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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 an internally focused mechanism which helps the company in controlling its costs, its profitability and inventory level.
Budget is basically an 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 advantages of budgeting for hospitality industry business are as below: (Smallbusiness.chron.com, 2018) (Investopedia, 2018)
1. 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.
2. 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)
3. 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.
4. 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.
5. 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)
1. 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)
2. 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.
3. 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.
1. Smallbusiness.chron.com. (2018). The Advantages of Budgeting in a Business. [online] Available at: https://smallbusiness.chron.com/advantages-budgeting-business process-21740.html [Accessed 2 Oct. 2018].
2. 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].
3. 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].
4. 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].
5. 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].