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Three Key Approaches to Developing a Budget

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One of the important subjects in the business is the ability of prediction performance. This ability
helps organizations to be successful in their businesses. If an organization be able to predict its
performance, arrangement of resources will befirmed, certain and in the most operative
approach. Budgeting bring this prediction value to the organization.

There are some methods that an organization can use for its budgeting process. We are going to
explain three method of budgeting and take a look to advantages and disadvantages of these
three methods. However, bottom up, top down and zero based are the introduced methods.

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Running a business in most efficient way needs to deploy some fundamentals issues. One of
these issues is budgeting. Budgeting has much return for organization to overcome different
barriers. The budget performs in different ways, it could also shows, if the performance of
organization is as it should be or not

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Abudget is a written guesstimate of how a department or business unit will execute monetarily
and it is a plan for saving and spending. Budgeting is the translation of financial resources into
managers¶ purpose. The real importance of budgeting derives when associating this estimate
with real performance. (Richard Pettinger , Kathleen Allen, Peter Economy(2007)) Administer
decision and department in the organization in the direction of its goals, is the aim or the goal of
budgeting

There are some benefits that budget offers to an organizations

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Each business and organization has its own goals and budget is an easy and quick way to make
sure that, if the organization is moving toward achieving that goals or not.(Richard Pettinger ,
Kathleen Allen, Peter Economy(2007))

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When the organization wants to start an activity, quickly can find out how much that activity cost
and is that activity profitable or not. The organization can find significant section in decision
making-process in budgeting- process.

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@ometimes budget is just a paper with most useful figures. With a simple budget the
administrators and managers can decide quickly.

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It is necessary to be able to make changes according to conditions. The budget accommodates
the changes and generates an up-to-date picture of the business, market and organization.

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When the expenses go beyond the budget there are numerous things to do in order to get back on road.

@uch as: Review the budget. It means that,before starting any other action it is important to look
closely at the budget. @ometimes the budget is disproportionate, or stop expenditure, one of the
most operative methods to bring spending back in the budget path is to freeze spending. If
spending is over budget, the organization can postpone new projects until it has enough money.
Or sometimes Fire employees and close servicesto cut expenses, the last retain is to dismiss staff
and blackout facilities (Richard Pettinger , Kathleen Allen, Peter Economy(2007))

Because of the significant role of budgeting in development of organization it seems, it is vital to

emerge budget in a system.

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There are three methods which cause budgets improve. Those three keys are: 1- Bottom up 2-
Top down 3- Zero-based budgeting

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In bottom up budgeting the supervisors and middle managers prepare the budgets and forward
them for review and approval. The start point of the bottom up methods is bottom or department
level that is founded on objectives of the sections. Though, the overall company goals must be
gratified by operating level. Every section makes its specific budget such as approximations of
sectiondoings and produces lines by department, before participates into the master budget
(Jeark.@him, Joel G.siegel (November 2008))

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When all lower-level managersare involved in budget preparation, they are more inspired to
reach budget goals.Anextensive level of involvement,commonlycauses greater support for the
budget and the individuals as anentire. In addition, it also origins more knowledge about what is
being performed. The advantage of a participative budget is better correctness of budget
evaluations. Managers with direct effective duty for accomplishments have a better
understanding of the results that can be reached and their costs. Also when managers have
assisted to established goals,they cannotaccuseimpracticalgoals as a reason for not reaching
budget visions.

In spite of the participation of lower- level managers, it is still essential for top managers to
contribute in the budget process to be sure that the combined goals of the several departments are
firm with profitability purposes of the corporation. The budget shouldrevised, corrected and
accepted at each advanced level(Jeark.@him, Joel G.siegel (November 2008))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 moral of the employees.This
improvement is because most of them will be involved in the budgeting process. Every
department will be expected to pitch in to come up with the new budget.
(http://Finweb.com/financial planning)?

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There are some disadvantages in using bottom up method: time consuming process from participative
involvement and the point that functioningpartsmay inattention some company purposes.
Bottom-up does not permitcontrol of the process and the subsequent budget is probable to be un-
balanced with regard to the connection of expense to revenue (Jeark.@him, Joel G.siegel
(November 2008))

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. (http://Finweb.com/financial planning)

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Top down budgeting is a tool for chief capitals managers. Top management makes top down budget and
enforces on the minor layers of the organization. Top down budgets obviously supervise the performance
goals and prospects of top management. (Dr.Kathleen Allen, Peter Economy (December 2007).)

Traditionally, budgets have been formulated according to a bottom-up approach. In Top down
method, the budget is formulated in another way from thebottom-up style. The finance ministry
establishes the completespendingthat is based on macroeconomic expectations and the medium-
term financial management`sgoals (John M.Kimandchung-Keunpark(2006).)

Top-down budgeting is not to prevent the optional powers of democratic organizations. In

contrast, it is to suggest and support any scope or distribution of the budget. It removes the
difficult and conflict-ridden process of selecting which sequencersand happenings should
acceptextrafinance, which should continue at prior year¶s level, and wherecuts should be
prepared. Though, a top-down process highpoints the trade-offs that have to be completed, and
earningsclearness as to how the progression of arrangement will be committed. (Gostaljungman
(November 2009).)

Top-down budgeting is a businessdesignstructure in which the budgeting process begins with a

flow of information from the very top of the organization -- the CEO and perhaps the board of
directors -- down to the departmental or divisional levels of the organization. This information
flow includes an outline of overall company goals for the year, guidelines for lower level
managers to use when preparing their budgets, and templates to be used for submission of the
budgets.
The top-down method of budgeting assumes that top management has a clear vision for the
direction the company must take to grow and become more successful. in Top management view
the company is a group of parts that have toact in synchronization, while lower level managers
may only have a narrow view that isdependent on the choice of their section`s or unit'sfarm
duties. Top management also has a strongimage of the properties that are accessible, mainly the
capital that can be paid. If lower managers set their specific budgets without any leadership from
senior management, then it is expected that the whole spending needs would go beyond ofthe
afford ability of the company (Angie Mohr (2007).)
The finance section in the top-down system makespatterns and directions for the units or
partitions in order to use in structureof their budgets. These templates may possiblycontain
spreadsheets in which the managers involvement their line articleexpenses, and the company
possibly willmake available a setup for all manager to write a descriptionclarification of the
suppositionthat they used in order to determine the budget. The whole company objectives for
the future year are also interconnected. The managers are obligatory to consider these goals
consideration once they are working on their budgets. For instance, a corporation may vote forto
have anemploymentrestriction, this means that no new personnel will be transported aboard in
the coming year. @ection or division level managers would have to decide how to influence the
objectives assigned to them employing the existing number of staffs. (Angie Mohr (2007).)

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Once the departmental and divisional heads make whole their budgets, the movement of statistics
causes the movement in the opposite direction, and they transfer their figures and expectations to
the finance department for joining into one master budget for the whole company. The
standardized format and strategies the finance department provides andcreates for at
easeunificationthis is an advantage of a top-down system. The finance department carries outall
budget line by line and decidesif there are any objects that don't appear to be reasonable, or
requireadditionalexplanation. In several companies, finance personnel would come in contact
with each manager and mentionalterations to the budget if they estimate it isessential. Other
companiesask senior management to review this process, and the role of finance is drawing
attention intosubjects in each budget that the senior managers may want to converse with the
department or division managers. After discussion and cooperationinside the management
collection, the division or department budgets and the total company budget are accepted by
senior management. (Angie Mohr (2007). )Collective budgets can every so often be developed
quite exactly.Budgets are unchanging as a percent of entireportion. The numerical distribution is
also unchanging, making for high expectedness alsominorexpensive tasks do not essential to be
separatelyrecognized. The understanding and decision of the executive financial records for
minor but significant tasks to be factored into the completeapproximation is considerable (John
Wiley (2006).)

Also the other advantages of top down budgeting is that , the evaluations of top managements
about the cost of projects in combinedpositions , frequentlybe given to be fairlycorrect. Likewise,
thesecombinedestimationsdeliver the source for disaggregation, which in turn offersvital
budgetary discipline and similarly cost control,as senior level managers are straight involved in
emerging the project budget, there is a sense of promise, ownership and care (Ray
R.Venkataraman ,JeffreyK.Pinto(2008))


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Because goals and guidelines are given to division or department managers from upper
management, they may feel that they were not given enough latitude in preparing their budgets.
Their view is that they have the best understanding of the challenges they face, and they should
be the ones who setting the goals. The role that finance managers play in the top-down process
can lead to friction with department managers. They resent that people outside their department
are telling them their expense requests are too high. However, the solution is for top management
to be sensitive to the concerns of the lower level managers. (Angie Mohr (2007).)

Also this budgeting method must be used in coordination with the philosophy that motivates it.
That is supposed to be true that top management possibly will not have the tendency or the
enough time to judge the precise cost value of eachsection of the project. Though it is anticipated
that the top management do have, the understanding the awareness and the wisdom to deliver
apracticalcollectiveapproximation of comprehensive budget for projects. If this relation is not
correctit can effect in some vibrantdrawbacks.

Firstly, lower-level managerpossibly willsense that their part of the project does not
truthfullyimpression of the task to be performed. should senior managers continueunchanging in
their budgetary situation, low-level manager mightemotionally sense that there is no other choice
for them except thatconsenting what they be aware of as unsatisfactory budgetary allocation as a
consequence, they possibly will feel that they accept all the accountability for their share of the
project, should it disappoint, but none of the specialist to identify and care a sensible budget for
their deeds.

@econdly, top down budgeting generates a theoretically conflict-laden atmosphere as the lower
level of organization work to bring into line their exact task budgets with the total project budget.
@incenumerous departments are challenging for a part of a fix amount,the top down method can
have the net consequence of fighting one department against another and
makingargumentativerelationships. When functional managers are in such situation which see
the budgeting progression is in these competitive lights, then there is a strong able to be for
political manner. Expandedestimates and other gamesmanship todefend in correct or
intentionallyunnecessary budget demand.

Thirdly, the efficiency of top down budgeting is influenced by the correctness and
trustworthiness which is used with it. Theprocedure is reallybeneficialjust when it is attached
with a top management that is well-informed to createrealistic cost estimation of the project at
hand; if they do not perform this way then the project is proximatelyhandled with an impractical
budget that cannot be reached.
Finally, some decision-making use top down budgeting unsuitably,they choose that by way
ofinspirational method for lower level managers. The cost of the project can also be
purposelybelowapproximation the trust that it will stimulate cost saving and efficiencies from
juniors. Whichever of this tactic is more likely to effect in staff discouragement and budget
exceed than projectachievement. (Ray R.Venkataraman ,JeffreyK.Pinto(2008))

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Zero based budgeting (ZBB) is a substitute method. The usage of zero based budgeting is
sometimes mainly in government and not for profit segments. In zero based budgeting, managers
are commanded to explain all budgeted expenses, not just changes in the budget from the prior
year.In traditional method of budgeting, start point for managers, is Last year¶s budget and adds
to it or withdraw from it. The basic is zero rather than previous year's budget.

Zero based budgeting methodneedssignificantcertification. besides to all of the timetables in the

normal master budget, the manager necessityformulate a sequence of conclusionsetsthat all
everyevents of the department are orderedconferring to their comparativerank and the cost of
each activity is recognized. Higher level managers can then analysis the conclusion packages and
cut back in those parts that seem to be less serious or whose costs do not look to be defensible.

Zero based budgeting is a respectableawareness. Just the subject is regularity with which a ZBB
evaluation is performed. Under zero based budgeting (ZBB), theanalysis is accomplished every
year. Criticizers of this type of budgeting charge that correctly executed zero based budgeting is
too time consuming and too expensive to defend on ayearlyfoundation. In adding, it is argued
that yearlyanalysesquickly become mathematical and that the whole purpose of zero based
budgeting is then misplaced. Whether or not a company should use annual reviews is a substance
of judgment. In some states, annual zero based reviews may be acceptable; in other conditions
they may not since of the time and cost. Though, most managers would at least reach agreement
that zero based reviews can be very supportive. (http/www.accounting for management.com)

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Using zero based budgeting has several advantages. a zero-based budget. @eparates the link with
the prior period¶s budget, so it can beescaped of the regular incremental growths that can collect
period after period when budgets are organized using the traditional technique. Business
accomplishments are reconsidered and financedin accord withquality and rendering to
orientation with the organization¶s strategic purposes. Making a budget with the zero-based
budget method is an operative way to design and an actual way to comprise and control costs in
an organization. (http://www.wikicfo.com/Wiki/Default.aspx)
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Formulating a budget by using the zero-based budget method can be pricey. Arranging a zero-
based budget requires much more exertion than preparing a traditional budget. It requires deeper
examination and study and inspection of entirely budget objects.
(http://www.wikicfo.com/Wiki/Default.aspx) It needs a lot of time, effort, and promise from
staffs. Arranging a zero-based budget necessitates much more time than making a traditional
budget. Because of this, it may be ideal to make a zero based budgeting every few financial
periods as opposite to each fiscal period.

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One of the keys to be successfulin a business is the capability of owners to predict how a
business will perform financially. Managers at all levels of an organization can play a role in an
organization`s financial strength and welfare The best kind of budgeting is the one that works
well in the way of organization aims and goals. @o this is the manager duty to choose the best
and most suitable way of budgeting and deed sufficiently on it so receiving a basic sense of an
organization financial image is important for management in order to have perfect budgeting
plan.
In this assignment firstly budgeting was defined and after that some of the benefits that
budgeting bringsin order to improve the business success is introduced.It has been recognized
that budgeting plays an importance role in any organization sothey needto go over the main
points and take all information together. It is also understood that expanding of budgeting is so
essential. In this case three ways that affectsemergence of the budgeting are introduced.These
methods are bottom up, top down and zero based budgeting method. Each method has its own
advantages and disadvantages that has been discussed and described in this assignment.
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1.RichardPettinger , Kathleen Allen, Peter Economy(2007). weekend MBA program .

I@BN:978-0-470-06097-1(pages 182-184)

2. Jeark.@him, Joel G.siegel (November 2008). Budgeting Basic and Beyond (3th edition) .
I@BN: 978-0-470-38968-3

3. Dr.Kathleen Allen, Peter Economy (December 2007). Choosing a Budget Method (2th
edition) I@BN:978-0-470-19429-4

4. http/www.accounting for management.com./zero-based budgeting (ZBB)

5. John M.Kimandchung-Keunpark(2006). Top-down Budgeting as a Tool for Central Resource

Management.OECD journal on budgeting.I@BN: 1608-7143

6. Gostaljungman (November 2009). Top-down Budgeting an Instrument to @trengthen Budget

Management. IMF (international monetary fund) work paper

7. Angie Mohr (2007). Financial Management 101 Get a Grip on your Business Number .
I@BN: 1-55180-448-4

8. John Wiley (2006).Budgeting and Cost Estimate

9. Ray R.Venkataraman ,JeffreyK.Pinto(2008). Cost and value management in projects (page86).

I@BN:978-0-470-06913-4

10. http://Finweb.com/financialplanning . The international financial portal financial web,

overview of bottom up budgeting

11. http://www.wikicfo.com/Wiki/Default.aspx.Modified on 2010/10/25 13:44 by @wathen.

.Categorized as accounting