The bottom-up budgeting approach
- Top-down budget brings out an overall corporate functional approach since the top management’s objective is the growth of the organization. Thus this approach allows allocation of resources by managers to departments with an aim to propelling growth by looking at the most sensitive departments. Secondly, the method saves time for the management at lower levels since lower managers present an already formulated budget to the upper management. Therefore the upper managers do not start from scratch. This not only saves time but also resources that managers would have used to draw the budget. Finally, this approach ensures that a budget is created at a time instead of each department creating its own and later consolidating, this makes the process less tedious as only one budget is crafted and adopted. Departments here are only allowed to make any suggestions depending on the set targets from the original budget.
The bottom-up budgeting approach has better accuracy due to the advantage of calculating estimates from the lowest points, and this helps increase the efficiency and transparency of the budget. All individuals in each department are involved, and hence the forecast presented will be as close as possible. It is from the sum of the estimates from all departments that gives the management the expectations of the year. Secondly, there is a lot of employee motivation with this approach since all employees are involved in budgeting and, therefore, are motivated to achieve the targets they set. There is ownership of the budgeting process by all employees.
The biggest task for the top management in the bottom-up budgeting approach is the approval of the budget estimates presented from the departments.
- Indirect costs in budgeting come in terms of facilities and administration and are hard to determine. They include; air conditioning costs, electricity, building maintenance, security, and costs of administration. It is usually very difficult to attribute each of these costs.
- The top-down budgeting process starts with top management meetings to make a decision on the sales targets, expenditures, and incomes in terms of profit. The finance department allocates these targets to the rest of the business departments for them to prepare their own budgets. It is after this that each department draws a detailed budget of how their targets will be met and at what cost. These budgets are then sent back to the finance department for approval if they rhyme with the overall objectives of the organization. Depending on the expectations and the financial position of the organization, the finance department may ask for some revisions. After all, details are finalized, the finance department puts the budget into operation, and monthly reports are generated to evaluate the performance against the budget estimates.
- Project budgeting refers to all the money that is allocated for a particular project to use. The project budget is usually estimated by the project manager or the project management team. The contents of this budget are the estimates of the total costs that are required to complete the project. On the other hand, category oriented budget is a budget designed such that it records, researches, and dose analysis for every activity that incur costs on behalf of the organization. Each undertaking that incurs costs in the organization is analyzed to create potential methods of bringing efficacy, and then the budget is drawn on this basis.