Budget Estimation and Risks

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Discuss the advantages and disadvantages of top-down budgeting and bottom-up budgeting. Provide examples of the application of each type of budgeting.

 

 

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Budgeting is an important part of financial planning as it helps organizations determine their spending priorities in order to maximize resources and reach desired goals. There are two primary types of budgeting – top-down and bottom-up.

Top–down budgeting, also called ‘roll up’ or ‘zero based’, focuses on the big picture by setting overall budgetary targets then breaking them down into smaller objectives (Bushnell & Gathergood., 2020). This method allows decision makers to take a macro perspective while taking into account external factors such as inflation or market trends which can affect company performance in the long run . One example of this type of budgeting could be when a company sets an overall annual budget for its operations then allocates funds accordingly across various departments (

.At the same time however this model does not provide much flexibility for individual departments leading to potential issues if certain areas require additional funding due to sudden changes in circumstances.

In contrast bottom–up budgeting works from ground level upwards by having individual team members submit detailed proposals outlining what they feel is necessary to complete their assigned tasks. These are then reviewed by higher management who make decisions based on their best judgement while considering any existing constraints (Bushnell & Gathergood., 2020). This type of approach allows more granular control over specific projects allowing leaders make better informed decisions that involve greater detail compared to top–down models.

One example could be when each department submits a proposal detailing how much they need along with reasons why —this might include information about expected profits or losses depending on which route is taken etc. Managers would then consider these requests before selecting the most cost effective solution for organization .

To summarize, both top-down and bottom -up methods have advantages and disadvantages but ultimately it depends on situation at hand as well as context related to project being undertaken. For instance if there exists numerous unknowns regarding completion timeline or costs associated with certain aspects then bottom -up might offer better solution since it provides greater flexibility versus top down where allocation must be decided beforehand without considering all available facts.

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