Bottom-up budgeting is a manner of accounting in which each individual department determines the amount of money necessary to complete projects. This amount includes the individual tasks involved in each project and any necessary materials or equipment, as well as the cost of labor and running the department. The numbers from each department are then added together to determine an overall budget. In some cases, bottom-up budgeting breaks the amount up into monthly costs, and then these costs are added together to come up with an annual budget. While this is considered a relatively accurate method of budgeting for both small and large organizations and companies, there is often a danger of individual employees or departments padding the budget, leading to waste.
This type of budgeting begins with each department inside a company determining what tasks are necessary to complete each project or meet company goals. These tasks are then assigned an estimated monetary amount, factoring in the resources, materials, and equipment needed to complete the task. This may include office supplies, purchasing new equipment, and construction materials, as well as contracting out work and any other monetary expenses expected per each project or task.
A large portion of bottom-up budgeting is a department determining the cost of running itself. This includes the salaries and benefits of current employees and the potential added cost of hiring additional workers as necessary. In this portion of the budget, maintenance of equipment and the building occupied by the department, if applicable, are also included in the budget. Once each department determines the overall cost of meeting the expected goals and running the department, the heads of each group typically come together with upper level management to determine an overall budget. In bottom-up budgeting, the estimates from each department are reviewed as a group and added together for an overall monetary amount.
The manner in which the budget is broken up depends largely on the company and its needs. In some cases, each department may determine a budget based on each month’s expected expenses, and then present these numbers to the group. Companies that manage or conduct large projects, in which the monthly expenses will vary drastically based on how far along a project is, will typically add up the project expenses and operating costs for an annual budget. Then, the numbers from each department are put together to determine an overall company budget.
Bottom-up budgeting is often much more accurate, per project, than top-down budgeting, in which upper level management determines the amount of money available to each department or project. Despite this, it is not without faults. Unless closely monitored, there is a risk of each department adding in extra line items, projects, or operating expenses to provide the department with a cushion. In cases where each department does this, there is a risk of waste.