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Bottom-up budgeting: How to make it count, and will it just get thrown out by the CEO?

Michael Dunn's Profile

It seems that every time we do a bottom-up budget, it a) takes a long time because we get inputs from across our company and have to roll it all up, and b) the bottom-up gets crushed by the top-down because regardless of how the numbers roll up, the CEO or the Board are really the ones driving the numbers we use as targets. Seems like we can’t not do this (sorry for the double negative), but it drives me crazy.

Answers

Topic Expert
Mike Caruana
Title: Director of Financial Services
Company: Diamond Resorts International
(Director of Financial Services, Diamond Resorts International) |

I hear you Michael, which was why we've primarily used that approach for scenario planning rather than annual budgeting. Although both take a tremendous amount of innovation, synergy and engagement, it seems that putting the bottom line first can come across as telling the business what it needs to do versus it telling you what it's capable of doing. In my experience, the innovation being driven into the process from the bottom up comes across more like compromise and concession, which are not nearly as creative as innovation and synergy. I'm sure others have had good experiences with the bottom up approach, I just haven't had many is all.

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

Michael,

You might also want to take a look at:

The CFO Guide to Budgeting Software: 10 key elements companies should look for

https://www.proformative.com/whitepapers/cfo-guide-budgeting-software-10-key-elements-companies-should-look

Enjoy! Best... Sarah

(Agent, JKS Solutions, Inc.) |

I agree. The Board wants manager involvement, but the managers usually can't be bothered. They will make it happen if you give them the number, but they don't want to take the time properly do the crunching. At the end of the day, I am the one held accountable to budget deadlines.

Robert Fetterman
Title: Chief Financial Officer
Company: Oneida Nation
(Chief Financial Officer, Oneida Nation) |

It can be a frustrating process, but both a top down and bottom up process can work well, without excessive effort. It should be an important resource allocation tool to help the CEO and their team prioritize the most important things to invest in. Consider the following pieces of the budget process.
1. Set high level goals early based on a strategic view of where the industry and organization is going. A good discussion of the thinking behind the goal expectations with the senior team ht buyin.
2. The CEO should hold the senior team accountable to come up with ways to achieve the goals, and what the risks are to the plan.
3. Use an automated tool to roll up your budget. It significantly reduces the rollup time.
4. When the budgets are rolled up there will be a difference with the high level goals. Have departments come up with how they would hit the goal and the impact/risk. I have found that discussions with the department head and CEO to resolve this and prioritize investments works well, with some independent input from finance.

I also recommend condensing the planning horizon (again an automated tool helps with this) and keeping focus on the material, big assumptions streamlines the process. Hope this helps.

Bob

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Bottom up does not work. Mainly because managers get caught up in the minutia of why things can't happen or budgets enlarge as managers say, "if I receive two more FTE's, I can achieve this number;" and managers are a mix of those that "over promise" and those that "under promise."

The best you ever achieve is a hybrid where the CEO provides a goal, senior managers grab their piece and division managers create the budget.

In early December you stick it together to see where you are. Then comes "budget negotiations."

Anders Liu-Lindberg
Title: Regional Finance Business Partner
Company: Maersk Line Northern Europe
LinkedIn Profile
(Regional Finance Business Partner, Maersk Line Northern Europe) |

Just stop doing the budget all together and split the budget into a target setting and a forecasting process. The forecast can then be unbiased whereas the target can have its offset in the strategic direction of the company but still allow for negotiation.

Harold D. Tamayo
Title: Vice President of Finance
Company: MHA Inc., a Roper Technologies Company
LinkedIn Profile
(Vice President of Finance, MHA Inc., a Roper Technologies Company) |

I am in agreement with Robert Fetterman. Both bottom up and top down can work and in my view you need both perspectives as to how to close the gaps as you set your goals.

Take for example a departmental budget. Each person will bring their own individual budget which then will roll up to the entire department. The head of the department usually has an idea of what (if not in dollar terms) the department would be like (headcount, projects, etc which drives the dollars). Then, there will be a scrubbing of assumptions before it is presented to someone else.

In my opinion, top down and bottom up budgets are necessary as they both provide a view required to calibrate assumptions.

Derek Quackenbush
Title: CFO
Company: Rising Data Solutions
(CFO, Rising Data Solutions) |

Yes, a challenge. We tackled it by using a multi-year rolling forecast maintained within finance. We routinely updated it for actual results and changes to underlying assumptions (or the addition of new products, regions, etc.) via a discussion with the applicable managers. This made every month a "budget" discussion and prepared folks really well for agreeing on an annual budget--we did the preliminary in November and locked in down for BOD presentation in mid-December. We could just use the rolling forecast we had been maintaining as a starting point--a pretty accurate one (as budgets go), certainly up-to-date, and in a format everyone had seen and was comfortable with. Hope this is useful!

Roger Whitham
Title: Principal
Company: Whitham & Associates
(Principal, Whitham & Associates) |

I'm in agreement with Robert and Harold that bottom up and top down both have benefits. Its important that the CEO set goals that stretch the business and push it to maximum performance. And while its good for the CEO to challenge the business its just as important that the organization provide a realistic view of what the business is capable to achieving. If the CEO is open to discuss the delta and reach consensus, and the management team makes an honest effort to meet the CEO challenge, then a realistic annual operating budget can be produced.

Derek, I like your approach and will have to look into introducing it.

Chris Holtzer
Title: Senior Manager - Strategic Analysis
Company: Sargento
(Senior Manager - Strategic Analysis, Sargento) |

I feel your pain Michael. The battle between top down and bottom up lives on in most businesses, and unfortunatley, the financial professionals are stuck being the "middle men". I think the biggest frustration, is the desire to lump "Plan" and "Goals" into one process, instead of making them seperate but dependent.

Bottom up should tell you what you realistically expect to happen (assuming you can get non-hedged info from the middle managers) with most controllable aspects assumed to be status quo. Top down, should be the companies goals, drafted by the management with a good understanding of the plan base, and the controllable changes.

Irv Williamson
Title: Owner
Company: Growth Guidance Solutions
LinkedIn Profile
(Owner, Growth Guidance Solutions) |

At the risk of sounding a bit contrary, budget management models that are annual, negotiated and fixed add little value. Budgeting is expensive and highly bureaucratic. Top down budgeting only reinforces the old command and control style that is way out-of-kilter with today’s business environment. Bottom up approaches encourage gaming the system and rarely is the “bottom” provided the authority needed to develop their own strategies necessary to achieve new results.

Management should be more concerned with fast response and continuous innovation than managing people and budgets. There’s a whole new world of performance management that American Express, Southwest Airlines, Google, Whole Foods and other world class organizations are adopting. Isn't it time your company rethink its annual budget process?

Anders Liu-Lindberg
Title: Regional Finance Business Partner
Company: Maersk Line Northern Europe
LinkedIn Profile
(Regional Finance Business Partner, Maersk Line Northern Europe) |

Irv I think we read the same book! I fully agree on your approach and as I stated above the first step is to simply split the budget into forecasting (unbiased), target setting (potential for negotiation) and resource allocation (bank is open 24/7).

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