A comparison of top-down to bottom-up budgeting
Here is a brief overview of the advantages and disadvantages of both top-down budgeting and bottom-up budgeting.
If you are bottom-up budgeting, you begin by identifying all of the different tasks and steps that are involved in a particular project.Then go through and write down all of the different resources and all of the money that will be needed for each step.Then, to determine the budget for the entire project, the funding needed for each step is added together.To come up with a budget for the level above individual projects, all of the projects are added together.All of the steps are added together higher and higher until you come up with a complete budget for either the entire project or the entire company.When you are determining costs for lower-level tasks, it is usually done by the normal method of cost estimation.If estimates are made in terms of materials or man hours, then they must be converted to cash.Costs negotiations will be required between those who are in charge of each task and the project manager, or the business owner.
Disadvantages of bottom-up budgeting
One of the primary disadvantages of bottom-up budgeting is that it can lead those who are in charge of tasks and also project managers to ask for more funding than will actually be needed.This is done in order to ensure that enough money is procured for each task to be accomplished, since most people assume that they will not be given all of the money that they request.This situation can lead to a waste of money and also a situation of distrust between various members of projects and different managers.
Another drawback to bottom-up budgeting is that it is difficult to actually draw up a complete and thorough list of every step and task that will be necessary for the completion of a project.It is easy to overlook a step of a project or a task, a problem that will lead to major issues in the overall budget.
Advantages of bottom-up budgeting
One of the major advantages of bottom-up budgeting is that the budget can be quite accurate for individual tasks.As long as no tasks have been forgotten, then this can work quite well.Also, bottom-up budgeting involves all members of a particular project, which can be a benefit in terms of company morale and involvement.
Top-down budgeting works the opposite direction of bottom-up budgeting.Top-down budgeting begins by estimating the costs of higher level tasks, and then those estimates will constrain the estimates for costs of lower level tasks.So the entire process of coming up with a budget will begin with upper-level management and an overall estimate of the entire project.Then the overall budget is divided among the first level of tasks, and then the budget is divided among lower level tasks and then lower level tasks.This continues until funding has been given to all of the tasks necessary for a project.
It is important that those managers who are in charge of determining the overall budget for a project have enough experience that they will be able to come up with an adequate and accurate budget that will give enough money to each level of tasks, yet will not ask for too much money.