Top-Down Budgeting: Definition, Process & Advantages

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Variances in Budgets: Definition, Calculations & Analysis

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
Your next lesson will play in 10 seconds
  • 0:02 What Is Top-Down Budgeting?
  • 0:18 Process
  • 2:20 Advantages
  • 2:43 Disadvantages
  • 3:09 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Speed Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Carol Woods

Carol has taught college Finance, Accounting, Management and Business courses and has a MBA in Finance.

In top-down budgeting, a company's high-level targets and goals are defined by senior management, and then managers are given an allocation from those targets. In this lesson, we'll discuss why companies use this method and how the process works.

What Is Top-Down Budgeting?

Top-down budgeting is a budgeting method in which senior management develops a high-level budget for the company. Once the top-level numbers are created, amounts are allocated to individual functions or departments that must create a detailed budget with their allocation.

Process for Top-Down Budgeting

Let's say you're a manager in an organization that follows a top-down budgeting process. Here's how the process would work from your point of view:

Senior management meets and determines high-level targets for the company for sales, expenses, and profits. You would not be included in this meeting; instead, only senior management would gather in a room and come up with the overall objectives for the year.

Then, the finance department takes the approved totals and allocates them out by department. They will likely use percentages from prior years to do this split - so if your department was responsible for 20% of the operating expenses last year, you will likely see a budget target of 20% of the total operating expenses approved for your department in the high-level budget.

Next, each department manager is asked to take his or her allocation and develop a detailed budget to match it. This will be your job - taking the total revenue and cost figures you've received and developing a detailed budget showing how your department will generate the revenues assigned and what you'll spend the cost dollars on to generate those revenues. This detailed budget will include specifics like the quantity of different products sold, the number and type of staff required, and detailed expenses by category, such as office supplies, equipment, and payroll.

All of the detailed budgets are then submitted back to the finance department, which consolidates them to make sure the overall objectives have been met. You may receive your budget back for revision; for example, if another department manager made a good case for her cost allocation being insufficient for her to meet revenue goals, that department's allocation may be adjusted with a corresponding decrease in your allowed expenses.

Once all of the detailed budgets are finalized, the whole thing is loaded into the financial system and monthly reports are generated comparing actual activity to the detailed budgets. You'll receive information each month showing your progress toward revenue goals and the amount of your allowed expenses you've utilized to date.

Advantages of Top-Down Budgeting

The greatest advantage of top-down budgeting is that the overall business plan ties to senior management's objectives and that management determines that the appropriate resources are utilized to meet those objectives. Top-down budgets also tend to focus management's attention on efficiency, since they receive a total and must figure out how to achieve their department's business objectives within that amount.

To unlock this lesson you must be a Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use

Become a member and start learning now.
Become a Member  Back
What teachers are saying about
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account