Bottom up budgeting

Bottom up budgeting (BUB) is one of the approaches to budgeting. Information that will be included in the master budget is coming from operational managers to senior managers. The opposite of bottom up budgeting is top down budgeting (TDB). This approach has a start point (the bottom) in each department within the company. Each department is following its own objectives and is preparing separate budget which is later on combined into master budget. For example, regarding sales or pricing, the bottom up budgeting will start from analyzing item by item and will follow these steps:

1. Firstly, forecast is prepared on products within categories,
2. Then, sales in the whole company is checked,
3. The last step is market share view.

Advantages and disadvantages

Bottom up budgeting has below advantages and disadvantages:

• Advantage is that bottom up budgeting is quite detailed planning and has strong accuracy as based on knowledge from operational managers, but at the same time it is time consuming process as there are many inputs,
• Operational managers has control over budgeting as they are the closest people to the processes, but it consequently causes that senior management has limited influence,
• Operational managers are more engaged into achieving budget goals as they created them individually and they feel more responsible for costs and planning, however they might miss big picture which senior management has,
• Individual profitability of departments is assured, but the total performance of the company might failure,
• Strengthen the felling of unit-ownership in the company, however feeling responsibility for the whole company might decrease,
• Operational managers understand better reasons behind budget values, but there is risk of over-estimation of needed means as each operational manager is budgeting separately,
• Operational managers might allocate resources better as they are close to the goals and know limitations but master budget might be unbalanced (big difference between revenue and expenses).

Typical questions while preparing bottom up budgeting

Operational (department) managers might need to answer below questions in preparing budget:

• What is expected value of promotional expenses in specific period of time?
• What is expected value of travel expenses in specific period of time?
• How many people is the company will be needed and what do they require?
• What is the value of expected raises?
• How many supplies would be needed?
• How many materials should be bought?

Examples of Bottom up budgeting

• Bottom up budgeting is an approach used by organizations to develop their budget. It starts with the operational managers submitting their individual budget requests to the senior management team. The senior management team then evaluates each request and decides how to allocate funds to each department. This approach allows the operational managers to make their own budget requests based on their own knowledge of the operational needs.
• For example, a company may have a department that specializes in sales and marketing. The manager of that department may submit a budget request to the senior management team that includes funds for a new marketing campaign, additional staffing, or additional advertising. The senior management team would then evaluate the request and decide how much money to allocate to the department.
• In another example, a technology department may request funds for new computer hardware and software. The senior management team would then evaluate the request and decide how much money to allocate to the department for the purchase of the new technology.
• Finally, a company may have a research and development department that requires funds for new research projects. The manager of that department may submit a budget request that includes funds for new equipment, personnel, or other resources needed to conduct the research. The senior management team would then evaluate the request and decide how much money to allocate to the department for the research projects.

Other approaches related to Bottom up budgeting

In addition to Bottom up budgeting (BUB), there are other budgeting approaches which are frequently used. These include:

• Zero-based budgeting (ZBB): This approach requires each program or activity to be evaluated each year and to justify its budget allocation. It allows for the reallocation of resources to the most important activities and departments.
• Line item budgeting: This is an approach whereby each item on the budget is detailed separately. It provides a detailed view of the costs associated with each item, allowing for better tracking of the budget.
• Activity-based budgeting (ABB): This approach focuses on the activities that are necessary to achieve the budget objectives. It requires an understanding of the activities and their associated costs in order for the budget to be accurate.
• Rolling budgeting: This is an ongoing process that involves continuously updating a budget as new information becomes available. It allows for better decision-making in response to changes in the environment.

In summary, there are four other approaches to budgeting which are commonly used in addition to Bottom up budgeting (BUB): Zero-based budgeting (ZBB), Line item budgeting, Activity-based budgeting (ABB) and Rolling budgeting. Each approach has its own advantages and disadvantages, and an organization should select the right approach based on its needs and objectives.

Footnotes

Bottom up budgeting — recommended articles

Master budget — Resource plan — Budgetary control — Functional budget — Business concept — Cost tracking — Line item budget — Budget manual — Capital campaign

References

• Kim J. M., Park C.-K. (2006), Top-down Budgeting as a Tool for Central Resource Management in "OECD Journal on budgeting Volume 6 – No. 1", OECD
• Ljungman G. (2009), Top-Down Budgeting—An Instrument to Strengthen Budget Management , IMF Working Paper
• Manasan R. G. (2015), Bottom‐up Budgeting: Backgrounder, Prepared for the Senate Centennial Lecture Series, Philippine Institute for Development Studies
• McLean R. (2002), Financial Management in Health Care Organizations Delmar series in health services administration, Cengage Learning
• Murray A. P. (2016), The Complete Software Project Manager: Mastering Technology from Planning to Launch and Beyond Wiley CIO, John Wiley & Sons
• Shim J. K., Siegel J. G. (2005), Budgeting Basics and Beyond, John Wiley & Sons

Author: Kinga Kutek