Top-Down Versus Bottom-Up Budgeting

Budget season doesn’t have to be a burden. If you choose the budgeting method that makes sense for your company and its culture, ensure data analysis is central, and leverage technology to remain focused but flexible during the process, it can be easier than you expect. One of the first questions you’ll need to ask yourself to make this possible is: should you choose top-down vs bottom-up budgeting?

Top-Down Budgeting

Top-down budgeting is exactly what it sounds like; it’s budgeting that starts from the top of an organization, and is passed downwards. The upper management, executive or leadership team of a company will be in control of the process, and create a budget which they pass on to department heads.

Stage 1

The initial process will typically involve an analysis of past results, spend, headcount, churn, etc. This information will be used in drawing up the company goals for the year, which often involves some aspect of revenue planning as its base. A new target budget will be created based on these factors, with the intent of enabling the company to achieve its stated goals.

Stage 2

Finance teams will frequently be responsible for taking the high level budget evolved by the senior management and dividing it up in terms of what is relevant for different departments. They may have some high level guidance from management about this, and almost always use the numbers from the past year (or years) as a guide. Ideally, it should be affected by strategic initiatives planned for the year that would affect the amount different departments require.

Stage 3

Department heads receive their proposed budget for the year ahead, and go through their own internal process, often involving team leads, to determine how their department proposes to spend the allocated budget to achieve the goals or targets they’ve received. It’s common for there to be official or unofficial feedback from individual contributors included in this process, to try to ensure the plan matches the daily known reality as closely as possible.

Stage 4

Departmental budgets are submitted to the finance department, which then is responsible for ensuring that each department’s proposal matches what they were allocated, that the mosaic created by putting all the budgets together has internal coherence and also reflects the priorities and initial budget from management, and so on. Signing off on the final version sometimes takes a certain amount of going back and forth between different departments for clarification, negotiation and explanation.

Bottom-Up Budgeting

Bottom-up budgeting is what it sounds like it should be, too. It begins with the contributors at the lower levels of the organization, and is handed upwards. Individual departments and sometimes even teams are in control of defining their targets and key projects and priorities for the year, and build budgets around those which they submit for approval.

Stage 1

Each department is responsible for determining their goals and strategies for the year, and then working out what they would need in order to achieve this. Naturally this will vary considerably for each department. Marketing and Customer Success have very different needs and key metrics, for example.

Stage 2

The teams or departments have to break down what they will need, including a fairly granular level of detail such as required headcount (taking into account any changes occurring or likely to occur in the department during the year), different possible scenarios that may need hedging against, any events or educational initiatives, any already allocated budget, etc.

Stage 3

The proposed budgets are sent to the finance team, which is responsible for putting all of the departmental pieces together to create a full company budget. Reaching this stage may require a process of clarification, negotiation and explanation, as with top-down budgeting.

Stage 4

Finance reviews the proposed company budget with the management, executive or leadership team, to get final approval.

Main Difference: Top-Down vs Bottom-Up Budgeting

In companies, it’s common to hear discussion of top-down vs. bottom-up budgeting, implying that these are very different and even opposing and mutually exclusive options. There is certainly some truth to this; as outlined above, the processes are very different and in a sense almost the opposite way around from each other.

The key difference, of course, is that the direction and control of the process in top-down budgeting belongs to management, whereas with bottom-down budgeting it belongs to employees.

The choice of top-down versus bottom-up budgeting comes with trade-offs. Each has its pros and cons.

Some pros of top-down budgeting:

• Management have high level insight into a wide range of data from across departments and also from the wider industry.

• Management can ensure that key company goals and priorities are central to the budgeting process.

• The process is relatively streamlined, with revision processes more limited.

Some cons of top-down budgeting:

• Management may not have sufficient insight into small but crucial details that will impact efficiency or resilience in the year ahead, making expectations unrealistic and leading to significant budget versus actual variance.

• Employees may feel ignored and disincentivized.

• Often the budget is passed down, but the reasons behind it are not, which can lead to a focus on KPIs that does not always best serve the real goals of the organization.

Some pros of bottom-up budgeting:

• Employees feel engaged and motivated, and incentivized to reach goals during the year.

• The reality of day-to-day workload and limitations are taken into account, making expectations more realistic.

• Employees are encouraged to be creative and focused about their plans for the year, and need to be able to defend their asks.

Some cons of bottom-up budgeting:

• The process can be challenging and time-consuming given that most departments are not expert in financial processes and planning.

• The initial process typically happens within each department individually, which can lead to lack of overall alignment and the need to rebalance significantly to accommodate other departments’ needs.

• Departmental heads may not have access to enough data about their company, both real time and historical, to inform properly data-driven decisions.

Is it Really Top-Down Vs Bottom-Up Budgeting?

There is certainly a difference between these two approaches. On the other hand, there are also similarities, including the need for clarity around goals, the importance of grounding budgets in historical data, and the necessity of ensuring that departments and management are aligned by the end of the process, which is usually led by the finance team.

Some companies find that incorporating an element of continuous planning into their routines can result in some of the advantages of both top-down and bottom-up budgeting. It takes some of the pressure off of budgeting more generally as well, and helps ground it in a more realistic understanding of both the wider company and what’s going on within individual teams. If management and departments are empowered to be more agile, then the accuracy of the forecasts is less vital.

Using a financial planning and analysis platform such as Firmbase to centralize data from across the company and make analyzing and understanding it intuitive even for non-finance professionals can streamline the budgeting process for everyone, by making it far easier for all involved to ground it in data.

Building in factors like continuous planning, agility (even for controversial factors such as cost cutting) and access to data into the processes connected to budgeting can help bridge the gap between top-down and bottom-up budgeting, enabling companies to get some of the advantages of both, with the disadvantages of neither.

Choosing: Top-Down Vs Bottom-Up Budgeting

Ultimately, every company needs to decide the budgeting approach that is best for them. The precise balance between responsibilities, control, and direction that is right varies depending on numerous factors including company culture, global/geographical spread, company priorities, industry, and more.

What is important for every company to bear in mind is that there’s more flexibility possible than is often realized. You don’t have to be all-in on either a top-down or bottom-up approach.

Moreover, the more you empower every department in a company with the access to actionable information that they need to make data-driven decisions, the more likely you are to come out of your budget season with a budget that’s comprehensive, clear, and realistic.

Create budgets, run forecasts and analyze important financial insights with Firmbase. Book a demo to learn more today.