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Bottom up budgeting creates waste. Top down!

budgetingMany people believe that bottom up budgeting leads to waste and misdirection. The advocates of top-down budgeting are strong in their belief that if you give each person or department no guidance, they will budget to their wants or specific needs, not to those that support a corporate goal.

So, they argue: Give your people a top-down generated target. Have them fit their plans into the target.  This way the corporate financial and strategic goals come from the top, as they should, and all departments fit into those strategies with their contribution and their overhead.

[Email readers, continue here…]  Over many years, in in many companies, I’ve overseen budgeting both ways, and agree with the advocates that it is often masked waste in the form of allowances for unknowns, extra padding for protection, and even higher budgeted expense numbers to make the managers look good at the end of year by under-spending, that are  found deep within bottom-up budgets.

On the other hand, often departments cannot fit their required costs into the structure required to meet a profit goal for the corporation, or just as important, corporate revenue goals.  In both instances, top down or bottom up, negotiations between department and corporate managers require compromise. The difference is that in a top down budget, the discussion almost always centers on compromises to meet the corporate goal, a much more important discussion than one centered around department goals.

Budgeting from the bottom up more often works in non-profit enterprises, where many departments are involved deeply into the detail of staffing and program delivery, and where the goal of the non-profit is service, not profit.   Either way, a budget is a necessary road map for a successful enterprise, and should never be ignored or worked upon after the year is already underway.

  • I meant to post this a while ago. Your words resonated with me. Budgets are a valuable tool for fiscal prudence and a best practice. In our experience, they can also lead to wasteful spending, CYA report creation, and a slowdown in innovation. At NEO Tech, we like to say that budgets can be a waste of money, and we recently made a movie to help illustrate that:

    NEO Tech: Budgets are a Waste of Money from NEO Tech on Vimeo.

  • Jason Peterson

    Great points! One of my favorite posts.

  • John Biggs

    Thanks for the new post. Couldn’t agree more. There are cost factors associated with units of revenue by vertical market, rooms occupied in hotels, per barrel of oil in natural resources etc. Need to know volumes of work sold however they’re unitized before you can project costs.

  • This was a very insightful article. I like the fact that you set the goals and perameters, and then your people can let you know if it is unrealistic or needs to be changed and sell you on the reasons instead of allowing inefficiencies in at the beginning. Thanks Dave! I read every one of your posts and find they have helped me much!

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