Top-Down and Bottom-Up Budgeting
The potential problems with top-down budgeting is inaccurate forecast. The reason inaccurate forecast is one is because the department leads have more understanding of the needs of the departments than senior leadership would (McQuerrey, 2019). When senior leadership handles without consultation of the department lead it could result in not properly funding the department and being over or under (McQuerrey, 2019). Another potential problem is there could be individuals that do not perform their job functions as they should because of not having enough funds either by retaliation or the fact they need them funds to be able to do their jobs properly (McQuerrey, 2019). Then you have wasted funds if they are overfunded because the department is going to use those funds to make sure their future funds continue to be the same (McQuerrey, 2019). Due to all of these you end up with those that have poor morale. They can possibly feel unvalued and do not have a say within their department (McQuerrey, 2019). Then you have those leaders that are unhappy with how senior leadership is handling the budgeting which causes the rest of the department to feel a certain way when they do not need to, which creates problems in the workplace (McQuerrey, 2019).
Bottom-up budgeting has it’s disadvantages as well as top-down budgeting does. There are several disadvantages which are; time consumption, misrepresenting numbers, lacks expertise and lack of context (Hartman, 2017). Creating a budget for the department can be time consuming to create the budget and make sure to have history to back up past budgets, spending patterns and forecasting what expenses will need to be covered for the next year (Hartman, 2017). Then all senior leadership would need to review history of the and decide. Which means there could be several steps in order to move forward and this process could take time and even repeat (McQuerrey, 2019)
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The ways of dealing with these potential problems and which is letting the departments handle their own, one of the biggest reasons is to make sure that the forecasted budget is what is needed for the department and the department has what they need in order to operate appropriately with clients. Make sure management knows that if they are overfunded, they do not have the use the funds or they lose them, that it is a balancing act and we need to know what they are needing and using with expenses. However, one year the department might need replacement equipment, however the manager needs to know that does not always come out of their budget but the capital budget of the business. When preparing a budget, the indirect costs that should be considered are;
- Electricity
- Maintenance
- Administrative Services
- Projects
- Security costs
- Rent or Mortgage
There are many more because it is any overhead expenses that is used to keep the business operating proficiently.
References
- Hartman, D. (2017, 09 26). Disadvantages of the Bottom-Up Approach in Budgeting. Retrieved from bizfluent: https://bizfluent.com/info-12069851-disadvantages-bottomup-approach-budgeting.html
- McQuerrey, L. (2019, 04 29). The Advantages and Disadvantages of Top-Down Budgeting. Retrieved from bizfluent: https://bizfluent.com/info-12031520-advantages-disadvantages-topdown-budgeting.html
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Fundamentals of Project Management: Analysis of Top-Down and Bottom-Up Budgeting.
(2022, July 14). Edubirdie. Retrieved April 19, 2024, from https://edubirdie.com/examples/fundamentals-of-project-management-analysis-of-top-down-and-bottom-up-budgeting/
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