Top down budgeting
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Top down budgeting is a planning system in which the budgeting process starts. In this system, the flow of information starts from the top of the organization and then goes to the lower levels of the organization. The information group contains templates to be filled out when translating budgets, guidelines that are used by managers and an outline of goals for a specific year. Top down budgeting and bottom up budgeting are two of the most common techniques of the budgeting process. In this budgeting process, everything starts with estimating the cost that is implemented in the organization for higher level tasks[1]. Top down budgeting can easily help understand boundaries and support of aggregate fiscal policy issues among decision makers. It makes it easier to set priorities in the government administration sector and of ensuring budget allocations compatible with those priorities[2].
Advantages of top down budgeting
There are a lot of different advantages and disadvantages of top down budgeting[3][4]:
Advantages:
- Cost control: At the beginning of budgeting, the money is allocated to tasks from the highest level and only later to tasks from the lower level. Acting in this order helps project managers and company managers to manage costs executives and thanks to it limited resources are better allocated.
- Development for management: Top down budgeting is a process that gives great opportunities to the management. It is the top managers who set the rules for developing the budget
- Internal approachStrengthens and promotes internal relocation and avoids preliminary budget proposals from the ministries.
Disadvantages:
- Need for expertise: Experience is obligatory. Members of the management team and managers must be properly trained and have specialized knowledge of top down budgeting. Without experience, they would not be able to allocate money properly. This type of budgeting requires a lot of knowledge from managers.
- Process difficulties: Many process problems may occur in this process, for example, the manager's failure to provide the proper level of funding for lower level tasks may result in the placement of an employee from this level of the organization is wrong because he will not have the means to perform his tasks.
Top down budgeting cases
There are two known and commonly used cases of top down budgeting[5]:
- It is used as an instrument to improve budget stability. This is a very good option because it is related to prejudice in making public decisions related to excessive deficits.
- It can improve budget stability by warning about the preferences of parliamentarians and ministers. Top down budgeting can help you understand borders and provide support of aggregate fiscal policy issues among decision makers.
Examples of Top down budgeting
- A budget is created by the CFO or the CEO of a company. This budget is then broken down into individual departments and departments are expected to adhere to the budget.
- A company sets a budget goal for the fiscal year and each department is expected to come up with a budget that is in line with the overarching goal.
- A manager sets a budget for the department and each individual is expected to stay within the budget in order to reach the goal.
Limitations of Top down budgeting
Top down budgeting is a very useful budgeting system, however it has its limitations. The following are the main limitations of top down budgeting:
- It is difficult to accurately estimate the cost of higher-level tasks. As the information starts from the top of the organization and then goes to the lower levels, it is difficult to accurately estimate the cost of tasks that are not known.
- It can be difficult to accurately assess the specific needs of the organization. This budgeting system relies on top-level decisions instead of on the actual needs of the organization.
- Top down budgeting does not take into account the input of lower-level managers and employees. This can lead to unrealistic budget targets and goals.
- It can be difficult to accurately adjust the budget when the organization's needs change. As the budget is set from the top, it can be difficult to make changes quickly and accurately.
- This budgeting system is not flexible. As the budget is set from the top, it can be difficult to make changes if the organization's needs change.
The following are other approaches related to Top down budgeting:
- Zero-based budgeting: This approach involves a comprehensive review of all expenses from the ground up. This helps to ensure that every expense is justified, and that every penny spent is spent in the most effective way.
- Activity-based budgeting: This approach focuses on determining the cost of activities required to complete tasks, rather than the cost of a particular service. This allows managers to see the actual cost of activities, which helps them make adjustments as needed.
- Rolling budget: This approach is a dynamic budget that involves setting a budget and then making adjustments over time as needed. This helps to ensure that the budget is reflective of current market conditions.
In conclusion, Top down budgeting is one of the most common approaches to budgeting, and is one of the most effective ways to ensure that resources are allocated in the most efficient way. Other approaches such as Zero-based budgeting, Activity-based budgeting, and Rolling budget can all help organizations better understand the cost of activities and ensure that resources are allocated in the most effective way.
References
- Bolojan F. (2011) Bottom-up/top-down budgeting Joint Logistics Command, Bucharest, Romania
- Emery R. (2007) OECD Journal on Budgeting Volume 7, No. 4, OECD, United States
- Ljungman G. (2009) Top-Down Budgeting: An Instrument to Strengthen Budget Management International Monetary Fund, USA
- Raudla R. (2014) Budgeting during austerity: Approaches, instruments and practices Budgetary Research Review Vol. 5 (1), Econstor, Tallinn University of Technology, Estonia
Footnotes
Author: Aleksandra Majcher
