A corporate budget creates a financial framework for a company to work within. A budget typically defines monthly expenditures, including operating overhead, inventory, payroll expenses and insurance. A budget also allocates set amounts of money to various departments in a company for discretionary use. The two types of budget approaches are top down, where management makes all decisions about how funds are allocated, and bottom up, where lower-level employees are consulted and have input in budgeting.
Bottom Up Budgeting Functions
A bottom up budget not only involves all departments in the budgeting process, but it encourages department managers to clearly identify and define anticipated projects and expenditures throughout a year. Managers are usually asked to outline specific cost projections for projects, which in turn, helps create a more accurate budget than the top down budgeting approach. It also helps an organization stay on track with projects and projections because much of the legwork is done when putting the budget together.
Corporate-wide Budgeting Involvement
Bottom up budgeting considers the needs of all departments and all employees in an organization. Rather than senior managers making decisions about the financial needs of individual divisions of a company, all employees are invited to submit proposals to the budget, outlining their specific financial needs. As budgets are often tied to sales projections, a bottom up budgeting approach allows all departments to openly discuss the validity of sales projections rather than be subject to strict mandates from above.
Benefits of Bottom Up Budgeting
Allowing individual departments in a company to have a say in how a budget is structured creates more autonomy among divisions and can even improve employee morale. When employees and department managers can make financial decisions on their own without going through continual purchase order requests, it can speed efficiency and create a more effective workplace environment.
Drawbacks of Bottom Up Budgeting
Bottom up budgeting takes a level of financial control away from upper management. The approach is typically more time consuming, and it may become more onerous to track the validity of each expenditure in various departments. Bottom up budgeting can sometimes lead to managers padding budgets to give them more financial leeway throughout the year. Additionally, if a department underestimates its budgeting needs, it can put a company in the red.
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