Top-Down vs Bottom-Up: Which Financial Planning and Forecasting Model Works for Your Firm?

The engine driving professional service firms is comprised of pistons, known as projects. For the firm to arrive at its destination as planned, each piston (project), needs to be beautifully managed, and have perfect timing so the machine runs smoothly. 

Macroeconomics 

The driver of the bus (your firm) is the CEO of the business. They have the skills necessary to handle the vehicle and are responsible for the quality of the ride and ensuring the passengers arrive safely. They are monitoring their dashboard, the road ahead and keeping an eye on the side and rearview mirrors. They make sure the gas tank has sufficient fuel to reach the destination and monitor the vitals that keep that engine humming. When all is well, they also ensure the bus interior and exterior are shiny and clean for the enjoyment of the passengers.  

Microeconomics 

Under the hood of the bus is a sophisticated engine that is the force enabling that driver to take those passengers to their destination. That engine hums when the pistons move as designed. I like to think of a project as a piston. If you want that piston to operate optimally, you must maintain it well. It must be inspected, lubricated, cleaned, cooled, and provided with proper fuel.  

The person responsible for how this piston operates is the project manager. When your firm provides project managers with the correct tools - this enables them to ensure that the project runs smoothly, and it serves the greater purpose.  

Project managers are actually business managers: they are the CEO of their own little business. That business is the project. Firms that don’t enable their project managers to have full financial and operational responsibility will never achieve optimal efficiency and profitability. The bus that they are serving will have a less than optimally, smooth ride. 

Top-Down vs Bottom-Up 

You more than likely have an understanding of what I mean when I say top-down and bottom-up approaches. Before we continue, let me give you a basic refresh.  

In the top-down management approach, management assumes the responsibility of making key decisions, in this case financial, which are then cascaded through a hierarchical structure. By assimilating information, conducting thorough analyses, and deriving actionable insights, managers proceed to formulate processes that are effectively communicated and executed by the entire team. 

When embarking on financial planning using the top-down approach, influential decision-makers begin with a broad objective and systematically work their way backwards to determine the specific actions required by different groups and individuals to achieve that objective. 

The entire planning process is orchestrated at the management level. Once an action plan has been meticulously devised, decision-makers disseminate it to the rest of the team, enabling its implementation. 

On the other hand, in the bottom-up approach, collaboration is fostered across all levels of the team to collectively identify the necessary steps towards accomplishing overarching goals. The bottom-up approach boasts greater adaptability compared to the more formal top-down strategy, which is why it’s predominantly embraced in innovative industries. 

Cloistered Systems 

Now that we have this picture of the two approaches, let’s back up and look at the bus and how top-down and bottom-up financial planning apply. 

It should be obvious that the reality is, typically, the bus driver doesn’t need to know or care about the engine or its maintenance. They are trained to drive and may have no idea about the mechanics of the engine.  

In some cases, they probably don’t even know how to unlatch the hood to look at it. Simultaneously, the mechanic charged with maintaining the drivetrain of the bus has no interest in the trip it will be taking. They neither know nor care about the lives of the passengers or the pickup or drop-off locations that the driver will be using.  

These two groups are firewalled. They can go about their jobs and do fine work without knowing what the other does. However, they both serve the ultimate purpose of ensuring the company that employs them is profitable and part of that success is the success of the mission and happiness of the passengers. 

In my four decades of working in and for the AE industry, I can say that this philosophy dominates. Firm management is cloistered from project management. Each group seems to enjoy this separation. After all, to optimize resources, ensuring their focus on the task at hand is desirable. Let’s not burden people with information that doesn’t help them in the most effective execution of their work. 

A Holistic Approach to the Financial Forecasting Model 

For anyone in the design profession, you can appreciate the distinction between conceptual design and construction documents. They are both essential to a successful project. You aren’t hired to design a building and start preparing the foundation plans. First, you articulate the vision and spend more time developing the ideas than you do in the production of the construction documents.  

When it comes to your firm, you must apply the same process to every facet. This is why we examine a strategic plan every year. We shape the vision for the firm (top-down), and once this is agreed upon, we look at what will be required to manifest this vision (bottom-up).  

The details in our construction documents serve the big picture.  

As Mies van der Rohe said, “God is in the details.”  

This is what elevates buildings to become architecture. 

A holistic approach to financial planning and forecasting involves bringing both groups into the analysis. The generals at the top need to ensure the big picture is being served. They need to ensure the destination they are taking the bus can be safely reached. The soldiers in the trenches need to state the truth about the field conditions and request the supplies and other resources needed in order for them to succeed with their respective objectives.  

To isolate these requirements doesn’t mean the goals can’t be achieved, but the odds of it failing entirely or in part are increased when not considered as a whole. 

The Right Tools 

For AE firms, I’m a proponent of the accounting module in BQE CORE. It includes a financial budgeting system that enables firms to inherit actual revenue and expense data from any prior period to help build their financial budgeting for the future year, quarter, or month.  

This means you can start with a snapshot of actual information and then get into the details by adjusting values based on your strategic plan and the business climate you anticipate. 

There is really little sense in doing any budgeting if you aren’t monitoring it on a regular basis. I recommend doing that review every month so you can compare how you are performing based on the budget. This gives firms the opportunity to make adjustments as needed.  

To be successful in business, one must always be malleable. When using BQE CORE, you can not only create your financial plan but have the system automatically generate reports on a regular schedule and send them to the people charged with managing the plan.  

In addition to firm-wide financial planning, every project requires a similar level of attention. This is one of the biggest benefits of having a system like BQE CORE which enables both business accounting but also project accounting. Having the ability to run a budget versus actual report at both the firm and project levels means you have the right tools that understand the importance of the engine and its pistons but also the conditions of the bus and its ability to arrive at the destination safely. 

The Benefits of Combining Top-Down and Bottom-Up  

I suggest that neither top-down nor bottom-up methods should be used alone. Your firm should follow a hybrid approach to financial planning, which combines elements of both top-down and bottom-up methods and provides several key advantages over using either method in isolation.  

1. Balanced Perspective: A hybrid approach ensures that both the big-picture goals of the organization and the detailed, ground-level realities are taken into account. This balance can lead to a more realistic and achievable financial plan. As you look at the forecasts, you won’t be disappointed as their roots are grounded in the real world.  

2. Improved Communication: By involving individuals from all levels of the organization, a hybrid approach can improve communication and understanding across the organization. This can lead to a more cohesive and motivated team, with everyone understanding how their specific goals align with the overall financial targets of the organization 

3. Increased Accuracy: Bottom-up planning can improve the accuracy of financial plans because it uses detailed, operational-level data. When this is combined with the strategic perspective of top-down planning, it can result in highly accurate, strategic, and detailed financial plans. 

4. Better Risk Management: A hybrid approach can improve risk management by ensuring that risks are considered at all levels of the organization. This can lead to more comprehensive risk mitigation strategies. 

5. Greater Flexibility and Adaptability: With a hybrid approach, organizations can quickly adapt their financial plans as circumstances change. They can switch between top-down and bottom-up planning as needed, depending on the particular situation or phase of the business cycle. 

6. Enhanced Employee Engagement: By involving employees in the financial planning process (a feature of bottom-up planning), organizations can boost employee engagement and morale. Employees who feel their input is valued are likely to be more committed to achieving the organization's financial goals.  

You will find advisors who suggest the top-down approach is more successful for very large organizations and the actual approach should depend on the firm size, structure, and organization. They might recommend small firms use the bottom-up approach. I, on the other hand, believe in the power of checks and balances.  

As design professionals, we are keenly aware of the importance of the grand vision and the imperative of proper detailing. Regardless of the size, structure, or culture of your firm.

Summary

In many cases, firms may find that a combined approach is best, using top-down forecasting to set overall strategic goals and expectations based on market trends, while using bottom-up forecasting for tactical planning and operational decision-making based on the specific projects at hand.  

The combined approach allows firms to benefit from the strengths of both methods, potentially increasing the accuracy and usefulness of the forecasts.