Types of Budgets

Types of Budgets

• Top-down budgeting is a budgeting method in which senior management develops a high-level budget for the company.
• Once the top-level numbers are created, amounts are allocated to individual functions or departments that must create a detailed budget with their allocation.
• This budget is imposed on the lower levels of the company and can therefore be less motivating.

• Time savings: Since only senior management is involved in the budgeting process, lower management can keep the business running without making time for the (often extensive) budgeting process.
• Highly strategic: Senior management has access to the entire company's finances. They can use that data to make highly strategic monetary decisions that departments without the big picture might not see.
• Unified direction: Since the budget comes from a unified source, it accomplishes an objective.
• Guaranteed executive buy-in: Since executives are the ones who agree on the budget, there's no need to worry about whether upper management will have issues with the budget.
• Easier to manage: Since the budget comes from upper management, it's easier to manage: upper management can make changes without needing outside buy-in or approval.

• Lack of on-ground knowledge: The employees doing the business's day-to-day tasks know what will make the biggest impact for them. Senior management might not always know or understand that.
• Communication Mishaps: The above problem results from poor communication, which is sometimes unavoidable, (especially during the busy budgeting season). Regardless, communication mistakes can lead to teams not getting the money they need to make strategic changes.
• Lack of employee and lower/middle-management buy-in: If employees aren't actively involved in the budgeting process, they might feel like their input isn't valuable; this can lead to lower engagement and frustration on the job, neither of which is the intent.

• Bottom up budgeting is a type of budgeting that attempts to determine the underlying costs for each individual department or segment of an organization and then total up each department.
• This type of budgeting works in contrast to top down budgeting.
• Since this form of budgeting is participative (every level makes their own budget) it is more motivating for lower level managers and employees.

• Employee enrollment in the budget: Since employees are so involved in the budgeting process, companies that use bottom-up budgeting see more employee buy-in into the end product.
• Empowers employee ownership and stewardship of the budget: Employees feeling more ownership of the end product means more conversations about how to use the funds in the budget best.
• More communication: Since bottom-up budgeting is an iterative process involving employees and senior management, it requires more conversations between all parties.
• More accurate budgeting: Because employees and the ones who know what individual items cost, bottom-up budgets are typically more accurate.

• Higher spending, probably: When departments can ask for what they want, the Office of the CFO will likely end up with an asking total higher than what they're willing to give. After various compromises, the spending will probably be more than the Office of the CFO initially set out to spend.
• More time intensive: Because of all the communication and the various inputs, employees and senior management will need to spend more time on the budgeting process as a whole.
• Potential mismatch between departmental vs. organizational objectives: Because bottom-up budgeting is decentralized, it's possible to lose sight of organizational objectives if departmental asks don't lead to them.
• Can create a "spend it or lose it" mentality: If departments don't use all the budget they asked for, that can signal to upper management that they'll repeat that next year. This means departments might waste any excess funds in their budget just to hit their number.