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Bottom Up Budgeting Creates Waste

By: Dave Berkus

 

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Many 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.

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.

Related Article: Startup Budgeting for Small Business Owners and Entrepreneurs

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.

Published: July 28, 2015
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Source: Berkonomics

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Dave Berkus

Dave Berkus is a noted speaker, author and early stage private equity investor. He is acknowledged as one of the most active angel investors in the country, having made and actively participated in over 87 technology investments during the past decade. He currently manages two angel VC funds (Berkus Technology Ventures, LLC and Kodiak Ventures, L.P.) Dave is past Chairman of the Tech Coast Angels, one of the largest angel networks in the United States. Dave is author of “Basic Berkonomics,” “Berkonomics,” “Advanced Berkonomics,” “Extending the Runway,” and the Small Business Success Collection. Find out more at Berkus.com or contact Dave at dberkus@berkus.com

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