If this style of budgeting is used, budgets are prepared from bottom-up, i.e. operating staff collects the detailed information from various departments/functions/other sources. Process usually has a budget coordinator – e.g. controller who aggregates/consolidates these lower-level budgets into the master budget which then is passed for management approval.
The process is thus reversed to top-down budgeting.
Advantages of bottom-up budgeting
- operating staff may be more motivated, if they participated in preparation (24)
- operating staff is in regular and detailed contact with the budgeted objects (24) and can therefore have better information compared to senior management, which may lack this insight. But on the other hand, operating staff often lacks a complex view.
- management can devote the saved time on more strategic issues (24)
Disadvantages of bottom-up budgeting
- lower control over budgets, mainly because operating staff often lacks a complex view and concentrate just on departmental issues (therefore the risk of not meeting the corporate objectives) (24)
- the risk of poor budgets increases, if operating staff do not have sufficient experience (24)
- the process of budget preparation is quite long (24)
- operating staff may set too easy targets (24)
- problems with coordination between departments (and departmental budgets need to interrelated)
- senior management often adjusts the final aggregated figures anyway. It is then very difficult to explain any variances of such budgets with actuals in the future if these adjustments are not planned into bigger operational detail.