About the Top-Down Budgeting Process

In down economic times, companies and governments are more likely to employ a top-down budgeting process. Budgeting is simply a process where benefits are attempted to be maximized given a set amount of resources. Top-down budgeting is where expenses are first categorized into groups before resources are allocated among those groups.

The Top-Down Budget

A top-down budget entails first separating expenses into larger aggregate categories. Before decisions are made about spending, a top-down budget sets an expenditure ceiling on each of these sectors. Individual appropriations of resources for any expenditure must be made without exceeding the total limit of the category to which that expenditure belongs. As an example, a top-down budget for a household might decide that $100 be budgeted for food, $100 be budgeted for clothes and $100 be budgeted for entertainment. Therefore, any spending on restaurants will fall under the food category and must not excessively contribute to exceeding the $100 threshold.

Top-Down Budget Drawbacks

Because top-down budgets derive their cost estimates from lower-level project managers, the aggregate budget estimates are only as accurate as the aggregate of these lower level cost estimates combined. A common scenario with top-down budgets is when executives and top-level management set unrealistic budgets for those below them. To prevent this, executives should seek the input of the managers and employees who must work under these budgets.

Postponing Projects

When top-level budgets are exceeded, management must decide where to cut costs. The easiest method is to postpone a project to a later date. The project will then not count against the current accounting period, but must be absorbed by a future budget.