Definition

Top-down budgeting, also known as budget allocation exercise, is part of any company’s financial planning process that focuses on establishing budgets before they are passed down to each department. Each department head will then be responsible to implement the departmental budget as per the allocations received.This form of budgeting begins with senior management creating a budget for the company as a whole. Resources are then allocated to each department as per overall objectives and targets.

Example

Here's how top-down budgeting commonly works:Company management will determine targets across sales, expenses, and profits. The finance team takes the totals and allocates them across departments. Percentages from previous years are commonly used to split the total budget across departments. For instance, if a department made up 20% of the company’s operating expenses the previous year, it will likely get the same budget approved this year.Next, department heads will take the allocated amount and set up a detailed internal budget to take it forward. This detailed budget will talk about specifics like staff salary, office supplies, equipment, and more.

Why it matters

Top-down budgeting focuses on overall corporate growth and objectives. It lets company management decide on the allocation of resources across departments to further the company's growth. With this model, they can begin by allocating to the most critical departments and can better ensure that all departments are more aligned with the company's top-level goal.Top-down budgeting saves time for individual departments as they need not start from scratch. With the overall allocated figure, they can use the previous year’s budget to further allocate the figure across areas. It also reduces complications that would arise in case individual department budgets were to be put together and totaled to make a company-wide budget.

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