Bottom-Up Budgeting – Definition, Advantages, Disadvantages and Tips

By | January 5, 2022

Bottom-up budgeting is a type of financial budgeting in which companies let each department set their own budget estimates . Top management then reviews the estimates made by each department and once agreed, a high-level budget for the entire organization is formed by adding up the estimates for each department.

This method of budgeting, which is also called participatory budgeting, involves everyone in the department in a decision-making process starting at the lower levels and working their way up the organizational hierarchy to finalize the budget for the entire organization.

What is Bottom-Up Budgeting?

Definition –  Bottom-up budgeting is defined as the budgeting process that starts with the lower-level departmental budgets and moves up towards the very top levels of the organization to create the company-wide final budget.

In the bottom-up approach, the total budget is decided according to the projected costs , expenses, employee salaries or employee wages, administrative costs, etc. of each department for the next financial period. Overall, bottom-up budgeting implies that organizational budgeting is done from the bottom up.

The process starts at the bottom and then gradually moves up to the organizational level. Although the budget for a particular department is set and presented by the department manager , it will be implemented only after approval from top management. Because this approach takes into account the needs of employees and company policies, the company can grow further.

All departments must cooperate in this method. Therefore, ensuring the smooth operation of the bottom-up approach is important. Understanding the vision and mission of the organization by all employees is the key.

Enterprise Budgeting Process from the Bottom-Up

The bottom-up method ensures that sufficient money is allocated to each department.

The lower management of each department creates its own budget according to the planned project, cost estimates for individual components, purchases of equipment, office supplies, and the previous year’s budget.

Employees can focus on what is important to them when budgeting is done from the bottom up or bottom-up. It also helps departments plan their projects for the next fiscal year.

1. Define the various departments of the company

The bottom-up approach starts from the lower levels of the company hierarchy. The main step is to categorize the company into departments. Identification of each department makes it easy to get budget estimates by department.

Employees of each department can list projects for the coming year. Then it is easy for department heads to compile a cost checklist for each project. Departments can also include their administrative costs on a checklist.

At times, a department’s estimated budget can be very large, forming an important part of the company’s budget. The department can be divided into sub-divisions for smooth estimation process.

2. Encourage each department to list expenses

With a list of projects and cost estimates prepared, departmental managers can create cost projections. All departmental costs are summed and submitted as projected departmental costs.

The department manager is responsible by the finance department to include appropriate and necessary costs. In this way, budget estimates are explicit, and budget expenditures are accurate.

3. Total costs for each department

The company’s overall budget is obtained by adding up the estimated budgets of all departments. The department head is given the role of submitting his department’s budget.

The overall budget is not the final estimate for the company. Top management analyzes all departmental estimates before finalizing the company budget.

4. Check each department’s budget

Although the needs of each department must be met, senior management must also pay attention to the annual budget allocation. Estimated budget must be in accordance with the goals and objectives of the company.

Senior management reviews each department’s budget estimates. It addresses the issue of underestimating or overestimating the department’s budget. Any unsatisfactory estimates are discussed with the respective department heads to make the necessary changes.

5. Complete the budget estimate

After top management was satisfied with the budget estimate, he recommended it to the finance department. The company’s profits and losses are analyzed for the long term.

The finance department approves budget estimates and establishes the company’s overall budget. Then distribute the funds among different departments.

Top-Down Budgeting Process vs Bottom-Up Budgeting Process

When choosing whether to use top-down or bottom-up budgeting methods, companies must understand the difference between the two and how they fit together. These are elements of the larger planning process known as top-down and bottom-up planning.

Choosing a budgeting technique based on theoretical results is common, but it may not give optimal results when used in practice. Bottom-up budgeting is sometimes referred to as a more advanced version of top-down budgeting. This is not the case, and the two are two different budgeting disciplines.

The department should budget in the position suggested by senior leadership in the top-down budget. Departments compile their budget estimates and send them to senior leadership in the budget from the bottom-up to the bottom.

The top-down budgeting approach is usually faster. However, it can cause the department to struggle to stay within budgeted amounts as management may not be aware of all the related expenses. Top-down budgeting also has fewer moral benefits.

These two main ways are the most widely used budgeting methods. On the one hand, a top-down budget saves time, but sacrifices a thorough understanding of the requirements of each department. As a result, some departments may not be able to function effectively within the limits set by top management.

A bottom-up budget, on the other hand, encourages employees to take ownership of the process and exploit their expertise in the departments they manage. However, departmental outputs may not always align with the overall goals of the organization.

Budgeting Advantages of Bottom-Up

1. Accuracy

Bottom-up budgeting usually has the advantage of being fairly accurate because every department of the organization knows its expenses and resources.

Summing up budget estimates for each department can produce an accurate budget for the company as a whole.

2. Motivation

Employees who are responsible for designing budgets usually work harder than others to meet company goals. Because they are given financial responsibility, they gain a sense of ownership.

It increases the morale and trust of the employees. Finally, they tend to stay with the company for a long time.

3. Departmental needs

Top Management may not have detailed insight into each program and be unable to decide where to allocate resources. The bottom-up approach helps align with departmental needs to achieve their goals.

Since employees from each department prepare budget estimates, the requirements are quite explicit in the forecast report.

4. Transparency

Department costs and resources are presented in the clearest way possible. Employees from each department are involved in budget estimation.

The allocation of funds and expenses made by the department is known by every employee of the department. Transparency helps to gain employee trust with the company.

Disadvantages of Bottom-Up Budget

1. Lack of Coordination

Lack of coordination between departments, making budgets without thinking about other departments. This can also lead to overlapping budget estimates.

2. Deviation from Organizational Goals

Budgets created by employees with the least experience may deviate from organizational goals. And will not bring luck to the company.

3. Over Budgeting

It is very likely if one of the departments exceeds the budget. That could influence other departments to add extra funds. Every department should be given equal opportunity for growth within the company.

4. Long Duration

The integration of all lower budget sets to form a unified budget for the entire company generally takes longer. Thorough analysis and implementation of budget estimates is a time-consuming process.

Bottom-Up Method Implementation Tips

Here are some suggestions for implementing bottom-up budgeting in your business. Try these tips before choosing a budget estimate derived from this method. This can be a wonderful strategy for your organization.

1. Have a Clear Goal

Defining goals helps to set boundaries for any process. Likewise with bottom-up budgeting. The target costs and expenses of each department manager must be reasonable. While this strategy is about departmental needs, you should also consider the company’s financial constraints.

2. Maintaining Structural Organization

Functions and requirements differ for different company departments. The respective budget estimates are prepared following the features of each department.

Similarly, the factors to be considered for budget estimates of one department should not overlap with those of another department. This will result in duplicating Budgets or missing any important details.

3. Pay attention to the details

The department head is responsible for being thorough with all departmental funds and expenses. It is their job to maintain a list of budgets with projected costs for the financial year.

While time-consuming, it is an effective way of not neglecting the expenses incurred by the department. This increases the responsibility and morality of employees.

Conclusion!

Business success lies in the long-term vision and mission of the business. Making budget estimates does not guarantee business growth. Budget estimates must be aligned and in accordance with the company’s objects.

Although the bottom-up approach meets the needs of employees, it must also bring benefits to the organization. Because overbudgeting can happen easily, research the budget list for each department.

Employees must adhere to budgeting deadlines. Remind staff to base their estimates on their best guess and not add extra dollars for padding. Make sure resources are allocated wisely and in a way that ensures everyone has what they need to achieve your overall business plans and goals.