Question

In this assignment, you are asked to analyze, examine and defend either the bottom up or top down perspective to budgeting. To do this, select a perspective and then use the information you have gained about the budgetary process, roles, objectives, formats, and anything else from Modules 4 and 5 (along with any personal experience) to describe the pros and cons of that perspective and defend it as the most preferable. Please try to

Answer 1

Whether you are creating a budget for your small business or a large corporation, there are two main approaches: the top-down approach and the bottom-up approach. Some companies and their employees swear by the top-down approach, but others believe the bottom-up approach provides the most advantageous view. Which one do you think is best?

Top-Down Budgeting

In corporate budgeting, this approach involves the senior management team developing a high-level budget for the entire organization. Once created, amounts are then allocated to individual departments, and then the departments take those numbers and build their own corresponding budgets within the given confines.

Advantages:

• Only the executive team is involved and therefore, lower management does not have to take the time to prepare the budget
• Significant time savings for those who are involved in the day-to-day rather than the overall strategy for the organization

Disadvantages:

• Those creating the budget may not be involved in the day-to-day, and as a result may not be aware of some of the specific expenses required
• Certain departments looking for resources may run in to problems that just don’t fit with the top-down budget

Bottom-Up Budgeting

With a bottom-up approach, the budgeting process starts in the individual departments, where managers create a budget and then send it upwards for approval. The proposed budget is then approved, revised or sent back for modifications. After this is process is completed by each department, a master budget is then created for the organization.

Advantages:

• Increased ownership of the budget
• More specific information included
• Increased understanding, communication and commitment between managers because they are directly involved in the process

Disadvantages:

• Higher spending targets in comparison to the top-down approach (This results in a necessary reconciliation process to produce a balanced organization-wide budget)
• Budgets may not be in line with corporate objectives if managers focus on department, rather than organization concerns

At the end of the day, it doesn’t matter which approach your organization business ends up taking. What does matter though, is understanding the pros and cons of each method, the objectives of your budget, and what level of detail your organization requires.