Budgeting is more than just a checkbox on a manager's list—it's equal parts art and science. Balancing a team's goals with a company's financial realities is tough. And given that 74% of CFOs are feeling the pressure to churn out faster, detailed reports in the post-COVID era, it's clear we need to rethink our budgeting game. Enter bottom-up budgeting, a fresh take that gives your teams a front-row seat in crafting the budget.
So, how do you craft a budget that captures your team's aspirations and aligns with the company's big picture? The answer lies in bottom-up budgeting. By letting your team members join in the planning and decision-making, you're setting the stage for a more collaborative and effective budget process.
What is bottom-up budgeting?
Bottom-up budgeting is a budgeting method that starts at the department level, moving up to the top level. Each department within the organization is required to compile a list of the things it needs, the projects it plans to carry out in the next financial period, and cost estimates. The estimates of all the departments are then summed up to get the overall company budget. Obviously, the team members don’t do this alone, the managers of each department are required to give their input since they know the cost estimates for the projects to be implemented. It is more a management practice than an accounting or finance approach.
Bottom-up budgeting is also called participative budgeting as managers have full participation in the budget-setting process. Instead of making a budget at the top level and imposing it on the lower level, functional managers are asked to make their estimates for their departments respectively. Each departmental head makes its projection for the coming period by incorporating the department’s needs, the projects they want to pursue, market dynamics, and other macroeconomic factors. All departmental heads submit their budgets to the board for final approval.
Why use bottom-up budgeting for your accounting and finance firm?
Bottom-up budgeting can offer several advantages, especially if you have a distributed team in different locations. Here are some of them:
It increases accuracy and reliability: Bottom-up budgeting relies on the expertise and knowledge of the people who are closest to the operations and customers. They have a better understanding of the market conditions, customer demands, resource requirements, and potential risks than the top management. Therefore, they can provide more realistic and accurate estimates for their budgets. This can improve the reliability and credibility of the overall company budget³.
It enhances motivation and accountability: When you give more autonomy and responsibility to the managers and employees who are involved in preparing their budgets, they feel more valued and empowered as they have a say in how their resources are allocated and how their performance is measured. This can increase their motivation and commitment to achieve their targets and contribute to the company’s goals. Moreover, bottom-up budgeting can also foster a culture of accountability as managers and employees are expected to justify their budgets and report on their progress regularly.
It improves communication and collaboration: Bottom-up budgeting requires frequent communication and collaboration between different levels and departments within the organization. Managers and employees need to share information, provide feedback, negotiate trade-offs, and resolve conflicts during the budget-setting process. This can enhance transparency, trust, and alignment among all stakeholders. Furthermore, bottom-up budgeting can also facilitate communication and collaboration across different locations if you have a distributed team. By using digital tools and platforms, you can enable your team members to participate in online meetings, share documents, access data, and collaborate on budgets in real-time.
Innovation and flexibility: Managers and employees can propose new ideas, initiatives, or projects that can add value to their departments or customers. They can also adjust their budgets according to changing circumstances or opportunities without waiting for approval from the top management. This can foster a culture of innovation and flexibility within the organization³. Additionally, bottom-up budgeting can also help your accounting and finance firm adapt to the evolving needs of your clients in different locations. By empowering your team members to make decisions based on local market insights, you can deliver more customized and responsive services.
How to prepare your team for bottom-up budgeting?
Before you start the bottom-up budgeting process, you need to define clear objectives and guidelines for your team members. You need to communicate what you expect from them, what are the timelines, what are the assumptions, what are the constraints, what are the performance indicators, etc.⁴ You also need to provide them with relevant data, tools, templates, or resources that they can use for preparing their budgets.
How to avoid the challenges of bottom-up budgeting?
Bottom-up budgeting requires involvement from all stakeholders who have an impact or interest in your accounting and finance firm’s budget. You need to identify who are the key decision-makers, influencers, contributors, and beneficiaries of your budget and ensure that they are engaged and consulted throughout the process. You also need to consider the diversity and inclusivity of your team members, especially if you have a distributed team in different locations. You need to respect their cultural differences, preferences, and perspectives and ensure that they have equal opportunities to participate and voice their opinions.
How to facilitate the bottom-up budgeting process?
Bottom-up budgeting can be challenging and time-consuming for your team members, especially if they are not familiar or comfortable with it. You need to provide them with constructive feedback and support during the process. You need to acknowledge their efforts, appreciate their inputs, address their concerns, clarify their doubts, and offer guidance or coaching if needed⁴. You also need to be flexible and open-minded when reviewing their budgets and avoid imposing your own views or preferences. You need to listen to their rationale, understand their assumptions, and discuss the pros and cons of their proposals.
Remember, bottom-up budgeting does not end with the approval of the budget. You need to monitor and evaluate the implementation and outcomes of your budget on a regular basis. You need to track the actual performance against the budgeted targets, identify any variances or deviations, analyze the root causes, and take corrective actions if necessary⁴. You also need to solicit feedback from your team members on how they perceive the bottom-up budgeting process, what challenges or benefits they experienced, and what areas for improvement or best practices they suggest.
Bottom line
Bottom-up budgeting is a budgeting method that empowers your teams to participate in the budget-setting process. It can offer several benefits for your accounting and finance firm, such as increasing accuracy and reliability, enhancing motivation and accountability, improving communication and collaboration, and supporting innovation and flexibility. However, bottom-up budgeting also requires careful planning and execution, especially if you have a distributed team in different locations. By following the tips above, you can implement bottom-up budgeting effectively with your distributed team and achieve your financial goals.
References
Bottom-up Budgeting - Overview, Budget Creation Process, Advantages. https://corporatefinanceinstitute.com/resources/fpa/bottom-up-budgeting/.
Bottom-Up Budgeting | Definition | Advantages & Disadvantages .... https://financiopedia.com/bottom-up-budgeting/.
What is Bottom-Up Budgeting? A Guide for Managers - Indeed. https://bing.com/search?q=bottom-up+budgeting.
Bottom-up budgeting: A short guide for finance leaders - Spendesk. https://www.spendesk.com/blog/bottom-up-budgeting/.
