Bottom-up budgeting is a type of financial budgeting in which a company lets individual departments set their own budget estimates. The top management then reviews the estimates made by every department and after being agreed upon this, the high-level budget of the entire organization is formed by adding up the individual department estimates.
This budgeting method, which is also called participative budgeting, involves everyone in the department in the decision-making process that starts at the bottom level and goes up to the top level of the organizational hierarchy to finalize the budget for the entire organization.
What is Bottom-Up Budgeting?
Definition – Bottom-up budgeting is defined as a budgeting process that starts with the bottom-level department’s budget and moves upwards towards the top-most level of the organization to make the final budget of the entire company.
In the bottom-up approach, the total budget is decided as per the cost projections, expenditures, employee salaries or employee wages, administrative costs, etc of every department for the next financial period. All in all, bottom-up budgeting implies that an organization’s budgeting is done from the bottom up.
The process starts at the bottom and then gradually moves up the organizational levels. Though the budgets for the specific department are organized and presented by department managers, they will be implemented only after approval from top management. As this approach considers the employee needs and the company policies, the company can grow further.
All the departments are to work together in this method. Thus, securing the smooth operation of the bottom-up approach is essential. Understanding the vision and mission of the organization by all the employees is the key.
Bottom-Up Corporate Budgeting Process
The bottom-up method guarantees the allocation of sufficient money to every department.
Employees can focus on what is essential to them when budgeting is done from the bottom up. It also helps departments plan for their projects for the next financial year.
1. Determine the company’s different departments
The Bottom-up approach begins from the lower levels of a company’s hierarchy. The primary step is to categorize the company into departments. Identification of each department makes it easier to obtain budget estimates department-wise.
Employees of each department can come up with a list of projects for the upcoming year. Then it is simple for the department head to compile a cost checklist for each project. The departments can also include their administration costs in the checklist.
At times, the budget estimate of a department could be huge, forming a significant part of the company’s budget. That department can be divided into sub-divisions for a smooth estimation process.
2. Encourage each department to make an expenditure list
With the prepared list of projects and the cost estimates, the department managers can make a cost projection. All the costs of the department are summed up and submitted as the department’s cost projection.
Department managers are held responsible by the finance department to include feasible and necessary expenses. This way, the budget estimate is explicit, and budget spending is meticulous.
3. Add up the costs for each department
The overall budget of the company is obtained by adding up the budget estimates of all the departments. Department heads are given the role to put forward the budget of their department.
The overall budget is not the final estimate for the company. The top management analyzes all the forecasts of departments before finalizing the company budget.
4. Examine the budgets of each department
Though it is necessary to fulfill the requirements of each department, the senior management should also keep in mind the yearly budget allocation. The budget estimate should comply with the goals and objectives of the company.
The senior management reviews the budget estimate of each department. It addresses the issues of very low or higher budget estimates from the departments. Any unsatisfactory estimates are discussed with the respective department heads to make necessary changes.
5. Finalize budget estimate
Once the top management is content with the budget estimate, it recommends it to the finance department. Profits and Losses of the company are analyzed for the long-term.
The finance department approves the budget estimate and sets the overall company budget. It then distributes the funds among different departments.
Top-Down Budgeting Process vs Bottom-Up Budgeting Process
When selecting whether to use a top-down or bottom-up budgeting method, companies must grasp the differences between the two and how they fit with each other. These are elements of a larger planning process known as top-down and bottom-up planning.
Choosing a budgeting technique based on theoretical outcomes is common, but it may not give the optimum results when used in practice. Bottom-up budgeting is sometimes referred to as a more advanced version of top-down budgeting. This is not the case, and the two are two distinct budgeting disciplines.
Departments must create budgets within the position forth by senior leadership in a top-down budget. Departments construct their budget estimates and send them to senior leadership in a bottom-up budget.
The top-down approach of budgeting is normally quicker. Still, it may cause departments to struggle to stay within their budgeted amounts because management may not be aware of all connected expenditures. Top-down budgeting also has fewer morale-related benefits.
These two primary ways are the most extensively used budgeting methods. On the one hand, a top-down budget saves time, but it compromises a thorough understanding of each department’s requirements. As a result, some departments may be unable to function effectively within limits imposed by upper management.
A bottom-up budget, on the other hand, encourages employees to take ownership of the process and exploits their expertise in the departments they manage. However, the output of the departments may not always line with the organization’s overall goals.
Advantages of Bottom-Up Budgeting
Bottom-up budgeting typically has the advantage of being quite accurate because each department of an organization is aware of its expenses and resources.
Summing up the budget estimates from each department could result in accurate budgets for the company in total.
Employees who are responsible for designing budgets typically work harder than others to meet company objectives. Since they are given a financial responsibility, they gain a sense of ownership.
This improves the morality and trustworthiness of the employees. Eventually, they tend to stick with the company for a long time.
3. Departmental needs
Top Management might not have detailed insights on every program and cannot decide where to allocate resources. The bottom-up approach helps to align with department needs to achieve their objectives.
Since the employees from each department prepare the budget estimates, the requirements are quite explicit in the estimate report.
The department costs and resources are presented in the clearest way possible. Employees from each department are involved in the budget estimation.
The allocation of funds and the expenses made by the department are known to every employee of the department. The transparency helps to gain the confidence of employees with the company.
Disadvantages of Bottom-Up Budgets
1. Lack of Coordination
There is a lack of coordination between departments, making their budgets without thinking about the other departments. This may also lead to the overlapping of budget estimates.
2. Deviation from Organization Objective
A budget created by an employee with the least experience might deviate from the organization’s objective. And will not bring any fortune to the company.
3. Over Budgeting
There is a high possibility that if one department exceeds the budget. It could affect the other department to add extra funds. Every department must be given equal opportunities for growth in the company.
4. Long Duration
Integration of all sets of lesser budgets to form an integrated budget for the whole company generally takes longer. Thorough analysis and implementation of the budget estimate is a time-consuming process.
Implementation Tips for Bottom-Up Method
Following are some suggestions for implementing Bottom-up budgeting in your business. Try these tips before opting for the budget estimate obtained from this method. It could turn out as a remarkable strategy for your organization.
1. Have Clear Objectives
Defining goals helps to set limits for any process. The same is the case with Bottom-up budgeting. The target costs and expenses from each department manager should be reasonable. Though this strategy is all about departmental needs, you should also consider the company’s financial restrictions.
2. Maintain a Structural Organization
The functions and requirements differ for different departments of a company. The respective budget estimates are prepared following the features of the individual department.
Similarly, factors to be considered for budget estimation of one department should not overlap with any other department. This would result in Budget duplication or missing out on any important detail.
3. Pay attention to details
The department heads are responsible for being thorough with all the funds and expenses of the department. It is their job to maintain a budget list with projected costs for the financial year.
Though time-consuming, this is an effective way not to overlook any expenditures made by the department. This increases the responsibility as well as the morality of the employees.
The success of the business lies with the long-term vision and mission of the business. Coming up with a budget estimate does not guarantee the growth of the business. The budget estimates should align and work along with the objects of the company.
Even though the bottom-up approach fulfills the needs of employees, it should also bring profit for the organization. Since overbudgeting can happen easily, be thorough with the budget list from each department.
Employees should comply with the deadline for budgeting. Remind staff to base their estimations on their best guesses and not to add extra dollars for padding. Make sure resources are allocated wisely and in a way that ensures everyone has what they need to achieve your overall business plans and objectives.