Top-down budgeting is a budgeting process in which a high-level budget for the business is created by senior management. The senior management of the company plans the budget based on its priorities and then passes it on for execution to department managers. Then the top management allocates the sums to the individual departments, who use those figures to plan their own budget. Company executives reflect on consideration on the previous experience and current market conditions. They can use the preceding year’s budget and monetary reports as a benchmark for making allocations to commercial enterprise departments and functions.
Prior to the preparation of the budget, managers of the individual departments may provide suggestions to the top management. It is up to the top management, however, to include those plans in the budget or not. The management makes a unique allocation to the various departments after the budget is established, which would then produce their own budgets based on their budget allocation and goals. For the top-down budget, the top management makes use of previous experiences and the present-day market scenario, including margin pressure, competition, tax legislation, macroeconomic conditions, and more. Senior management may also take inputs from lower-level managers, which helps acknowledge the worries of the normal body of workers who are tasked with imposing the budget.
Internal and external influences are often taken into account by senior management, such as current economic conditions, adjustments in tax laws, margin pressure, increases/decreases in wage costs, peer profitability levels, etc. Actually, the top-down budgeting process starts with the executive setting targets and goals for the company. In terms of revenue, costs, and benefits, they discuss and decide what the company achieves. They take several variables into consideration when formulating the numbers, such as:
- Previous year’s achievements
- Future market climate forecasts, such as economic growth, inflation, and interest rates
- Competition conditions in the next year
- Market demand trends
- Contribution of each department to the previous year’s achievements
Department managers and lower-level workers do not generally participate in the discussions but may offer ideas for consideration. The goals are passed on to the finance department until management finishes writing the goals. For each department, the finance department is in charge of allocations. They will base the figures of the previous year to divide allocations. Suppose, for instance, that the marketing department invested 10 percent of last year’s overall budget. In that case, next year they will allocate the same percentage.
After all the products are finalized by the finance department, the budgets are put into the framework. To compare the actual results with the expected ones, monthly reports are produced in the future. Ideally, the department manager’s job is to take the projections of revenues and expenditures and construct a budget that explains how the department can invest the allocated funds to achieve the required revenues.
There are some advantages and some disadvantages of Top-down budgeting:
- The best benefit of top-down budgeting is that the overall strategic strategy is related to the priorities of senior management and that management decides that enough resources are used to achieve those goals.
- It makes departments aware of what the top management expects from them.
- It is a quick way of preparing a budget and helps to overcome interdepartmental issues.
- Saves time for lower leadership as well. Each department gets a fixed target rather than planning the budget from scratch. This saves time and money for both.
- Management produces only one budget under top-down budgeting, rather than encouraging the department to create its own budget and merge them later. It is therefore a less boring solution.
- Such type of budgeting may often lead to over or under allocation of resources.
- Since managers are not in a phase of the budget-making process, they may no longer sense much motivation to ensure their success.
- Since senior managers are not very conscious of the departments’ daily operations, they can set ambitious goals. This results in it being hard for lower-level executives to reach the set numbers.
Department-level budgets must include the specifics of anticipated expenditures, e.g., purchasing computer systems and workplace equipment, and salaries, as properly as the projected variety of merchandise that the branch goals to sell to generate revenues. Once all of the precise budgets are finalized, the total aspect is loaded into the economic device and monthly reviews are generated evaluating real recreation to the targeted budgets.