Top Down, Bottom Up
Top Down, Bottom Up. This sounds like a mixed martial art move. Or, perhaps something you do in gymnastics.
But for this article, it refers to two distinct approaches to budgeting or projections.
Planning
“In their hearts humans plan their course, but the LORD establishes their steps.” – Proverbs 16:9
Planning is an important discipline.
In fact, Jesus himself used an example of this when he was discussing the cost of discipleship.
“Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you, saying, ‘This person began to build and wasn’t able to finish.’” – Luke 14:28-30
Large Organizations
If you have ever worked in a Fortune 5oo company, you know the efforts that large organizations undertake for planning.
In fact, very large organizations may have teams of very dedicated professionals that spend the majority of their time doing just that. And, this is what I observed back in the 90s when I worked for a very large Fortune 500 organization.
On one side of the street we had the Financial Reporting Department. Financial Reporting spent their time compiling and preparing the current year’s actual financial reporting. And, literally, on the other side of the parking lot (in another building), we had FP&A (e.g., Financial Planning and Analysis).
The FP&A team literally spent their year analyzing and doing two things:
- Comparing the current year’s actual results to the current year plan, and
- [For the rest of the time], worked on multi-year forward-looking projections.
Most [but not all] large organizations have planning covered.
Small Organizations
Small organizations, on the other hand, are completely different.
It’s not uncommon for small organizations to skip this important step altogether.
Or, a projection in a small organization might look something like this:
“This year’s (or last year’s) gross sales of $____ million, plus __ .” You can fill in the blank with your sales and your desired percentage increase.
But, as the saying goes, “a goal without a plan is just a wish.”
Two Approaches to Projections
You could be a business owner. Or, maybe a C-level executive leading an organization. Whichever the case, be encouraged to pursue the practice of praying over and preparing projections.
To simplify matters, there are two distinct approaches.
Top Down
The Top Down approach involves YOU or a key C-level executive preparing a projection.
Typically, the Top Down approach is used by smaller organizations that lack the internal management talent to involve a large team.
Every plan or projection I’ve worked on or observed looks different. Every person is different. There are no two organizations alike. Consequently, every projection is different.
Some are elaborate. Some are very simple. In practice, some Top Down projections look like top-line revenue projections, like the example given above. Basically, it’s what the CEO would like to see for sales.
Bottom Up
The Bottom Up approach involves your team preparing a projection.
Typically, the Bottom Up approach is used by larger organizations that have the internal management talent to do so, like in the case of the Fortune 500 company example given earlier.
As mentioned, large organizations have people dedicated to working on plans year-round. These might look like multi-year projections. They can be sophisticated, multi-variable Excel models. But, whatever the medium, these projections usually come together with all of the underlying assumptions that go along with it. And, that is the key.
What’s the Best Approach?
Whichever approach you decide to employ, the main point is to do it.
Here are some things to consider:
- No matter what, it’s important to plan your way. Wayne Gretzky has a saying: “You miss 100% of the shots you don’t take.” So, be encouraged to practice preparing projections.
- Also, the projection is only the first step. The real work follows. Additionally, you should take the time to document and assess the underlying assumptions. As a result, you will need to identify what you will need to do to observe the results you desire. Be encouraged to read the article To Move Forward Think Backward.
- Lastly, be encouraged to revisit the projection throughout the ensuing months. Are you on track? Are you engaging in the new efforts you outlined?
A Hybrid Approach
If your organization has adequate and skilled staff, you can use the Bottom Up approach.
Generally, it’s a good idea to involve others in preparing the plan. Most people will appreciate the empowerment. They will feel valued and trusted. And, as a leader, you have blind spots. So, gathering input from those with different vantage points is valuable.
It can be a fun and revealing exercise to do both. That is, having the CEO or a capable C-level executive prepare a Top Down projection. And, then, compare this to the Bottom Up projection.
Then, be encouraged to marry or synthesize the two. It’s a good idea to involve everyone in helping give shape to this exercise.
A Caveat
I have seen an approach that doesn’t work well. I’ve seen it where a team was engaged to prepare a Bottom Up projection. But, the results were summarily thrown out in favor of the Top Down version. If you do this, you will disenfranchise your team.
They will be left to feel like their input is not valued.
So, if you decide to employ a Bottom Up or a hybrid approach, you will do well to include your team in synthesizing the two.
Conclusion
Are you in the practice of preparing projections? I hope you will embrace this important discipline.
Whether it’s Top Down or Bottom Up — or a combination of the two — be encouraged to wade through the process. It’s not just about the destination, as they say. It’s about the journey. The real value is in arriving at actionable steps for the next year. Remember, it’s important to continually Innovate, Accelerate, Replicate®.
We’d love to walk with you through this process. Contact us if you’d like to do this.
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About the Author:
Ken Moll is the Principal and Founder of Blue Elevator®. With professional experience spanning four decades, Ken has a breadth of foundational business knowledge rarely found – making him part of an elite class of professionals. Ken's passion is helping clients of Blue Elevator® get their “business to the next level™.”