Here’s the argument:
Many people believe that bottom-up budgeting leads to waste and misdirection. The advocates of top-down budgeting are strong in their belief that if you give each person or department no guidance, they will budget to their wants or specific needs, not to those that support a corporate goal.
Why some CEO’s argue to budget from the top.
So, they argue: Give your people a top-down generated target. Have them fit their plans into the target. This way the corporate financial and strategic goals come from the top, as they should, and all departments fit into those strategies with their contribution and their overhead.
The risks they see in allowing bottom-up budgeting.
Over many years, in in many companies, I’ve overseen budgeting both ways, and agree with the top-down advocates that bottom-up budgeting is often masked waste in the form of allowances for unknowns, extra padding for protection, and even higher budgeted expense numbers to make the managers look good at the end of year by under-spending, that are found deep within bottom-up budgets.
Flip the coin. Here’s the other side.
[Email readers, continue here…] On the other hand, often departments cannot fit their required costs into the structure required to meet a profit goal for the corporation, or just as important, corporate revenue goals. In both instances, top down or bottom up, negotiations between department and corporate managers require compromise. The difference is that in a top-down budget, the discussion almost always centers on compromises to meet the corporate goal, a much more important discussion than one centered around department goals.
When to use bottom-up?
Budgeting from the bottom up more often works in non-profit enterprises, where many departments are involved deeply into the detail of staffing and program delivery, and where the goal of the non-profit is service, not profit.
Either way, a budget is a necessary road map for a successful enterprise and should never be ignored or worked upon after the year is already underway.