Creating a corporate operating budget involves crafting a framework for the company’s expenditures. A budget usually covers everything from payroll and overhead operating expenses to individual department budgets. Top-down budgeting is the term used to describe a budget-drafting process in which upper management makes key decisions about company expenditures without input from middle managers or lower-level employees. The process has pros and cons.
Pro: Better Financial Control
When upper management evaluates a company's overall financial needs and compares the needs to projected revenues for a year, it gets a clear picture of how much money it can reasonably allocate to different areas. This is among the main advantages of the top down approach. Decisions are made about where finances will have the most positive impact and staffers are given directives on what they have to work with. This approach allows upper managers to maintain complete financial control over a budget.
Pro: Accountability of Staff
When a staff is given a certain budget to work with, it must make prudent financial decisions about how the money will be used. This may result in greater financial accountability and more comparison-shopping for products, services and consulting help.
Pro: Faster Budgeting Process
Top-down budgeting is much more time-efficient than bottom-up budgeting. When input is allowed from multiple sources, staff must dedicate time to identifying an entire’s year’s worth of anticipated expenditures and justify the need for specific budget requests. The top-down approach is less time-intensive, as it includes only the input of key decision-makers.
Con: Inaccurate Forecasting
Theoretically, department heads have a better understanding of the financial needs of their departments than upper management. Creating a budget without the input of key personnel from the rank and file can result in underfunding or overfunding of a department.
Con: Potential for Underperformance
If a department feels it is being underfunded, it may underperform in retaliation. It may use its exclusion from the budgeting process as a way to justify why goals or objectives are not met by indicating it did not have the financial resources to meet unfunded directives. Top-down budgeting may also spur a department to use all of its financial allocation whether it really needs to or not, so it can avoid the risk of getting less money the following year.
Con: Poor Employee Morale
With the top down budgeting process, managers and employees may be resentful that their input is not valued in the budgeting process. Directors and department heads who are at odds with upper management over financial issues can cause tension and performance issues in the workplace.