A Business Budget – A Top-Down and Bottom-Up Approach
An Overview of the Annual Business Budget Process: A Top-Down and Bottom-Up Approach
A well thought out business budget is essential to ensuring financial goals are met within a company. This process starts with the analysis of the owner’s/shareholder’s expectations for risk, annual financial goals and the enterprise value they want to achieve. The business budgeting process should allow plenty of time for analysis and discussion so that a thoughtful projection of revenue and growth can be made. Typically, this would start in the third quarter of the prior fiscal year and include the input of both a “Top Down” and “Bottom Up” approach. Let’s delve into this in more detail.
The goals of the owner/shareholders are taken into consideration in the “Top Down” approach. Optimization of earnings and growth is the goal in most cases. However, it is also wise to take into consideration what kind of risks are associated with this outcome and how these goals affect the overall health and well-being of the company. Some questions to consider are:
- What is the revenue growth compared to the earnings growth?
- What is the goal for earnings growth for the owner/shareholders?
- How much tolerance is there for additional debt given the projected goals for growth?
- What is the long-term strategy for the company? Is a sale in the future plans?
- How will the decisions that are being proposed effect the culture of the company?
Taking all of the answers to these questions along with an analysis of prior year’s projections versus actual results, will help you better understand the forecasting of “Top Down” goals each year.
Putting the information gained through this analysis to work will result in concrete goals for your company. Perhaps the goal is to increase revenues by 15% over the prior year. Or focusing on the expense side, it could be to decrease operating expenses by 5% over last year. Also keep in mind the company culture. How do these decisions help to maintain your positive corporate culture? There are many facets of a business to consider. As the owner/shareholder, it is your responsibility to understand these as they pertain to your company and industry to create the most comprehensive “Top Down” business budget approach.
Once the “Top Down” goals are set, it is the responsibility of the department managers to take ownership of these goals. They need to break the goals down further and develop budgets and marketing strategies for their areas of responsibility. Budgeting is all about accountability. Each manager must fully understand what is expected of their area and define a path to achieving them. This is the “Bottom Up” approach. Questions that will need to be answered may include:
- What additional investments in labor, equipment, travel, etc. will need to be made this year?
- Are there new products or services needed and what is the time frame for development and deployment of these additions?
- What are the potential vulnerabilities that would stand in the way of achieving goals such as customer retention issues, supply chain delays?
The budgets and marketing plan’s historical data along with current market conditions also need to be taken into consideration.
Bringing It All Together
It is then important to facilitate the sharing of information from each department. The clearer the information is exchanged, the more efficient the business budget process will be. Implementation of a template with defined parameters and formatting will minimize the need for repeated requests for information from the managers. Using this methodology works well to control changes. For example, the sales manager may have the opportunity to increase sales by 50% but the operations manager may not have the capacity to build that amount of product. The choice then is to either increase the capacity of the plant or lower the sales forecast.
The final step is to ascertain any gaps between the “Top Down” goals and the “Bottom Up” budget and the marketing plan. Perhaps there is a disconnect between the desire for growth and the risk tolerance for additional capital expenditure. Maybe there is a conflict between leadership groups so that one area is favored over another. There are many reasons that a gap may exist but it is the main goal of the business budget process to identify what the gap is and how, as a team, it can be addressed and overcome.
The budget process can be time consuming and feel overwhelming. If you’re in need of budgeting help, Contact us today for a free consultation.