Bottom up budgeting is a type of budgeting that attempts to determine the underlying costs for each individual department or segment of an organization and then total up each department. This type of budgeting works in contrast to top down budgeting. Here are a few things to consider about bottom up budgeting and how it works.
This process starts out small by looking at the individual components and costs of projects. In order to do this type of budgeting, you will need to start out by identifying all of the projects that you plan on completing as a business. Once you identify the project, you need to figure out what steps you will be taking to complete that project. At that point, you have to figure out the costs for each step of the project and total them up.
Work Your Way up
After you have come up with a realistic cost estimate of each project, you need to total up all the projects together. During this process, you need to work your way up from one level to the next. For example, you may start out with a project budget for each week. Then total although the to come up with a project budget for each month. You will then total the projects for each month together to come up with an annual budget.
With this type of budgeting, you will also rely on managers to help out in the budgeting process. You need each manager to come up with a realistic budget for all of the projects that they will be taking on. You will then get the information from each manager and total it up in order to come up with a budget for the company as a whole. When it comes to estimating the number of man-hours that will be necessary to complete a particular project, a manager should convert that figure to cash. This will ensure that there is enough money budgeted for payroll as well.
Advantage of Bottom up Budgeting
One of the primary advantages of bottom-up budgeting is that it is traditionally very accurate. As long as everyone takes care to look at every last detail of a project, it will generally come out with an accurate estimate of costs. This type of budgeting also tends to improve the morale of the employees because most of them will be involved with the budgeting process. Every department will be expected to pitch in to come up with the new budget.
Disadvantage of Bottom up Budgeting
One of the disadvantages of this strategy is that it can sometimes lead to over budgeting. Every department wants to make sure that they have enough money for the things that they want to do over the course of the year. Because of this, some managers might add a little bit of extra money into the budget so that it will be padded. If this happens often enough, it can throw the whole budget off.