A process for bottom-up budgeting

Bottom-up budgeting is when all the departments or sections of a company create a list of all their anticipated expenses and then each department’s list is totaled up to create an overall budget. Bottom-up budgeting is often referred to as participative budgeting since managers from each department need to help create the budget.

Companies use bottom-up budgeting to ensure each individual department is getting enough funding for their wants and needs. This kind of budgeting encourages employees to think about their department’s goals. It also gets departments to plan ahead for things like new hires, scheduling and projects.

Here is how to do bottom-up budgeting:

1. Identify all of the company’s departments
2. Instruct each department to create a list of expenses
3. Total every department’s expenses
4. Review each department’s budget
5. Decide on a final budget

1. Identify all of the company’s departments

First, you need to identify all of your company’s departments. Decide if you should break your departments up into smaller sections. For example, if you have a large marketing department, you could make social media its own section. Make it clear who needs to create a list of expenses and what areas they need to cover.

2. Instruct each department to create a list of expenses

Now, each department should create a comprehensive list of all of their anticipated expenses. They should list planned projects for the upcoming year and then list all the expenses for each project. Other costs may include employee wages, equipment, office supplies, administrative costs and travel costs. Inform department managers of what exactly they need to include on their list.

3. Total every department’s expenses

After creating their list of expenses, each department needs to add all of their costs up to get the department’s budget. Then, after collecting each department’s budget, add all of the budgets up to get a grand total for the company.

4. Review each department’s budget

Now it’s time to decide how realistic each department’s budget is. Decide if their expenses are appropriate or if some things could be cut. Likewise, if a department’s budget seems low, encourage managers to think about any other wants or needs their department has for the upcoming year.

5. Decide on a final budget

After any departmental changes are made to the budget, add up your total again. Then, decide if this is a good budget for your company. If it is, let each department know that their individual budget has been approved.

Best practices for your business

Bottom-up budgeting can be a great option for your business if it’s done correctly. Here are some best practices for this type of budgeting:

Set expectations

Before department managers start to create their cost lists, set some realistic expectations for them. Tell them to be reasonable about what they list, but if there is something that would really benefit their team, they should list it. Bottom-up budgeting is supposed to be more accommodating for each department, but as a company, you want to stay within your limits.

Stay organized

For things like employee wages and office supplies, it’s important to determine who should account for them. For example, you could either have the human resources department make all employee wages a part of its budget or decide that each department should be responsible for listing its team member’s wages. By staying organized, you can make sure every detail is accounted for and not listed more than once.

Related:How to Communicate a Pay Raise

Be detail-oriented

Tell managers they need to account for every anticipated cost, within reason, for the year. This will be a tedious process, but when everyone creates a detailed list, your company is more likely to stay within budget.

Bottom-up budgeting FAQs

Before using bottom-up budgeting for your business, make sure you understand both the benefits and the caveats of this method of budgeting.

Here are some frequently asked questions about bottom-up budgeting:

What are the advantages of bottom-up budgeting?

Bottom-up budgeting tends to be the most accurate method of budgeting since it starts with the wants and needs of each department. When budget lists include every single detail of a project, there is less room for error.

Bottom-up budgeting can also increase morale among employees because they feel like their department’s needs are valued by the employer. Employees also feel like they have more agency with this kind of budgeting which can also increase job satisfaction. With top-down budgeting, managers can feel more constrained by the money they are allocated for each project or departmental need.

Related:How to Motivate Your Employees

What are some things to keep in mind when using bottom-up budgeting?

When using bottom-up budgeting, take precautions to avoid over budgeting. It’s important for you to still review everything a department has on their budget list and determine if it is necessary for the success of their team and the whole company. Remind employees to use their best estimates and do not add extra funds for cushioning.

Also, while it’s important to account for every detail, there’s no need to be overly tedious. For example, when budgeting for office supplies, there’s no need to list every single pencil and pen. Set a deadline for each budget so employees spend an appropriate amount of time budgeting.