Bottom up budgeting
| Bottom up budgeting |
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| See also |
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)[1]. 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[2][3]:
- Firstly, forecast is prepared on products within categories,
- Then, sales in the whole company is checked,
- The last step is market share view.
Advantages and disadvantages
Bottom up budgeting has below advantages and disadvantages[4][5]:
- 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[6]:
- 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?
Author: Kinga Kutek
Footnotes
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
