Effective corporate financial management is not only about the ability to effectively allocate resources – it is also about precise enterprise planning and expense control. How to do it professionally and wisely? Learn budgeting methods for companies – the foundation of an effective financial management strategy. In this article, we will look at different budgeting approaches, analyzing their advantages and disadvantages, as well as how to adapt the appropriate budgeting methods to manage your company’s financial resources.
Budgeting: methods. About the top-down and bottom-up budget
One of the most key aspects of budgeting is who takes part in the process – this is why we distinguish between top-down and bottom-up budgeting.
Top-down budget
This is a budget created by senior managers and presented to the rest of the company.
Advantages:
ensures compliance of activities at lower management levels with the goals of the entire enterprise;
higher-level employees have more information about business goals and the conditions for implementing a given budget.
shortens budgeting time.
Defects:
top-down budgeting may hinder the flow of information in the company;
this is one of the budgeting methods that generates the risk of non-acceptance of goals and the distribution of finances among other employees;
it does not motivate employees – they do not decide on the budget.
Learn more: What are the goals of budgeting?
Bottom-up budget
What are the budgeting methods beyond top-down budgeting? A bottom-up budget, i.e. prepared by managers at all operational levels, with the participation of the staff. Such a budget is later verified by the management board, but is not created by it.
Advantages:
effective coordination of activities of individual parts of the enterprise;
higher employee motivation, better understanding of goals;
realistic, based on employee experience.
Defects:
longer budget preparation time due to many decision-makers.
What are the budgeting methods in companies? Incremental, zero-based, static, dynamic and percentage of sales budgeting
Incremental budgeting
This budgeting method involves correcting data from the previous period with expected changes in the next year, taking into account external and internal factors (development, economic crisis, etc.). It is not very labor-intensive because it does not require changing procedures, but it increases the risk of transferring errors from previous years/quarters to the new budget period.
Budgeting from scratch
Zero-based budgeting methods, as the name suggests, are based on working from the beginning, without copying assumptions from previous periods. Thanks to this, past irregularities can be avoided, but it is a very time-consuming process that requires a lot of involvement of various people and departments.
Static method
It involves planning a budget for a specific period of time. It does not take into account unforeseen situations and the need for potential changes within the budget. It is prepared once for a given period, therefore it may become outdated.
Dynamic/flexible method
It begins with the creation of a sales plan, takes into account the analysis of factors influencing sales conditions, and allows for a flexible approach during the period covered by the budget. It takes into account the changing conditions of the company’s operations and external influences.
Budgeting using the „percentage of sales” method
In this budgeting method, assets and liabilities are divided into those dependent on and independent of sales, and the value of dependent assets is a linear function of sales. This is a simple, uncomplicated method that allows you to easily adjust your budget to dynamically growing businesses. However, there is a risk of copying errors from previous periods into future budgets.
It is worth adding that there are also mixed methods that combine elements of the above strategies, creating a strategy tailored to the needs and capabilities of the enterprise.
Check also: What are the stages of budget planning in a company?
Let’s summarize budgeting methods for businesses
You already know what budgeting methods exist in companies and how to use them. Let us remind you:
Top-down budgeting
Bottom-up budgeting
Incremental budgeting
Budgeting from scratch
Budgeting using the static method
Budgeting using the dynamic method
Budgeting using the percentage of sales method
Choosing the right budgeting strategy is not only about effective financial control, but also an opportunity to gain greater flexibility. Analyze your budgeting methods of choice and tailor your strategy to your unique needs and goals. It is worth noting that budgeting is not just a tool, but actually a whole process that involves the entire organization. Effective financial management through proper budgeting can ensure the stability of the company and motivate its development.