Saturday, 6 October 2012

Top Down Budgeting


Different methods of Top-Down Budgeting

As the name suggests, these include the approach of setting up a budget at the topmost level in an organization and then is allocated to the lower levels. There are different types of methods that include the following:
  1. Affordable Method – In this, the budget is first allocated for seemingly more important functions – operations and production, then the remaining amount is set aside for promotional activities. This is more commonly used by the small firms as it focusses on the spending limit more than the requirements of different functions
  2. Arbitrary Allocation – While this is less scientific than the affordable method, very few firms use this today. The budget is decided as per the management discretion without any theoretical backing
  3. Percentage of Sales – This is most commonly used as the budget is set as per the sales amount. The most important part of any business is to increase income and hence, taking sales as basis is more logical. At the same time, this method should be used with some variation so that maximum benefits can be obtained
  4. Competitive Parity It states that the budget for advertising and promotion will be set as per the competitor’s allocation. Here, people have greater belief in the collective thinking of the industry players. A major problem is that knowing about the exact figures of competitors may not be possible every-time
  5. Return on Investment Every aspect of business converges to one thing – Income/ Returns. The amount of investment that is made depends upon the return on investments made by the owner. This method seeks to reward the functions that provide higher returns for business. The main concern is that it is not really possible to find out the real benefits of promotional activities
Below is an example of a top down approach:




0 comments:

Search

Loading...