Top down & bottom up approaches

NotesQuizMock

Top Down / Imposed Budget

‘Authoritative’ or ‘non-participative’ budget

This is also called an ‘authoritative’ or ‘non-participative’ budget as it is set without allowing the ultimate budget holder the opportunity to participate in the budgeting process.

These budgets will begin with upper level management establishing parameters under which the budget is to be prepared.  

Lower-level personnel have very little input in setting the overall goals of the organization as they are essentially reduced to doing the basic budget calculations consistent with directives.

One disadvantage of the top-down approach is that lower-level managers may view the budget as a dictatorial standard.  

They lack ownership of the budget and as such, they will be reluctant to take responsibility for it. 

Further, such budgets can sometimes provide ethical challenges, as lower-level managers may find themselves put in a position of ever-reaching to attain unrealistic targets for their units.  

However, it can be argued that this top down approach may be the only approach to budgeting which is feasible if

  • the organisation is newly-formed

  • the business is very small

  • low level employees have no interest in participating in the process

  • they are not technically capable of participating in budget setting

  • only top level management have access to information which is necessary for budgeting purposes

Bottom Up / Participative Budget

Consequences of participative budgeting

The budget holders have the opportunity to participate in setting their own budgets. 

In fact, the lowest level organisational units are asked to submit their estimates of expenditure for the next year. 

Senior management, meanwhile, has made a forecast of the income it expects to receive. 

There may be a negative variance between the forecast revenue and the sum of the departments’ budgets. 

The variance is resolved by lengthy discussions or arbitrary decisions. 

This type of budget is also called participative budget.

It is argued that bottom-up budgets improve employee morale and job satisfaction.  

Furthermore, the budget is prepared by those who have the best knowledge of their own specific areas of operation. 

This type of budget leads to better communication and increases managers’ understanding and commitment. 

On the negative side, a bottom-up approach is generally more time consuming and expensive to develop and administer.  

Another potential shortcoming has to do with the fact that some managers may try to "pad" their budget, giving them more room for mistakes and inefficiency. 

As we have already discussed, this is known as ‘budgetary slack’.

Negotiated Budget

Process of negotiation

In practice, different levels of management often agree budgets by a process of negotiation.  

The budgeting process is therefore a bargaining process. 

Budgets lie somewhere between what top management would really like and what junior managers believe is feasible.

Goal Congruence vs Dysfunctional Behaviour

Goal congruence

Goal congruence ensures that all members of the organisation pull in the same direction towards helping the organisation to achieve its overall goals and objectives.

If individuals in an organisation fail to demonstrate congruent behaviour, decisions taken may benefit that individual personally or the division which that individual works for, but it may not benefit the organisation as a whole – dysfunctional behaviour.

NotesQuizMock