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Understanding Bottom-Up Budgeting

written by: Marce•edited by: Donna Cosmato•updated: 7/4/2011

Are you wondering what bottom-up budgeting is and if it's the best for your financial situation? Learn about it in this article as well as an alternative budgeting method.

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    There are two main types of budgeting: bottom-up budgeting and top-down budgeting. Bottom-up budgeting is the most popular type of budgeting for home and business.

    Understanding What is Bottom-Up Budgeting

    Chances are, you have used bottom-up budgeting without even realizing it. The first thing you do is list all of the things you need to do and buy for a particular project. Once your list is complete, you go through each item that you need and calculate how much it will cost. You then take a total from it and withdraw that amount from your funding.

    In the business setting, managers usually discuss needed items for a particular project or necessities for their office. This list with other lists from other managers of different departments lead to a determination of the total amount for the budget needed for that fiscal year.

    Disadvantages of Bottom-Up Budgeting

    The disadvantages to bottom-up budgeting are that you may end up asking for more money than you actually need. This is only a problem if you are unable to give the money back, which is common in many companies. However, the alternative problem to this type of budgeting is that you may under calculate what you need and then not have enough.

    Advantages of Bottom-Up Budgeting

    The advantage of using this type of budgeting is that you are free to procure all that you need as long as you ask for the right amount of money. Just remember that it's better to overestimate than underestimate.

    The Alternative: Top-Down Budgeting

    The alternative to bottom-up budgeting is top-down budgeting, which is getting a budgeting and working within it. This means you may not be able to get everything you need but it does keep you from overspending.

    Deciding on a Budgeting Method

    When decided which type of budgeting to use consider the project and the amount of money you have in funding. If you have limited funds, it may be best to keep a budget in mind. However, if your funding is large, it's best to get what you need so you can get what you need and get the job done right.