What is the difference between a top-down and bottom-up budget?

O or?amento, conhecido como TOP-Down. Esse or?amento é definido pelo nível mais alto da organiza??o, sócios, investidores ou Diretores. Ele é menos colaborativo, em geral aplicado em empresas de controlador majoritário e também empresas de menor porte. A vantagem é a agilidade do processo or?amentário com menos interlocutores e maior alinhamento com objetivos estratégicos definidos pelos controladores TOP Management.

A top-down budgeting is a goal-driven method in which executives are given the overall budgetary goals for the organization. This approach gives ownership of the budget to the executives, who are responsible for allocating resources to meet the strategic goals of the company. These targets are then passed down to lower levels of the organization, where managers and employees develope detailed budget plans keeping aligned with the overall budgets. One of the key advantages of a top-down budgeting is its flexibility. It can be adjusted and revised as needed to respond to changing market conditions, customer needs, and other factors. This flexibility allows the company to be more agile and responsive to changes in the business environment.

In a top-down budgeting approach, the budget is created based on high-level targets and directives set by senior management or executives. The budgeting process starts with overall revenue and expense targets, which are then allocated to various departments or cost centers. It is a more centralized and hierarchical approach to budgeting. Often used in organizations where decision-making authority is concentrated at the top levels.

A top-down budgeting approach starts at the organizational level, where senior management sets the overall budget based on strategic goals, revenue targets, and cost constraints. Then, this budget is allocated down to lower levels of the organization. In contrast, bottom-up budgeting begins with individual departments or units estimating their budgetary needs based on their specific operational requirements. These estimates are then aggregated to form the total budget for the organization. In summary, the main difference lies in the direction of the budgeting process: top-down starts from the top of the organization and moves down, while bottom-up starts from the bottom and moves up.

Senior management sets overall budget goals and targets Allocated to lower-level departments and units Advantages: >> Aligns with strategic vision >> Faster and easier to implement Disadvantages: >> May not reflect realistic needs >> May reduce the autonomy and involvement of employees

O or?amento conhecido como bottom-up. Ele é mais colaborativo, envolve os departamentos que "solicitam" verbas para os projetos e despesas planejadas por eles para seus departamentos. A desvantagem é que requer um processo mais longo de revis?es para ajustar e alinhar aos objetivos estratégicos, reuni?es para definir prioridades e negociar recursos com Gerentes, Diretores e Controladores. Em geral, ele tem mais precis?o porque os responsáveis pelos departamentos tem maior capacidade de definir as previs?es/proje??es de gastos das atividades sob sua responsabilidade.

A bottom-up budgeting approach involves gathering input and budget proposals from individual departments, teams, or employees at lower levels of the organization. These proposals are then aggregated to create the overall budget.

Lower-level departments prepare budget proposals based on expected revenues and expenses Submitted to senior management for approval and consolidation Advantages: >> Encourages participation and ownership >> More accurate and flexible Disadvantages: >> May take more time and resources >> May not align with the strategic direction

A bottom-up budgeting is a more detailed and realistic budgeting method that starts at the operational level and works its way up to the overall budget. This approach involves collecting data on actual expenses and revenues for each team, equipment, or project, and then using that data to estimate future expenses. One of the key advantages of a bottom-up approach is that it is easier for employees who are working hands-on to understand the budget. It is more likely to be realistic and accurate, reducing the risk of omissions or errors compare to the top-down method. It also allows for a more detailed analysis of budget satisfaction, as managers can compare actual expenses to budgeted amounts for each item.

In contrast to a top-down budget, a bottom-up budget empowers individual departments to build their spending plans from the ground up. Department managers, who are closest to day-to-day operations, estimate their resource needs based on past data and upcoming projects. This approach fosters a sense of ownership among employees and leads to more accurate budgets that reflect departmental realities. However, it can be time-consuming to gather input from everyone and requires strong leadership to ensure departmental requests align with the company's overall goals.

A Top-down budget refers to the budget set by senior management and cascaded down to different units of the organization. A Bottom-up budget refers to the budget set by different units individually and then aggregated to form the overall organization level budget. Both the approaches present their own unique set of strengths and challenges. While Top-down budget would be quicker to make and closely aligned to organization's strategic goals and objectives, Bottom-up budget presents a more nuanced approach, provides detailed insights and encourages participation of all the units in the planning process. A cookie-cutter approach may not help and it is important to leverage both the methods to ensure a successful budgeting exercise.

Top-down: Efficient, aligns with strategic goals Bottom-up: Detailed insights, employee ownership, flexible Key is to balance efficiency and effectiveness, control and empowerment, consistency and adaptability

Top-Down Budgeting: Begins with senior management setting the overall budget. Efficient and aligns with strategic goals. Provides centralized control but may lack employee buy-in and flexibility. Bottom-Up Budgeting: Starts with individual departments estimating their budgetary needs. Offers detailed insights, employee ownership, and flexibility. Time-consuming and may deviate from strategic goals without strong central guidance. In summary, top-down is efficient but may lack employee engagement, while bottom-up provides detailed insights but can be time-consuming and less aligned with strategic goals without proper oversight.

Top-Down - Pros: Goal-oriented, quick decision-making, easy to align with overall strategic goals. - Cons: May not provide clear understanding of budgetary priorities for lower-level managers and employees, may not take into account specific needs and perspectives of employees. Bottom-Up - Pros: Realistic and detailed, easy for employees to understand, provides a clear picture of financial situation, allows for detailed budget satisfaction analysis. - Cons: Time-consuming, may not align with overall strategic goals, challenges in reconciling individual budget plans with overall budget.

One of the best practices in a budgeting exercise, is the combined adoption of both the budgeting approaches- Top-down and Bottom-up. (Please refer my earlier contribution to this topic). The Top-down approach helps the leadership team to ensure strategic alignment of the budgeting exercise to the organizational goals and objectives. It also helps the teams across the hierarchy to understand the management expectations. Bottom-up approach helps provide a reality-check to the leadership teams and flags off major gaps between strategic objectives and the means to achieve them (operational/financial/talent etc.). A combination of both of these approaches, helps in making the budgeting exercise more inclusive, balanced and achievable.

The best practice is to leverage both. Start with a top-down framework, then let departments build detailed plans within it. Foster communication to reconcile departmental needs with company priorities, creating a realistic and strategic financial plan. Make sure you are using modern technology to automate processes and provide access to data driven analysis and insights throughout the process.

In theory, top-down & bottoms up present different advantages and the balance of both methodologies would lead to the most “accurate” budget/forecast. In practice, top and bottom are not equally weighted and the mandate tends to reside with those among the top. Additionally accuracy may not be the goal and often gives way to optics and narrative. Seasoned operators will anticipate these gaps and manage expectations when management comes in with top down edits.

Here are the five purposes of budgeting. Planning: Budgets help in setting financial goals and mapping out strategies to achieve them effectively. Resource Allocation: They ensure that financial resources are distributed efficiently to support essential activities and initiatives. Performance Evaluation: Budgets provide benchmarks for assessing actual financial performance against planned targets, enabling informed decision-making. Control: Budgets serve as a tool for monitoring and controlling expenses, ensuring that spending stays within predefined limits. Communication: They facilitate communication and coordination among stakeholders by conveying financial priorities, constraints, and expectations clearly.

Indeed, the choice between a top-down and bottom-up budgeting approach depends on factors such as organizational structure, culture, decision-making processes, and the level of detail and involvement desired in the budgeting process. Some organizations may use a combination of both approaches to leverage the strengths of each method.