An Analysis of Top-Down and Bottom-Up Budgeting for Financial Planning

This report examines the contrasting approaches of top-down and bottom-up budgeting. It begins by defining each method: top-down budgeting, where senior management sets the budget and allocates funds, and bottom-up budgeting, where departmental managers create individual budgets. The report then details the advantages and disadvantages of each approach, including time-saving benefits and alignment with company strategy for top-down, and increased motivation and detailed planning for bottom-up. The report concludes with a personal choice based on a start-up scenario, advocating for top-down budgeting due to the company's size and lack of defined business units, emphasizing time efficiency. The report references key sources to support the analysis.

Difference between Top-Down and Bottom-Up Budgeting.
In top-down budgeting, the senior management is responsible for preparing the
overall budget of the entire organization. They then plan and allocate funds to the
departments, who are expected to develop their own departmental budgets within the
numbers allocated for them (Braun, 2019). On the other hand, bottom-up budgeting starts
with departmental or business unit managers who prepare individual budgets for each unit,
then send them up for approval by the senior management (Braun, 2019). Once approved,
revised, and modified, the final budget is sent back to the departments for implementation.
Bottom-up approach results to higher spending targets than the top-down approach
because departments are very specific about their operational needs (Johnson, 2019).
Advantages of Top-Down Budgeting
1. Saves time as departmental issues are not involved. The decisions are made centrally,
and implemented quickly within the departments.
2. Aligns departmental goals to the overall strategy of the firm because the senior
management gives the direction of the company by prioritizing projects that are of
greater benefit to the entire firm (Johnson, 2019).
Disadvantages of Top-Down Budgeting
1. The middle management and lower level management may be demotivated because
they are not involved in the overall budgeting for their departments, yet they run the
day-to-day operations.
2. If communication is not clear about project specifics, it could result to project failure
due to unspecific requirements and expectations (Braun, 2019).
Advantages of Bottom-Up Budgeting
a. The departments fully own their budget because they were involved in the process,
hence increased motivation and commitment.
b. There is increased understanding and communication about the projects and goals to
be achieved by each department (Braun, 2019).
c. Leads to more detailed project planning because every team member is involved. The
resulting schedules and costs are more accurate because of the collaborative process.
Disadvantages of Bottom-Up Budgeting
a. Takes more time for the senior management to prepare a budget for the whole
organization that has fairly reconciled the processes and needs of each department to
be aligned with the organization’s strategy (Johnson, 2019).

b. Departmental conflict may arise because middle level managers are more concerned
about their departmental projects rather than the organization’s overall success.
c. It has a risk to get out of control if there is no clearly defined scope and control
process.
Conclusion: My Personal Choice
I have worked in a start-up whose strategy was to introduce a new affordable health
insurance products to the market. If I had the chance, I would have chosen top-down
budgeting. This is because the company was small, without clearly defined business units.
Therefore, it would have been easier for the top-management to come up with the firm’s final
budget then communicate to the team members about the goals and strategy based on the that
budget. As a small company, it would have saved a lot of time.
References
Braun, G. (2019). Top Down or Bottom Up Corporate Budgeting – Which One is Best? |
True Sky. Retrieved from http://www.truesky.com/top-down-or-bottom-up-corporate-
budgeting-which-one-is-best/
Johnson, R. (2019). Bottom-Up/Top-Down Budgeting. Retrieved from
https://bizfluent.com/info-8763801-bottomuptopdown-budgeting.html