Budgeting Techniques: Budgeting Controls vs. Budget Planning
Contrary to popular belief, there is no one-size-fits-all approach to corporate budgeting. What works for an enterprise may not work for a startup. And what works for a startup that sells services may not work for a startup that sells products.
Your company could benefit from a different approach to budget management. Discover various budgeting techniques and then make the call for yourself. In this article you’ll learn:
- The differences between budgeting controls vs. budget planning
- The differences between top-down budgeting vs. bottom-up budgeting
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Budget planning vs. budgeting control
The budget process is a coin with two sides: budgeting controls and budgeting plans.
Budget planning is the exercise of creating a startup operating budget, and is what we most commonly associate with the word “budgeting.” It involves a budget committee reviewing operating costs and forecasting cash flow to create a detailed plan for how the money will be spent over a period of time, and how much to allocate each team or project. Budgeted performance versus actual performance from previous years is also considered. Budget preparation can take a top-down or a bottom-up approach, depending on the company’s size, structure, and priorities.
While both creating and controlling a budget are valuable exercises, Neil Churchill of the Harvard Business Review argues that when it comes to startups, conceiving this financial plan is more important than executing it
After a company plans its budget, the budgeting controls process comes next. It involves executing the budget plan by proactively managing how money is spent. This side of the budgeting coin is about preventing misspending, rather than taking corrective action after the damage has been done. It deals with actual results, rather than strategy.
Internal controls, like tying virtual cards to budgets and assigning vendors to budgets, are critical to keeping spending on track. Churchill advises that having a budgetary control system is more important for established businesses than for startups.
Top-down budgeting vs. bottom-up budgeting
Here’s a closer look at the differences between the top-down and bottom-up approaches to creating financial budgets, and when it’s beneficial to use each one.
The top-down budgeting process
Executives and members of top management are responsible for planning the budget in the top-down approach.
Pros of top-down budgeting:
With top-down budgeting, the decision-makers have a holistic outlook of the company and understand its assets and goals better than the managers of individual teams do. Top-down budgeting also takes external factors, like industry trends, competition, and the state of the economy, into the decision making equation, which can be beneficial.
Cons of top-down budgeting:
However, this approach is disconnected from the people who will ultimately spend the money, which makes controlling the budget difficult. Top management may not understand the needs of finance teams or what resources they need to contribute to global goals.
Further, top-down budgeting isn’t very flexible and can prevent pivots and growth, especially in competitive industries.
When to use the top-down approach to budget planning:
Startups where executives are immersed in operations and understand overall business goals would be well suited for the top-down approach. This strategy is also useful when departments need to work closely together and their budgets have to be related.
The bottom-up budgeting process
Bottom-up budgeting relies on departmental managers who are involved in day-to-day business spending activities to create a budget plan, rather than executives who have a higher-level view of resources and overall company performance.
Pros of bottom-up budgeting:
With bottom-up budgeting, the people who are most involved in the daily operations and goals of the teams decide the departmental budget. This approach makes budget owners more invested in making sure their teams spend within their means than if an out-of-touch executive had decided the budget for them.
Who better to be in charge of the allocation of resources than someone intimately familiar with their team's needs? When department heads can distribute resources where they are most needed, they set their teams up for success.
Cons of bottom-up budgeting:
While departmental managers are uniquely qualified to set spending priorities for their teams, they often lack insight into what other teams' goals and resources are, which can be detrimental at a company where departments are dependent on one another. This siloed approach is less collaborative than top-down budgeting. Bottom-up budgeting may be too granular for large companies.
When to use the bottom-up approach to budgeting:
Startups benefit from bottom-up budgeting because it gives them the ability to pivot quickly to compete with other companies.
At enterprises, this method of planning a budget is most useful when departments work independently of each other.
What is budget planning, and what kind of company benefits most from it?
Budget planning is the exercise of creating a strategy for how to allocate funds. This exercise is most useful for startups.
What are budgeting controls, and what kind of company benefits most from them?
Budgeting controls help companies stick to their budgeting plans. They’re most useful for large, established companies.
What is top-down budgeting, and in which scenarios is it most useful?
This approach involves executives planning budgets. It’s most useful at startups in which the executives are involved in day-to-day operations or companies in which departments collaborate heavily.
What is bottom-up budgeting, and in which scenarios is it most useful?
Bottom-up budgeting involves departmental managers creating budgets for their teams. This approach is best for startups that need to pivot quickly and companies in which departments work independently of each other.