A look at top-down budgeting

There are two major approaches to coming up with a budget for a business or for an individual project: top-down budgeting and bottom-up budgeting.While bottom-up budgeting is the more traditional way to approach budgeting projects and companies, top-down budgeting began to be more popular among businesses and the government during the 1990s.Top-down budgeting is more often resorted to by companies and the government in times of fiscal stress.Top-down budgeting has several advantages over bottom-up budgeting, along with several disadvantages when compared to bottom-up budgeting.

What exactly is top-down budgeting?

Top-down budgeting is an overall budgeting process that is based on, instead of building a budget from the bottom up, an overall estimate that is made of the higher level tasks.Then those estimates of higher-level tasks are used to set limits on the costs of lower-level tasks.Money funnels down from higher level tasks down to the lower level tasks until all tasks that are necessary for a project are given funding.The budgeting process begins with overall project managers.The estimate for a project or for a larger budget depends upon the experience and the judgment of the manager or the managers who are in charge of coming up with an overall budget.

This experience and this judgment of the top managers who are in charge of coming up with the overall estimate is key to the success and the accuracy of the particular budget.The manager or managers has to remember to keep in mind high cost tasks that are minor but are still expensive, any time delays that might happen with the project, problems with procuring supplies, and any other difficulties that might happen with the project.If the overall project manager can't come up with an accurate budget, then lower-level managers and employees will find themselves scrambling for money so that they can accomplish their tasks with not enough money.These types of problems can lead to the downfall of the project, based on a lack of funding and lower morale and resentment among employees.

In order to escape these types of problems with a project and with company and employee morale, then a number of managers of particular tasks will ask for more money than they know is actually necessary for their tasks.Many managers feel that this is alright to do when top-down budgeting is implemented for a project or for a company.However, asking for more money than is necessary might not be safe to do in terms of the overall funds available to the company.Many lower-level managers feel themselves forced to accept less money than they know is actually needed, and fights between managers and power plays can end up erupting.This type of situation will end up being destructive for the company.

Generally speaking, top-down budgeting is seen to be a good way to approach budgeting.Many companies use top-down budgeting because it is well designed and suited to traditional organizations that are structured along a hierarchy.When top-down budgeting is done correctly and accurately, then it has a very high level of overall accuracy.Also, because all aspects of the budget are included in the initial budget estimate, then there is a high level of stability in terms of the amount of money that is given to each of the different tasks for a particular budget.

If any manager is in charge of coming up with a top-down budget for a particular project, then he or she will want to talk to lower level employees who will be in charge of implementing and carrying out particular tasks.Then those employees will be able to give the project manager a better idea of how much money will be needed for each task.