Question

Answer the following question in your own words. Your answer must have a 150 minimum word count:

• Describe the differences between top-down and bottom-up budgeting.

Answer 1

Top-down Budgeting

Top-down budgeting is a budgeting method in which senior management develops a high-level budget for the company. Once the top-level numbers are created, amounts are allocated to individual functions or departments that must create a detailed budget with their allocation.

Bottom-up budgeting

Bottom-up budgeting is a bit different than the traditional budgeting model with which you might be more familiar. Bottom-up budgeting, sometimes referred to as participative budgeting because of the participation required at all levels, starts with a list of things individual departments want or plan to do such as projects, assigns a cost to each project, and then totals up all the projects in each department to arrive at an overall budget number.

Difference Between Top-down Budgeting & Bottom-up budgeting

1. Top-down usually encompasses a vast universe of macro variables while bottom-up is more narrowly focused.

2. Top-down breaks the massive problems into smaller sub problems where as bottom-up approach solves the fundamental low-level problem and itegrates them in to a larger one.

3. Top-down analysis generally refers to using comprehensive factors as a basis for decision making. The top-down approach will seek to identify the big picture and all of its components. These components will usually be the driving force for the end goal.

4. Top-down investing strategies typically focus on exploiting opportunities that follow market cycles while bottom-up approaches are more fundamental in nature.

5. Typically, the bottom-up approach will result in higher spending targets compared to the top-down approach, and thus a reconciliation process will be required in order to produce an organization-wide budget in which all the parts add up correctly. Also, sometimes bottom-up budgeting can result in budgets which are not in-line with corporate objectives if managers focus too much on department, rather than organization, concerns.

6. The top-down approach goes from the general to the specific, and the bottom-up approach begins at the specific and moves to the general.

7. While top down and bottom up can be very distinctly different they are often each used in all types of financial approaches like checks and balances.

8. With top-down budgeting, only the executive team is involved and thus lower management does not have to take time to prepare the budget. Usually the outcomes of this bottom-up are increased ownership of the budget, more information since employees familiar with each department are creating the budget, and increased understanding, communication and commitment on behalf of managers because they are directly involved in the process.

9. Top-down investing strategies typically focus on profiting from opportunities that follow market cycles while bottom-up approaches are more fundamental in nature.

10. In corporate budgeting, a top-down approach involves the senior management team developing a high-level budget for the entire organization. Once these budgets are created, amounts are allocated to individual departments, and those departments must then take those numbers and build their own corresponding budgets within the confines of the executive-level-created budget and  With a bottom-up approach, the process starts in the individual departments where managers create a budget and then send it upwards for approval. That budget is either approved, revised or sent back for modifications, and a master budget is created from the various departmental creations.