Quirk & Associates, LLC

3931 Common Street
Lake Charles, Louisiana 70607

Office Hours: 9:00-12:00
1:00-5:30
Monday - Friday

office (337) 474-7979
fax (337) 474-6989
 

Budget Strategy: Top-down or Bottom-to-Top?

The budget development process is often viewed as either a top-down or bottom-to-top process. A variation on these approaches is to make the process an iterative one, either during its initial developmental stages or through periodic re-forecasts of the original budget. In each case, executive management's choice of a strategy will have a far reaching impact.

The budget process often affects how the organization's decision-making process is perceived by lower level managers, how information is disbursed, the quality of the organization's information and middle management's level of involvement in reaching the organization's objectives. These are important considerations when deciding upon a budget process that fits with your organization's structure.

Let's be realistic. Many large scale organizations elect to develop their budgets based upon the efforts of a relatively small group of strategic planners. The reasons for limiting the number of individuals involved vary, but managers often cite cost and time as two of the primary constraints. Could it be that the actual costs are much higher as a result of limiting the planning effort to only a few individuals ?

If the organization's planners do not have detailed knowledge of the items that they are budgeting, then they must perform the necessary research themselves or settle for information whose quality may be less than optimal. Both scenarios can prove to be increasingly costly. If your strategic planning group is spending a great deal of time asking questions to mid-level managers, then it may be better to get middle management involved at the beginning of the budget process rather than later. Take some time to look at the cost of your organization's information.

Some organizations choose to implement their budget in a top-down approach in order to impose performance goals on lower management. This strategy is common among large, bureaucratic organizations and organizations whose management style is autocratic. Is it appropriate for today's lean, thinly-layered organizational structures?  Today's organizations place a heavy emphasis on workgroups, information dissemination, participatory-style management and responsible decision making among their low-level managers. These organizations are trying to improve information quality and the decision-making process by promoting the use of information throughout the organization. A top-down approach may actually stifle these efforts and possibly even alienate low-level managers from 'buying in' to the final budget.

Frontline managers, who are involved in the day-to-day operations of their departments or divisions, are their organizations' best resource for realistic budget information. These managers' experience and knowledge can provide realistic information quickly and at a much lower cost than what usually results from the finance department's time-consuming research. Executive management is also more likely to be able to hold these managers accountable for variances from the final budget than if the budgets were developed without these managers' input.

Somewhere in the Middle

Reaching down to the lowest levels of departmental managers for budget information is certainly not practical for very large organizations. Without a highly-organized and well-designed mechanism for managing detailed information, a large organization can be overwhelmed quickly by the sheer volume of the information that it must consider in the budget process.

A more practical strategy is to develop a tiered approach, possibly by establishing that the lowest level of input will occur at the divisional or regional level. Even at one of these higher levels, it is important that managers are able to easily exchange budget information with the organization's lower level managers. The greater use of budget information throughout the organization will improve its quality and promote responsibility for the organization's performance.

Staying in the Loop

All budget processes rely greatly upon effective communications. Strong communication can contribute to improved information quality, lower costs, and an enhanced decision-making process. Does your organization experience breakdowns in the process of obtaining and relying upon budgeted information ? If so, then it may benefit from making an effort to better structure its communications during and after the budget process.

An effort to improve communications could be as simple as documenting the budget process timelines, managerial guidelines, and budget assumptions. Efforts like these can help keep everyone on the same page. The planning department will benefit by eliminating the number of areas where potential misunderstandings can occur and disrupt the process. Also, by developing official guidelines and assumptions, the planning department builds resources that can be used in both their administrative and research tasks.

Good documentation also serves the mid-level managers who are responsible for explaining performance variances to senior management. Effective documentation can reduce the time that these managers spend meeting and explaining their variances to senior managers. Instead, these managers can spend more of their time managing their operations and improving their performance.

Is All This Really Necessary?

Simply having a good idea of where an organization is headed will never be good enough. Executive management should have a detailed plan by which they can measure their performance and adjust the organization's direction when it becomes necessary. Without a plan, it becomes very difficult to analyze and understand the factors that are affecting performance. An integrated budget process can give management the information and mechanism they need to align the entire organization and focus it on its goals.