What is a Top-down Budgeting and How can it Affect Various Businesses
What is top-down budgeting?
In the business world, finding the right budgeting strategy is the key to success. A top-down budget refers to a budgeting method in which senior management makes high-level decisions about the company. The company’s senior management makes this budget based on company objectives. To come to a final budget, the company’s senior management will consider the current market situation. They will also discuss the previous budget, how it worked, and if any changes are required according to the previous budget so they make a new budget. If no changes require so they can implement the same budget strategy for the upcoming year.
The management will also take tax, inflation, and economic-financial consideration as part of the recreation of the budget. When the budget has been made, financial allocations will be made to the relevant department, who make sure to form their budgets with the original budget in mind. The department manager may be able to influence the final budget before implementation.
How top-down budget works?
Top-down Budgeting is being with senior management meeting to discuss the company’s objectives, goals, and also long-term financial plans. They will also discuss what they want to see out of the company in the upcoming year, as well as achievability. They will take into consideration sales, profits, and losses. When working through these figures, they will come up with a better budget strategy more than previous budgeting. Once the management is done with their work on a new budget then the budget will be passed onto the finance department for allocation.
Once senior management has passed the budget onto the finance department, they will start making allocations to departments. The coming year’s allocation may be made according to the past year’s financials. Of one department only spend 15% of the overall expense, then the same depart may receive 15% of the total expenditure for the coming year. The allocations will change on the wishes of senior management. If the organization decides to change its business strategy, then budget allocation may decrease or increase.
Departmental Budget Management
When the allocations have been assigned to department managers then depart managers are creating their budget according to the company’s overall budget. The depart managers will try to reduce it further. Budget at the departmental level can include the purchasing of technology, equipment, and will include the staff’s salaries. They also include the marketing and promotional costs. Every month or after few months, each department will plan a meeting with the finance department and discuss their monthly expenditure. If any department is overspending then they will be questioned by the finance department.
Advantages of Top-down Budgeting
There are some advantages of a top-down budget. A Top-down Budgeting helps in the overall growth progress of your company, which benefits every single area of the company. Departments are aware of what are the expectations of them from senior management, it is a very quick and simple way of preparing a budget. This budgeting method has a relief edge for lower management (who are the busiest part of any company), they have no burden for creating a budget and they can easily focus on more important immediate areas of the company that they are supervising. Senior management creates a single budget, that’s why the lower management doesn’t have any to create their budget which may conflict with each other.
Disadvantages of Top-down Budget
Where you find advantages, you will also find disadvantages. Because lower management is not involved in this budget creation process. And here their influence is very little, they may not particularly be motivated to ensure the budget’s success. If the lower management is supposed to be a budget creator felt great passion to deliver their budget and prove themselves. In this process, the senior management is rarely involved in the company’s day-to-day operations. Because of that, they set targets that are simply unrealistic. It creates more stress for low-level management. Usually, a budget is created by the senior management, who are not involved in the company’s day-to-day operations, can be over or under-allocated.
Ultimately, top-down budgeting is more successful than the bottom-up budgeting method. No doubt it has its disadvantages, but there are more disadvantages founded in bottom-up budgeting. Because of that, there are also great benefits to having bottom-up budgeting. By having lower management’s interference in the budget, in some cases, the budget can be more realistic can take into consideration the company’s day-to-day operations. In top-down budgeting, lower management does not have a proper influence on budget creation. That’s why top-down budgeting can be very effective if employed properly.