Advantages and Disadvantages of Budgeting in the Hospitality Sector

This assignment explores the crucial role of budgeting in the hospitality industry, examining its advantages and disadvantages. Budgeting is presented as a vital tool for identifying potential costs, incomes, expenses, and revenues, enabling informed management decisions regarding product viability and pricing. The advantages discussed include performance evaluations, fund planning, price fixing for products, cost control, and capacity management, all of which contribute to improved business operations. Conversely, the assignment highlights disadvantages such as the time-consuming nature of budget preparation, its reliance on assumptions, and its sole focus on financial outcomes, potentially overlooking non-financial aspects like service quality and market reputation. The analysis emphasizes the importance of understanding both the benefits and limitations of budgeting in the hospitality sector for effective financial management and strategic decision-making.

G. Budgets advantages and disadvantages
Budgets are an important part of the business. Budgets helps in identifying
the potential costs, incomes, expenses and revenues. On the basis of
budget, the management takes various decisions as regard to product, it’s
costing and its future viability, etc. Preparation of budget is an important
tool under cost accounting and is basically internally focused mechanism
which helps the company in controlling its costs, its profitability and
inventory level.
Budget is basically estimation of revenues and expenses over a specified
period of time. Budgets are prepared in advance for the coming years. It is
a long process which takes significant time and efforts.
The hospitality industry is related to providing services to its customers.
These services can be in the form of event planning, transportation
planning, tourism etc.
The advantages of budgeting for hospitality industry business are as below:
(Smallbusiness.chron.com, 2018) (Investopedia, 2018)
a. Performance evaluations - Budgets are prepared in advance, and
helps in setting the accountability or responsibility of the respective
departments. Thus it acts as a benchmark because on the basis of
budgets a goal or target is given to the respective department to
achieve in the coming year. After completion of the year, the actual
results are compared with the budgeted numbers and the variances
are computed, which helps the management in understanding the
deficiency of the business over the past period. Further, since the
incentives, bonuses of the employees are linked with the budgeted
number, it acts as a moral for them to achieve, since less achievement
will result in less payout to them. Hence, it helps in boosting sales of
the business.
b. Fund Planning – The preparation of budget gives the insight to the
management of upcoming expenses and the funds requirements. On
the basis of budgets, the management gets overview of upcoming
income and expenses. So, the management will have sufficient time to
plan its funds requirements. Thus, it helps in funds planning by
providing the requirement and time of funds. (Bragg and Bragg, 2018)
c. Prices Fixing for Products – Setting the price of the product is the
most typical and important aspect of any business. What price to
charge to the customers is an important question for every business?
Determination of product price is based on various elements, but

charging the price on the basis of competitor’s price is not the only
criteria. Thus, budgeting helps the business and the management in
determining the price of the product or service offered. As the
budgets calculates each and every aspect of the costs, including
material costs, labor costs, admin costs, etc. So, the management can
review those costs and determine the selling price of the product.
Thus, it gives a reasonable basis for charging of price.
d. Cost control – Budgets identifies the upcoming costs. Hence, the
management can evaluate those costs and can control the costs
wherever possible. Thus, it helps in controlling cost and other
irrelevant expenditures which in turn helps in increasing profitability
of the business.
e. Capacity Management – Every business has some bottlenecks or the
resources which are limited and should be used effectively. The
budgets allocates the resources to various activities and thus reflects
the capacity utilization. On the basis of this information, the
management can evaluate the utilization of those constrained
resources and use them in the most profitable manner.
Similarly, the disadvantages of budgeting for hospitality industry business
are as below: (CPA Practice Advisor, 2018)
a. Time consuming – The preparation of budget is a long and lengthy
process as it involves taking the inputs from various departments,
then evaluating those inputs, finalizing the information’s, setting of
the assumptions to be taken for preparation of budget and finally
preparing the budgets. Hence, it is long process which take significant
time and efforts. (Bragg and Bragg, 2018)
b. Assumption based – The budgets are based on the assumptions.
These assumptions includes like assuming sales units, assumption
regarding price of the raw material or inputs, etc. The business
operates in the business environment which is prone to changes. In
case, there is any change in the assumption taken, then the entire
budget will become meaningless and will reflect inaccurate picture.
These changes can be change in market conditions resulting in lower
sales then budgeted, change in the price of the product or labor
making the product or labor cheaper or costlier, etc. Hence, in such
scenario, the reliability of the budget gets weaken.

c. Only considers financial outcomes – The budget is based on
financial information and considers only the financial outcomes. It
does not considers non-financial impacts like service quality,
reputation of firm in the market, fair pricing etc. Considering these
impacts in the budget is not possible.

References:
Smallbusiness.chron.com. (2018). The Advantages of Budgeting in a
Business. [online] Available at: https://smallbusiness.chron.com/advantages-
budgeting-business-21740.html [Accessed 2 Oct. 2018].
Investopedia. (2018). What are the main advantages and disadvantages to
the cost accounting method?. [online] Available at:
https://www.investopedia.com/ask/answers/041515/what-are-main-
advantages-and-disadvantages-cost-accounting-method.asp [Accessed 2 Oct.
2018].
CPA Practice Advisor. (2018). The Disadvantages of Budgeting. [online]
Available at: https://www.cpapracticeadvisor.com/blog/10951056/the-
disadvantages-of-budgeting [Accessed 2 Oct. 2018].
Bragg, S. and Bragg, S. (2018). The advantages of budgeting. [online]
AccountingTools. Available at:
https://www.accountingtools.com/articles/what-are-the-advantages-of-
budgeting.html [Accessed 2 Oct. 2018].
Bragg, S. and Bragg, S. (2018). The disadvantages of budgeting. [online]
AccountingTools. Available at:
https://www.accountingtools.com/articles/what-are-the-disadvantages-of-
budgeting.html [Accessed 2 Oct. 2018].