Top-down Budgeting is a budgeting method where senior management agree on a high-level budget for the company.
This budget is then apportioned or allocated into individual departments or cost centres who then generate their own detailed budgets from these allocated values.
Senior management can evaluate a company’s overall financial needs against projected revenues for the year, they get a clear picture of how much money it can allocate to different areas. Decisions are made about where finances will have the most positive impact and staff are given directives on what they have to work with. This approach allows senior managers to maintain complete financial control over a budget.
Accountability of staff
When staff are given a certain budget to work with they must make prudent financial decisions about how the money will be used. This may result in greater financial accountability and more efficiencies for products, services and consulting help.
Top-down budgeting is a significantly more efficient process than bottom-up budgeting. Key decision makers take high-level decisions which are less time intensive than taking input from multiple sources.
Creating a budget without the input of department heads can result in under budgeting and over budgeting of a department. Theoretically, department heads have a better understanding of the needs of their departments than upper management.
Potential for underperformance
If a department feels it is being underfunded then it may underperform. Budget holders may use all their allocation to avoid the risk of losing budget in the following year or may justify underperformance on a lack of financial resources.
Managers and employees may be resentful that their input is not valued in the budget process. Conflict over the budget can cause tension and performance issues.
The second part of our Top Down Budgeting analysis will investigate how we can take advantage of IBM Planning Analytics to perform a top down budget utilising Microsoft Excel as the front end to our application.