The Budgeting Process
Many traditional companies use top-down budgeting, a process of developing budgets in which top management outlines the overall figures and middle and lower-lever managers plan accordingly. The top-down process has certain advantages: top managers have comprehensive knowledge of the organization and its environment, including their familiarity with the company's goals, strategic plans, and overall resources availability. Thus, the top-down process enables managers set budget targets for each department to meet the needs of overall company revenues and expenditures.
Other organizations use bottom-up budgeting, a process developing budgets in which lower-level and middle managers anticipate their departments' resource needs, which are passed up the hierarchy and approved by top management. The bottom-up approach builds on the specialized knowledge of operating managers about environment and marketplace, which they have gleaned from day-to-day operations. In reality, the budgetary process usually involves a mixture of both styles.