

Budgeting strategies across industries

These examples showcase the diversity of budgeting approaches across sectors, emphasizing the importance of selecting strategies that align with industry-specific dynamics.

Top-down approach

Manufacturing: In the manufacturing sector, a top-down approach is implemented to establish company-wide targets for production volumes and cost controls. Senior management, leveraging a holistic view of organizational objectives, directs the budgeting process.

Business Services: Within the business services sector, a top-down approach is applied to define comprehensive targets for service delivery and cost management. This allows management to take the lead in formulating budgetary directives, drawing from an overarching understanding of corporate goals.

Healthcare: In the healthcare sector, a top-down strategy shapes overarching goals for patient care, operational efficiency, and cost management. Drawing from a comprehensive understanding of healthcare objectives, leadership takes the lead in shaping the budget.

Bottom-up approach

Real Estate: In real estate, a bottom-up approach involves collaborative input from property managers, leasing teams, and maintenance staff. This ensures detailed consideration of property-specific needs, tailoring budgets to each property's unique characteristics for effective management and development projects.

Financial Services: Within the financial industry, adopting a bottom-up approach entails collaboration among diverse teams. This collaborative input ensures detailed consideration of risk mitigation, regulatory compliance, and client service strategies.

Hospitality and Event Management: The hospitality industry often adopts a bottom-up approach for event-specific budgets. Teams collaborate to estimate costs related to venue bookings, catering, and entertainment, ensuring that each event is financially optimized.

The power of a hybrid budgeting approach

Why choose between top-down and bottom-up budgeting when you can harness the strengths of both through a hybrid approach?

Combining elements of both approaches can mitigate concerns. For example, setting top-down targets and allowing bottom-up adjustments within those constraints can strike a balance between efficiency and detailed insights.

Mitigating Over-Budgeting Concerns: By integrating a hybrid model, organizations can establish top-down targets and leverage bottom-up adjustments within those constraints, striking a balance that mitigates the risk of over-budgeting.

Enhancing Employee Engagement and Ownership: A hybrid approach empowers employees by involving them in the budgeting process, fostering a sense of ownership and accountability. This increased engagement often translates into more informed and committed spending.

Achieving Adaptability in Dynamic Environments: The flexibility within a hybrid approach allows organizations to adjust to unforeseen circ*mstances. Top-down guidance ensures alignment with strategic goals, while the iterative nature of bottom-up adjustments accommodates real-time adaptability.

Meeting Diverse Stakeholder Expectations: A hybrid model allows businesses to consider diverse stakeholder expectations. By incorporating input from multiple levels, the budgeting process becomes more inclusive, addressing a broader range of stakeholder needs and priorities.

Conclusion: all about top-down vs. bottom-up budgeting

Now you know the difference between top-down and bottom-up budgeting.

Top-down budgeting emerges as a centralized, mission-driven force, known for its adept and swift decision-making capabilities.

On the other hand, bottom-up budgeting, acknowledged for its precision, not only improves accuracy but also cultivates a sense of ownership among employees, deepening their connection with spending decisions.

In the world of financial strategies, both methods bring their own strengths, creating a well-rounded tune for successful fiscal management.

Cube can significantly aid companies in choosing between top-down and bottom-up budgeting approaches by providing advanced analytics and collaborative features.

Book a personalized demo today and unlock the full potential of strategic budgeting for your company.

Top-down vs. bottom-up budgeting: which should you use? (4)

Top-down vs. bottom-up budgeting: which should you use? (2024)

FAQs

Top-down vs. bottom-up budgeting: which should you use? ›

While a bottom-up approach allows decisions to be made by the same people who are working directly on a project, the top-down style of management creates distance between that team and decision-makers. This can lead to poorly-informed decisions if leadership doesn't ask for input or feedback from their project team.

Is top-down better than bottom-up? ›

While a bottom-up approach allows decisions to be made by the same people who are working directly on a project, the top-down style of management creates distance between that team and decision-makers. This can lead to poorly-informed decisions if leadership doesn't ask for input or feedback from their project team.

Why can bottom-up budgeting be a good idea? ›

Bottom-Up Budget Pros

Because budget estimates are developed at the bottom, they are typically far more accurate. Gives the clearest picture of each department's costs and resources. Empowers employees at the lowest level to take ownership of their department.

What are the advantages and disadvantages of a top-down budget? ›

What is a Top-Down Budget?
Top-Down Budgeting Process
AdvantagesDisadvantages
A more expedited processCan create unrealistic expectations
Provides clear expectations to departmentsMay cause resentment in lower management
Time-saver for upper and lower level managementLess accurate
1 more row

Which one of the following correctly identifies the budgeting style used when the budget is set from the bottom-up? ›

A bottom-up budget is known as a participative budget.

Which is more efficient top-down or bottom-up? ›

The top-down approach can be more efficient in terms of decision-making and execution. With a clear plan, task assignment is quick, and the project progresses seamlessly. While the bottom-up approach may take more time due to collaborative decision-making, it fosters high team engagement.

When to use top-down approach? ›

Companies utilize the top-down approach in order to assess, determine, and implement business decisions made by upper executives. The processes are streamlined and communicated to lower rank employees, who carry out these tasks.

Which is better, top-down budgeting or bottom-up budgeting? ›

Key takeaways. Top-down budgeting is centralized, quicker, and FP&A-driven but typically lacks employee buy-in. Bottom-up budgeting leads to higher employee buy-in and more accurate budget but might lead to over-budgeting or lack a focused directive.

What are the disadvantages of bottom-up budgeting? ›

There are a few potential disadvantages of bottom-up budgeting. First, it can be very time-consuming, especially for large organizations. Secondly, bottom-up budgeting often requires a high level of employee involvement which may not always be possible or practical.

What are the advantages of top-down versus bottom-up planning? ›

The advantage of top-down planning is that the objectives of the subplans across all hierarchical levels largely correspond to the objectives of the entire company. In addition, complex and time-consuming coordination tasks are eliminated so that the plan can be created more quickly.

What is an example of a bottom-up budget? ›

For example, the cost estimates of the human resource department may include $10,000 for recruiting personnel, $20,000 for employee salaries, and $6,000 for administrative costs, bringing the department's total budget to $36,000.

Which budgeting approach is most favourable? ›

Expert-Verified Answer. The budgeting approach that is most favorable to obtain employee support is: Participative budgeting.

What is the basic rule used in budgeting? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

Which is better top-down or bottom-up investing? ›

Top-down investing involves looking at big picture economic factors to make investment decisions, while bottom-up investing looks at company-specific fundamentals like financials, supply and demand, and the kinds of goods and services offered by a company.

Which is better top-down or bottom-up parsing? ›

Bottom-up parsers are more powerful than simple top-down parsers and can handle a wider range of grammars, including those with left recursion. However, not all bottom-up parsers can handle all grammars. For instance, LR parsers, a type of bottom-up parser, can parse a wide range of grammars but still have limitations.

Should I use top-down or bottom-up market size? ›

There are top-down and bottom-up approaches to estimating market size. The bottom-up approach is more convincing because its uses assumptions that are substantiated through other aspects of your pitch, such as customer definition, revenue model, and GTM.

What are the advantages of top-down approach? ›

Simplified Decision Making: The top-down approach simplifies decision-making processes by focusing on the big picture and main priorities. It helps filter out less relevant issues and concentrate resources on what truly matters, improving efficiency and effectiveness.

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