The Advantages of Bottom-Up Budgeting

by Natasha Gilani ; Updated September 26, 2017

Budgeting is a formal process in which a company’s expenses and revenues are planned for the future. Top down and bottom up are two most common budgeting techniques. In the top-down approach, upper management prepares budgets with no input from employees or lower-level managers. In the bottom-up budgeting approach, managers and employees at the department level prepare budgets for their individual departments. A final, organizational budget is prepared by consolidating all individual, department budgets.

Decentralized and Participative

Bottom-up budgeting is a participative approach to budget preparation that encourages input from organization-wide functional and divisional managers and employees. It utilizes their intimate operational knowledge to formulate plans. The authors of the book “Interpreting Company Reports for Dummies” state that bottom-up budgeting works better than the top-down approach because employees and managers take the budget preparation process seriously and are more likely to adhere to it once it is approved and implemented.

Greater Employee Motivation

The decentralized and participative nature of bottom-up budgeting leads to more motivated and involved employees. Employee motivation is directly related to higher morale, job performance, unit-level ownership, commitment and satisfaction.

Suits Large Organizations

Bottom-up budgeting fits well in large, diverse and decentralized organizations where lower-level managers and their associates are better aware of customer behavior, preferences, inputs, outputs and processes than top management. This budgeting method is more common in large corporations than the top-down approach, according to the authors of “Interpreting Company Reports for Dummies.”

Accurate

Nils Rasmussen, in his book “Process Improvement for Effective Budgeting and Financial Reporting,” states that bottom-up budgets are accurate because they are prepared by employees and managers who are closest to the sources of revenue and have comprehensive expertise and knowledge that upper management lacks. Budgets are accurate for each individual department and tasks. Component costs, resource predictions and product and sales forecasts are precise. All individual department budgets are of high quality.

Better Coordination and Communication

The authors of the book “Cost and Value Management in Projects” state that bottom-up budgeting facilitates coordination and improved communication between functional department managers and upper management. Open lines of communication between top mangers and functional managers exist, allowing top managers to communicate overall budget expectations and functional managers to report back any issues or problems. Bottom-up budgeting also encourages coordination and communication among employees and managers in different organizational departments. Employees and lower-level managers provide important feedback and information to functional managers about resources they need and challenges they face in their specialized areas.

References

  • "Interpreting Company Reports for Dummies"; Ken Langdon and Alan Bonham; 2008
  • "Process Improvement for Effective Budgeting and Financial Reporting"; Nils Rasmussen; 2003
  • "Cost and Value Management in Projects"; Ray R. Venkataraman and Jeffrey K. Pinto; 2008
  • "Handbook of Cost Management"; Roman L. Weil and Michael Maher; 2005

About the Author

Natasha Gilani has been a writer since 2004, with work appearing in various online publications. She is also a member of the Canadian Writers Association. Gilani holds a Master of Business Administration in finance and an honors Bachelor of Science in information technology from the University of Peshawar, Pakistan.