Commons Methods Used to Prepare Financial Budgeting Spreadsheets
Both methods share the same objective to produce an accurate Financial Budgeting Spreadsheets.
Bottom Up Budget
In the "Bottom Up budget" method, the company let the all the managers of departments (HODs) to come up with their own budgeting spreadsheet justified by formulae, researches and plans. The HODs will do the first review of the spreadsheets. Once they have finalized, the spreadsheets will be submitted to the Financial Planning Unit for further review. During this review process, the budget figures will be fine tuned. During this review stage, it is quite common for the spreadsheets to flow in and out between the respective Departments and Financial Planning Unit.
Once the Financial Planning Unit finalized the spreadsheets, it will be submitted to the Board of Directors (BODs) for final review and final approval. During the review by BODs, there may still be spreadsheets flow to and backward to the BODs. But the frequency of these would be very much reduced at this stage. Once the BODs finalized the budget figures, the financial budgeting spreadsheets will be final and ready to be implemented by the respective departments.
Top Down Budget
In the "Top Down budget', the Financial Planning Unit uses the historical reports such as Balance Sheets and Profit and Loss Statements, to comes up with preliminary budgeting spreadsheets. The Financial Planning Unit will hold a meeting with all the BODs and HODs and presents the preliminary spreadsheets to all. During this meeting, the spreadsheets will be discussed and fine tuned to the satisfaction of the meeting. Once the meeting finalized, the spreadsheets will be circulated to the respective departments for implementation and to draw up plans to achieve budget figures.
Pro and Con
Both the above methods have their pro and con. The "Bottom Up Budget" is slow but the budgeting spreadsheets tend to be more accurate as all levels of the company staff, from bottom to top, are involved in the preparation of the budget numbers.
The "Top Down Budget" is faster but the budgeting spreadsheets are less accurate as the budget numbers are decided at top level meeting and the participation of lower level staff are limited. The impact of this less accuracy can be minimized by applying some financial analytical ratios and formulae to fine tune the final budgeting spreadsheets.
The review process may be differ from organization to organization. But the main objective of the review process, that is, to produce Financial Budgeting Spreadsheets as accurate as possible, is the same.
I personally prefer the "Top down Budget" method and fine tune it with various analytical rations and formulae.
Visit http://www.budgeting-spreadsheet.com for more related articles.
Thomas Wong
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