Bottom-up budgeting: A short guide for finance leaders
68% of US companies felt that their business was affected either "negatively" or "very negatively" due to the Covid crisis. In many cases, this led to budget cuts and increased pressure on teams and employees to work efficiently.
While there may have once been a little room for errors and mistakes, the gap is closing fast.
A shift towards more strategic budgeting reduced costs by over 37% at one “Big 3” firm, largely due to more certainty around spending. Bottom-up budget strategies allow for more accuracy and incentivize staff to play by the budgeting rules.
As we’ll explore in this article, doubling down on this certainty and accuracy is the key to business budget success.
What is bottom-up budgeting?
Bottom-up budgeting refers to the flow of information from the ‘floor level’ employees in each department up towards senior management. Departments will decide their own forecasted expenses, and then request approval from higher ups. It’s performed this way to accurately inform the resource allocation process and create a budget that’s as realistic as possible.
With a key focus on real-time data, the typical bottom-up budget can closely forecast actual future expenditure. For example, the World Food Program uses bottom-up budgeting for “greater clarity and consistency in regional budget submissions.”
In this example, more strategic cash management means funds are better aligned with actual activity - very important for a charity. The World Food Program’s budget was not only more targeted but also used more efficiently.
Bottom line? The money went further.
As discussed, bottom-up budgeting relies on each department manager taking ownership of their own spending. But to remain in control, senior leadership will use budgeting software and technology to oversee progress and limits. Ownership and decision-making lives with budget managers, but finance teams have budgetary control.
Currently, only 40% of organizations employ a cloud-based system. For an increased chance of bottom up budget success across all areas of an organization, a software system is highly recommended.
Top-down vs bottom-up budgeting
The opposite of bottom-up is known as top-down budgeting. In this process, the finance department or corporate heads allocate resources to each department. The flow of information moves from the top, down to the individual department managers, and then more junior members of staff.
Instead of using plans and upcoming projects to form the budget, it’s based on overall company priorities as well as historic data.
Of course, the main advantage of the top-down budgeting method is that management can control departmental spending down to the penny. Fortunately, integrative budget technology now makes this possible for bottom-up budgeting too.
After the allocation is set, it’s hard for junior staff to argue against, or petition for increased funding with a top-down approach. This rigid structure has been proven to lead to inaccurate resource allocation during periods of growth.
The Corporate Financial Institute (CFI) also indicates that top-down budgeting leads to a disconnect between the management level and lower levels in a company. This is likely to create a lack of participation and motivation for lower-level managers, alongside a gap between expectations and reality.
Therefore, bottom-up budgeting is preferred for a stronger strategic approach to the financial management of a company.
How to create a bottom-up budget
Here is your step-by-step guide to creating a bottom-up budget:
Separate the individual departments
Have each department perform a cost analysis
Total up the departmental budgets
Review and adjust individual departmental budgets
Publish final budgets
1. Separate departments
The first step to creating a good bottom-up budget is to determine where your resources should go. For example, larger companies are likely to have separate departments for:
Research and development
A common misconception is that budgeting stops as soon as you assign funding.
When you divide your company up into definitive areas through a bottom-up approach, you can align each area with its own budgetary responsibility.
Alongside this resource allocation come significant KPIs and targets, which also fall under the budget. Strategic budgeting means that you’ll continually be measuring performance in real time, and using this data to inform your economic allocation decisions. But more on that soon...
2. Cost analysis
The second step in creating a bottom-up budget is having each departmental head anticipate their costs and expenses. In a more general sense, this could include items such as salaries, but each department is likely to have specific, industry-focused expenses too.
Of course, knowing your costs and expenses relies on knowing your plans and projects. So, this style of budgeting might also help organize your quarterly or annual plans and the work to be done.
Here’s some information if you’d like to learn more about how to do a spend analysis.
3. Total the budget
Next, the departmental heads will submit their budget requirements and you’ll have to see if everything makes sense. This should form the total company budget for the following year.
4. Review and adjust
Of course, some of these departmental predictions will be way over budget. Your job is to review the planned expenses and adjust each departmental budget accordingly. Instead of relying on historic spending patterns, the strategic budget planner uses real-time data to inform their decisions.
The other aspect of the review period is to check that spending plans match up with overall company goals and perspectives. Ask yourself if it makes sense to allot funding towards X if your goal is Y.
5. Finalize and publish
Once each step is complete, you should have a pretty robust budget plan. It can now be finalized and published as the formal strategy.
Since each department contributed to the decision-making process, every single employee is invested in keeping spending within the final budget, feels valued, and will make the most of the resources they are allocated.
Why real-time budget data is essential
Real-time data is one of the most important factors for high-quality bottom-up planning. Without it, you’re left to guess based on historic trends.
The problem with this is that processes and pricing can change quickly, and drastically. This has only been more exacerbated in recent times. Outdated information cannot be relied upon to move confidently with emerging trends.
Furthermore, without real-time budget data, it’s difficult to hold people accountable. Having access to the measurable consequences of your data is what can set your company apart from its competitors. Up-to-date information enables team members to take accountability for their actions and rectify issues quickly, if necessary.
Overall, this makes each budget allocation easier to manage.
Finally, without real-time data, your team may struggle to learn from previous efforts. Without the information that indicates previous mistakes, departments continue to act the same way.
A constant flow of information is required to highlight where changes are required and follow through with the results of any changes.
How Spendesk makes your budgeting more strategic
With the right technology, access to current data makes your whole budget planning experience more strategic and efficient.
Fortunately, Spendesk gives you real-time spend data, so you always know how much of the budget has been consumed.
This allows for quick reactions- letting you make timely decisions in anticipation of what’s to come. Tried and tested by thousands of finance teams, allow your company to see around the corner before you turn it with Spendesk’s business budgeting software.