In this FAQ we will discuss what imposed budgeting is, the benefits and limitations, and the process of creating and implementing an imposed budget.
What Is Imposed Budgeting?
As the name implies, an imposed budget is one that is created by senior leaders and then imposed on lower-level staff for implementation. This is also known as top-down budgeting and is a common approach to budgeting that relies on input from lower-level staff but ultimately culminates in senior leaders having the final say.
Usually, input is gathered from the various departments which is used to allot budgets eventually imposed on individual departments. The individual departments are then responsible for creating their own budgets within the parameters set by senior leadership.
Benefits And Limitations of Imposed Budgeting
Like all budgeting methodologies and approaches, there are pros and cons. Understanding these will help you to identify if imposed budgeting is the best approach for your business.
Benefits of Imposed Budgeting
One of the key benefits typically observed with imposed budgeting is that it may involve a higher degree of efficiency. This is because each department is responsible for creating the most prudent and appropriate use of its allocations.
Another benefit of imposed budgeting is a faster turnaround – requiring fewer resources than more sophisticated budgeting. In contrast, bottom-up approaches usually put large demands on resources and can take significant time as lower-level staff are saddled with their normal workload plus the additional demands of the budgeting process. In contrast, imposed budgeting relies on a handful of key individuals who are well placed to make suggestions for each department.
Limitations of Imposed Budgeting
One of the primary criticisms of the imposed budget is that it tends to sap motivation among lower-level staff disassociated from the budgeting process.
Another common shortcoming of imposed budgeting is that it can limit allocations to departments that require additional funding to achieve growth. This has been cited as a reason why departments are unable to meet budgeted targets.
Imposed Budgeting Process
While every business conducts its budgeting process a little differently, there is a basic framework for the process of creating an imposed budget.
Senior Leaders Set Targets
The process begins with senior leadership setting overall objectives for the enterprise. These objectives help top-level leaders to identify targets for revenue, profit, and expenses for the upcoming year. These targets are considered within the context of previously achieved values and projected economic conditions.
Many facts are considered when setting targets including payroll increases or decreases and changes in the legal or business environment. In doing this, senior leaders often rely on individual department heads for input.
Finance Department Reviews and Approves
The proposed budget is typically sent to the finance department – they create the various allocations to each department.
Departments Receive Allocations and Prepare Budgets
Once allocations have been made by the finance department, the individual departments are then required to create more detailed budgets. These budgets should demonstrate a clear path to achieve the targets set by senior leadership.
Review Of Departmental Budgets
In their review of the budgets created, finance aim to align their departmental budgets with the overall goals set by senior leadership. In cases where budgets exceed the guardrails established by leadership, the finance department either denies or accepts the justification.
Final Budget Is Allocated and Monitored
Once finance managers have reviewed and approved all the departmental budgets, a final budget is distributed across the organization. This is typically done with the help of some financial software or system. Actual performance is then monitored against budgeted performance and top-level management regular reviews reports which indicate the extent to which each department is reaching their goals.
Using Datarails, a Budgeting and Forecasting Solution
Datarails’ FP&A software solution replaces spreadsheets with real-time data and integrates fragmented workbooks and data sources into one centralized location. This allows users to work in the comfort of Microsoft Excel with the support of a much more sophisticated data management system at their disposal.
Every finance department knows how tedious building a budget and forecast can be. Integrating cash flow forecasts with real-time data and up-to-date budgets is a powerful tool that makes forecasting cash easier, more efficient, and shifts the focus to cash analytics.
Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.
Datarails is an enhanced data management tool that can help your team create and monitor cash flow against budgets faster and more accurately than ever before.
Learn more about the benefits of Datarails here.
Additional Budgeting Resources you Can Learn From:
> Predictive Budgeting Guide
>Activity based Budgeting (ABB)
> Zero Based Budgeting
> What is Incremental Budgeting?