How can you use a bottom-up approach to improve corporate accounting forecasts?

Strategy is top down, while execution emerges from bottom up Would like to share my insights on the Bottom up approach that Health care companies adapt during the Annual Operating plan (AOP) exercise to forecast a Revenue model as below (Volume * Price = Revenue) 1) No of Out-Patients (footfalls) 2) Realization from Out-Patients (Consultation, Lab, Radiology & Pharmacy) 3) No of In-Patient admissions and Price per patient (conversions from Out-patients or direct elective admissions) 4) In-Patients by Specialty (Ortho, neuro, Plastic etc.) 5) In-Patients by Doctors 6) By Service (Lab, Radiology, Pharmacy, Room Rentals, Operation Theatre, ICU etc.) The above streams gives us a good heads up to forecast Revenues. Regards Badri

In case of bottom-up or participative budgets. Managers and employees here enthusiastically propose their budget objectives. Budget input starts from the operational level, moves up to the middle, and top-level management with full participation in decision-making.

Bottom-up approach always begins with collection of individual granular data points be it for sales or for any cost item. All Business teams and function teams works out their individual Bottom-Up Plan (BUP) by product, by country or by sales channel etc as the case may be, which then gets consolidated at the group level.. Among others benefits, the detailed nature of BUP allows KPI monitoring at granular level that aids in performance evaluation..

Bottom up planning refers to the realistic numbers that can be achieved; after consideration of risks & opportunities for any KPI. Normally, the approach is to report forecast as well as bottom up plan for any reporting period. Organizations tend not to change forecast, but can report realistic numbers in bottom up planning. Example: In Mar (Q3), New Orders FC for (Q4) is 100 and in next round of FC in Apr, org repeats the same forecast (i.e.100);as they are confident that they will achieve it. But, when the team do in depth analysis (bottom up planning), they realise that they will not be able to acquire 3 orders due to some issues, but 2 more orders will be acquired that were not considered in forecast. Bottom up number comes out to 85.

Prepare OPEX and CAPEX manual explaining on how to complete information required for the budget. You can have forms to guide business unit heads in the budget completion.

It makes managers responsible for taking ownership of their targets. Which makes it a lot easier for senior management to drive performance management.

It promote team work in decision making process. It help employees collaboration. It help from promote innovation from the managers understanding the core processes of company.

While the purpose of the BUP is to have granular level of information and planning; managers need to understand the level of granularity that applies to their business and product. Breaking down objectives into smallest of the part can be challenging.. It can be fascinating to divide the objective into its smallest the part, but what sometimes people tend to overlook is the value that we derive out of it.. The breakdown should be to the level that is manageable, can be analysed and aids into business performance understanding.

Firstly, it allows for greater inclusivity and participation. By involving all individuals and stakeholders at different levels, it ensures that everyone's input and insights are valued. This can lead to more creative and innovative solutions, it promotes a sense of ownership and empowerment. When individuals have the opportunity to contribute their ideas and be involved in decision-making processes, they feel a stronger sense of commitment and responsibility towards the outcomes. This can result in higher levels of motivation and engagement. As ideas and feedback are gathered from various sources, there is a greater likelihood of identifying potential pitfalls or opportunities that may have been overlooked in a top-down approach.

When we use a bottom-up approach, it means everyone in different parts of the company shares what they know. This helps us really understand specific things better, like different markets. Plus, it gets everyone involved and excited about planning together!

1. Collecting detailed information from various departments for a bottoms-up budget can be time-consuming. It requires thorough input from each division, and coordinating this process may take a significant amount of time. 2. Managing a bottoms-up budget can be complex due to the multitude of details involved. It may be challenging to integrate and consolidate diverse inputs, and the complexity can make it harder to understand and communicate the budget effectively.

One challenge is that it can take longer to implement changes or see results because it involves incorporating ideas and feedback from various levels and perspectives within an organization or community. Additionally, it can be challenging to ensure that all stakeholders have a voice and feel included in the decision-making process. However, despite these challenges, a bottom-up approach can lead to increased buy-in, collaboration, and innovation, as it allows for a more diverse range of ideas and perspectives to be considered.

Use of a bottom up approach for forecasting are susceptible to risk of inconsistent assumptions, level of conservatism and judgements across different business units. This is in turn, could the forecasts based on bottom up approach less robust relative to a top down approach.

This is actually a well crafted & researched article. There are a few things I wish that it would have discussed further such as the top to bottom approach. The reality for multi-nationals is the head office usually (or always) calls the shots. Yes, they would confer with branch offices but in the end they would set the targets/KPIs based on the objectives for the year. There are times that the targets/KPIs are simply unattainable or unrealistic. Another issue would be quality of information. As they say garbage in garbage out, the best sources of information may not be available within the organization. Forecasts are only true for a given set of assumptions. Other factors that would dampen these assumptions must also be considered.

Here is an example: Say you are forecasting Room revenues of a hotel. You would look at * Number of rooms * Avg Occupancy rate * Number of rooms sold For all the hotels in the company. Lets assume you have 3 hotels in the chain. Hotel 1 Revenue from Rooms = Number of rooms X Average Occupancy x Avg. Revenue per room You would do this for all the hotels. Total Room Revenues = Hotel 1 + Hotel 2 + Hotel 3

We use the bottom up approach and it's effective but truly time consuming and takes a lot of work but it's the best approach to get a realistic forecast that can help plan future revenue and expense for a cost effective organisation.

Generally the business planning and forecasting are driven based on market expectation, macroeconomic factors and medium term strategy of the top management. Hence, you can never have a pure bottom up approach. Following a bottom up approach just adds credibility to the targets set by the top management.