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Why Bottom-Up Budgeting Could Be The Future For Your Company

It doesn't just have to be top-down

16Feb

Budgeting is an essential part of any company’s success and one of a finance leader’s central, and most challenging, responsibilities. A good, accurate budget is achieved through a combination of technologies and processes, with advances in big data and cloud technology, for example, all making it far easier in recent years.

While these are all still vital, budgeting is also increasingly coming down to collaboration between finance and all other business departments, as organizations move away from a top-down to bottom-up model.

Collaborative budgeting traditionally involves every level of management throughout the creation of the budget, negotiating with them from draft through to completion. For example, in some models, leadership may just communicate the strategic plan, objectives and goals down to budgeting managers and allow them to use their individual area of expertise and experience to build a budget designed to meet them. The idea rests on the central conceit that managers are doing a job on a day-to-day basis and therefore they are likely to have a better understanding of what is achievable and any events that could arise in the forthcoming period to impact this. It is not a new phenomenon, and finance leaders have always sought the input of their colleagues. What is changing is the degree to which their input around how best to use funds is being sought, as well as an expansion outside higher-level employees down the ranks, with far more engagement occurring with lower-level employees.

There are many benefits to a more collaborative budgeting process. Firstly, it is more agile. When you are trying to react quickly to market volatility, working together helps to ensure quicker adjustments. It also greatly empowers all employees impacted by a budget, preventing the development of an us-versus-them culture and encouraging transparency and therefore a higher degree of trust. There is a significant body of research to suggest that mutual trust between leadership and employees not only helps to drive an effective collaborative budgeting system, it also better fosters teamwork, cohesiveness, and trust, all of which are vital to the success of the overall business. The increased transparency will also motivate greater efforts by employees to achieve their predictions as they have some degree of ownership over the figures. It also means they have to take more accountability for their decisions.

While the benefits are persuasive, however, it is not an easy process. Curt Koltz, Finance Director, Nonprofits Assistance Fund, notes that, ‘A budget is just another version of a mission statement or strategic plan expressed in a different language, the language of numbers. In order for this to be true in practice, a budget must be the cumulative effort of all who implement the organization’s mission, including key leaders from all areas of the organization. The idea of including this many people in the budgeting process might be daunting for some financial leaders.’ It may be that finance leaders feel they are losing control and are unwilling to cede what is a large part of their function in the organization. There can also arise differences in what exactly a collaborative budget entails. I spoke recently with a more senior CFO whose new controller had complained to him that the budget was not as collaborative as she had experienced in her prior roles. He felt that he had encouraged participation as much as was needed, while she, perhaps because she was from a younger generation, did not. By talking through their problems, they came to realize that it was simply a difference in definition and worked together to reach a point where they were both happy.

There are also a number of practical challenges to overcome. Collaborative budgeting is a communication-led process, and therefore comes with any of the pitfalls of any communication-led processes. It requires proactive, positive communication – ensuring the strategic plan and objectives are communicated and that every includes them when making any budgeting decision. It also needs lower-level employees to properly explain the reasoning behind their decisions and understand the limitations around company resources. Some may attempt to manipulate budgets and resource allocation to their benefit, and doing both of these things should help keep them on the straight and narrow.

Ultimately though, it is a bottom-up, collaborative approach to budgeting that best leads to an achievable budget, with more accurate figures and a workforce more inspired to meet them. Although it may take a greater investment in time, the pros far outweigh the cons, and it should be considered.

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