Question

With locations ranging from the USA to China the grand 58 hotel chain is known for its indulgent luxury and sumptuous surroundings. This aura of old world elegance stands in stark contrast to its rather heavy emphasis. Yet it is this very approach that makes it possible for the Ritz Carlton to offer the legendary grandeur all guests expect during their stay

A hotel's performance is the responsibility of the general manager and controller at each location worldwide. Local forecasts and budgets are prepared annually and are the basis of subsequent performance evaluations. Preparation of the annual budget begins with the sales budget prepared by the hotel's sales director. Budgeted sources of revenue include hotel rooms, convention, wedding, meeting facilities, merchandise, and food and beverage. The controller then seeks input from all employees from maintenance staff to kitchen workers about anticipated payroll changes, operating costs, and planned events or promotions that may affect costs. Standard costs based on cost per occupied room are used to build the budget for guest room stays. Other standards are used for meeting rooms and food and beverage. The completed sales budget and annual operating budget are sent to corporate headquarters. From there actual monthly performance against plan is monitored.

On the 25th of each month budgets for the next 3 months are reviewed to be sure goals are still accurate. Accuracy can be critical for a business whose occupancy can fluctuate from day to depending on group or company bookings, special events, or changes in local competition. Any changes are communicated to corporate headquarters with explanations of revisions provided as needed. Managers of each hotel meet daily to review performance to date and have the ability to adjust prices in the reservation system if they choose. Adjusting prices can be important if a large group cancels at the last minute or if other unforseen events cause occupancy to drop suddenly as happened in the 2001 World Trade Center attacks.

Meeting the monthly budget goals is primarily the responsibility of each hotel controller. The controller of each hotel receives a monthly report from corporate headquarters that shows how the hotel performed against budget as well as against the actual performance of other Ritz Carlton hotels. Ideas for boosting revenues and reducing costs are regularly shared among hotel controllers who recognize the value of contributing to the entire organization's success not just the success of their own hotel properties
QUESTION
The Ritz Carlton gives all employees at each of its hotels the chance to meet with their hotel's controller to review budgets and reports on actual performance as a form of participatory budgeting. What advantages or disadvantages do you see with this approach?

Answer 1

Budgeting is a controlling tool in which the targets to be achieved are defined and the actual results are compared budgeted amounts to evaluate the performance. However, it is important the budgeted figures should be feasible and achievable. Thus, the process of creating a budget is considered to very crucial and should be undertaken very cautiously. Participatory budgeting allows all employees who are affected by the budget to get involved in the budget-making process. Employees are given authority to create and implement the budget.

Advantages:

• As manager allows employees freedom and responsibility for decision making, their morale will raise put their best efforts to meet the standards.
• Once they are given authority and responsibility, they understand the importance of cost management. They realize there is a cost which is attached to every single mistake. For example, due to any breakage, the availability of funds for wage increments, new uniforms, etc. will decrease as the cost of mistake will be recovered from that funds. In this way, they will perform their jobs carefully and with utmost responsibility.

Disadvantages:

• It may take a long to create a budget as the large group of people would be involved in the decision making process.
• As employees are involved in the process of decision making, they would have access to confidential data. In case if they leave the organization, they may leak information to the competitor.
• Employees may fail to coordinate their individual goals with overall organization goals.