Top-Down v/s Bottoms Up Budgeting

Top Down or Imposed Budgets

In case of Top-down budgets, the top management takes all the decisions without any participation from departments or the middle management. This might leave employees feeling unheard and disengaged.

A top-down estimation will usually be performed in the following way:

Bottom's up Budget

In case of Bottom’s up or participative budgets. Here, managers and employees recommend their budget targets. Budget input starts from the operational level, moves up to the middle, and top-level management with full participation in decision-making.?

It goes from the specific to the general, from business units or departments first, and combining them to create a company-wide forecast.

So, the Bottom-up Sales forecast will be done in the following way:

Example: Top-down v/s Bottoms, Forecasting the revenues of a hotel:

Sometimes senior management can be unhappy with the preliminary sales forecast (Bottoms up), believing the company should aim higher. The senior management makes a top-down estimate while each division forecasts through the bottoms-up method.?

Usually, the two sides reach a compromise that’s between the two forecasts. The budgeting committee plays the role of intermediary between the two parties.

Top-down vs. Bottom-up : What's better?

If you like cars, then top-down budgeting is like looking at the car from outside. From the outside we look at exterior, mileage, speed etc . On the other hand Bottoms-up budgeting is like inspecting the various important parts of the car like chasis, engine, fuel pump etc.

Neither approach is right or wrong. Both are important steps of the budgeting process from both a high-level and individual deal / transaction / business unit / department level view.

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