Budgeting

The budgeting process

How a budget is built: top-down targets, bottom-up submissions, and the negotiation that reconciles them.

20 minintermediateFree lesson

Learning objectives

Explain top-down and bottom-up budgeting and the trade-offs of each
Recognise budget slack and the incentives that create it
Reconcile a bottom-up submission to a top-down target and size the gap

A budget is a company's financial plan for the coming year, agreed by management and approved by the board. It sets targets, allocates resources (people, marketing, capital) and becomes the yardstick that every month's results are measured against. FP&A (financial planning and analysis) teams run the process, challenge the numbers and later explain why reality differed.

In this track you are the FP&A analyst at Rawdah Home Retail Co., a home-furnishings retailer with FY2025 revenue of SAR 1,497.0 million. You will build its FY2026 budget, explain the first quarter's variances and re-forecast the year. Rawdah Home Retail Co. is a fictional retailer; all figures are illustrative.

Two directions, one number.

Top-down: the board or executive team sets targets ("grow revenue 8%, hold the EBITDA margin") from strategy, investor expectations and the market. Fast and aligned with strategy, but the people who must deliver it may see it as imposed and unrealistic.
Bottom-up: each budget holder (category manager, store manager, department head) builds their own plan from operational detail. Realistic in detail and owned by those who deliver it, but slow, and budget holders have an incentive to build in slack (an easy target).

Most companies combine the two: guidance goes down, detailed submissions come up, and FP&A reconciles them. The gap between the two is negotiated through challenge sessions where every assumption is tested, until the board approves a single plan.

A typical annual calendar (for a December year-end):

Q3: guidance. Strategy review, top-down targets and planning assumptions (inflation, pay rises, FX) issued by FP&A.
September–October: submissions. Budget holders build revenue, cost and headcount plans in FP&A's templates.
October–November: consolidation and challenge. FP&A adds up the submissions, compares them with the targets, and runs review meetings.
December: approval. The board approves the budget, which is phased by month so it can be tracked.

Other approaches you will hear about: incremental budgeting (last year plus a percentage: quick, but it carries forward old inefficiencies) and zero-based budgeting (every cost justified from zero each year: rigorous, but time-consuming).

Sizing the gap

Gap = Top-down target − Σ bottom-up submissions; Uplift needed = Gap ÷ Σ bottom-up

Top-down target: last year's actual × (1 + the board's growth target)
Σ bottom-up: the total of all budget holders' submissions
Uplift needed: how much the submissions must rise, in total, to meet the target

Concept check

Exercise 1

Check your understanding

Rawdah's board has set an 8.0% revenue growth target for FY2026. The CFO asks you which budgeting approach to use. Which statement best describes the trade-off?

Top-down is fast and ties to strategy but lacks ownership; bottom-up is detailed and owned but slow and prone to slack. Combine them and reconcile the gap.Bottom-up is always more accurate, because the people closest to the business know the detail.Top-down is best, because ambitious targets imposed from above always lift performance.If done carefully, both approaches produce the same number, so the choice doesn't matter.

Concept check

Exercise 2

Check your understanding

Rawdah's Décor manager expects about 12% growth next year but submits 7.5%, because the bonus pays out on the amount by which actual sales beat the budget. What is this, and what is the best response from FP&A?

Budget slack (sandbagging). Challenge the submission with drivers and history, and consider rewarding absolute performance rather than beating the budget.Prudence. A conservative budget protects the company, so accept it."Use it or lose it" spending, fixed by moving to zero-based budgeting.Incremental budgeting, fixed by adding the board's growth rate to every category.

Calculation

Exercise 3

Calculate

Rawdah's submissions total SAR 1,587.0m against the board's top-down target of SAR 1,616.76m. In the challenge sessions, three changes are agreed:

Furniture adds a spring marketing campaign worth SAR 12m of extra sales.
Home textiles adds a new online range worth SAR 8m.
Décor takes over the room-bundle sales of SAR 6m that were already in the Furniture submission (Furniture's plan falls by the same amount).

How much of the gap is still unresolved and must go back to the board (SAR m)?

Your answer

Worksheet

Exercise 4

Challenge: Reconcile top-down and bottom-up

Rawdah's category managers have submitted their FY2026 revenue budgets (SAR millions). Complete the reconciliation:

Totals in B8 and C8, and the growth each submission implies in D5:D8.
The top-down target (B10), the gap (B11, positive means the submissions fall short) and the uplift needed (B12).
A first-pass allocation of the top-down target in proportion to each category's submission (E5:E8), and the gap each category must close (F5:F8).

Use formulas linked to the inputs.

0/17 cells entered · Ctrl+. jumps to the next empty cell

	A	B	C	D	E	F
1	Board guidance	Value
2	Board growth target, FY2026	8.0%
3
4	SAR m	FY2025 actual	Bottom-up FY2026	Implied growth	Top-down allocation	Gap to close
5	Furniture	823.4	870.0
6	Home textiles	374.2	395.0
7	Décor and accessories	299.4	322.0
8	Total
9
10	Top-down target: FY2025 total × (1 + target)
11	Gap: top-down − bottom-up
12	Uplift needed on the bottom-up total

InputYou build (dashed while empty)Given, lockedImplied growth · Furniture

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