The budget can be formulated in three ways: a bottom-up approach, a top-down approach, and an iterative approach. The first method affects primarily departments and projects, the second relies on the targets of the firm's management, and the iterative method implies the presence of conditional stages. The information is disseminated by the management, then it is collected and summarized from below.
In order to properly budget, the management of the enterprise needs to adhere to the mixed iterative method. Since it is very useful to know the information from the departments in order to make informed decisions at the top. Their adoption requires “clean” filtered information, which the budget process can provide.
At the same time, lower-level managers can better plan their activities if they have more information from the top from management. After all, it knows better the goals of the company for the long term, and also has a clearer picture of the overall picture of the company's affairs.
Bottom-up budgeting requires all lower-level managers to budget for the areas of activity for which they are responsible. This method allows the heads of departments to take a more responsible approach to the formation of the budget and the subsequent implementation of all its goals. However, it is also very likely that the indicators presented “from below” will be significantly changed at the top, which in turn will cause negative feedback from subordinates if the decision is unreasonable.
A top-down budget requires just as much commitment from management and a clear understanding of the company's specifics. The management must be able to form an absolutely realistic forecast for the required period. In this case, coordination of the budgets of the departments will be achieved, the benchmarks for the main points (sales, expenses, income, etc.) will be taken into account, which will help to effectively evaluate the work of the responsible centers.
Still, the most effective budgeting process is iterative. Financial indicators are lowered from the top, and generalized information is collected from the bottom, the entire system of enterprise budgets is formed, they are analyzed from the point of view of compliance with the set goals of management (profitability, turnover, etc.). Indicators have been achieved, the budget is signed by the management. If not, iterations continue.
