Bottom up budgeting is a form of financial budgeting where a company allows each department to set their own budget. Each department creates a list of expenses and cost projections, which is then submitted for review from senior management. Once agreed, these separate budgets are added together to form the company’s overall budget.
It is also referred to as participative budgeting because department managers are given a role in setting their own budgets.
Bottom up budgeting example
There is a set process that companies follow when formulating their own bottom up budget.
1. Identify all of the departments within a company
The first step is to identify all of the different departments that make up a company. If some departments are particularly large, you could break them down into smaller sub-groups. This may help with budgeting as accurately as possible. Make it clear who needs to come up with a list of expenses for each department and what they must cover.
2. Instruct each department to create a sum of cost projections
Each department needs to create a comprehensive list of all their anticipated costs and expenses. They must include all planned projects for the upcoming year and their relevant expenses, as well as regular costs such as employee wages, equipment purchases, office supplies, administrative costs and training and travel fees.
Once each department has completed the list of planned projects and expenditures for the year, they need to add them up to form their total budget. For example, the sales division of a large recruitment company estimates their department will need $850,000 for employee salaries, $40,000 for equipment and supplies, $25,000 for administrative costs and $150,000 for training and travel fees. Their total budget is $1,065,000. Check out our guide to budget templates for help.
3. Sum up the budgets of all departments
Once all the individual department budgets are complete, they can be added up to form the grand total budget for the company.
4. Review individual department and total budgets
The individual department budgets and grand total budget are then reviewed by the company’s leadership team. They are checked against the goals and objectives of the company for the next financial period.
If satisfied, senior management will approve the budget estimates and send them on to the finance department to formalise allocations for each department.
If not, they may advise for certain projects or expenses to be cut or if a department’s budget seems low they may encourage managers to think about any other requirements their department might need for the upcoming year.
5. Set final budget
After any departmental changes are made to the budget, the total will be added up again. If this grand total is agreeable, each department will be informed that their budget has been approved.
Bottom up budgeting advantages and disadvantages
The main advantage of bottom up budgeting is that it is usually very accurate. Individuals in each department are best placed to understand their costs, resources, expenses and requirements.
It can also provide a boost to morale because when employees are given accountability to set their own budgets, they are often more motivated to work hard to meet company goals. A sense of ownership may be achieved, along with increased job satisfaction.
The disadvantages include a tendency for department heads to over-budget, to ensure they have enough money for the year. This can be combated by reminding managers not to add extra funds for cushioning and by reviewing each budget thoroughly.
Top down versus bottom up budgeting
The difference with top down budgeting is that senior management creates a total budget for the entire company and then allocates each department’s budget accordingly.
This type of budgeting is usually quicker but may see departments struggle to keep to their allocated amounts, as management may not be aware of all their associated costs. Also there are less morale-related benefits with top down budgeting.