We all have the anxiety to know what will happen to us in the future and the majority of the time we have our plan as humans love to forecast things, in the case of companies also the same thing happens where company forecast its sales and revenue based on certain variables some of which are in their hand while some of which are beyond their control. Bottom up forecasting refers to that forecasting method which starts from the bottom that is individual departments and goes all the way to the top that is the summation of forecasts of all the departments which in turn gives the forecast of the whole company. In order to have a better understanding of this term, one should look at some of the advantages and disadvantages of bottom up forecasting –
Advantages of Bottom Up Forecasting
Grounded Approach
The first and foremost advantage of bottom up forecasting is that it is a more grounded approach in the sense that since all data is taken from the ground level and hence there is no scope for any superficial figures which is the case with the top up forecasting which in turn ensures that forecasting is closer to ground reality leading to the achievement of budgeted targets by the departments at the end of the financial year.
Department Segregation
Another benefit of this forecasting is that it leads to the segregation of various departments forecasts which in turn help the company in looking at the potential of individual departments. In simple words, this method ensures that departments which are having good potential will come into the eyes of the top management of the company and the company should ensure that those departments get all the resources to excel which in turn will help the company in not only achieving the targets but also overtaking the targets.
Motivates Employee
This approach in a way helps in motivating the employees because in the case of top down approach employees do not have any say as they have to follow what top management has said resulting in them working like robots. In simple words when employees themselves make forecasts then they will try their level best to achieve the target forecasted by their departments resulting in the achievement of the targets by the company.
Disadvantages of Bottom Up Forecasting
Time Consuming
The biggest disadvantage of bottom up forecasting is that it is very time-consuming because every department will give its inputs and the company will have to look into those inputs and then make the forecast for the company as a whole which makes the whole process lengthy which is not the case with top down forecasting where top management can make forecast fairly quickly as they do not have to consult each and every department resulting in the company doing forecasting quickly.
Lacks Vision
In the case of top down forecasting, top management makes forecasts taking into account all factors which in turn ensures that top down has broader vision as it is made keeping in mind the whole company and not individual departments while in the case of bottom up forecasting departments will have a narrower vision and they will think only about their departments and themselves while making forecasts which in turn results in bottom up forecasting lacking vision. In simple words bottom up forecasting is more like a portrait picture where departments will think about themselves while top down forecasting is more like a landscape picture where many details are captured giving the company a better vision regarding its future.
Biasness
When you ask employees and departments to forecast then chances are that some people may use it to make an inaccurate forecast that is projecting fewer sales and revenues when actually they can achieve more so as to be on the safer side. In simple words, it’s like giving answer sheets of examinations to the students for checking and we all know that biases will creep in same is the case with bottom up forecasting where biases will creep in if employees and departments are asked to forecast the sales and revenues
As one can see from the above that bottom up forecasting has benefits as well as limitations and that is the reason why any company thinking of taking this approach for forecasting purposes should carefully read the above points and then only should take any decision.