Page 3: The importance of feedback
The budgeting process is a cycle of ongoing review and monitoring. Every month, Kraft uses variance analysis to identify deviations within the monthly result. A variance is the difference between the budgeted figure and the actual figure.
Variances can be favourable or adverse. For example, if actual sales income was greater than budget, this would be a favourable variance. On the other hand, if actual expenses were greater than budget, this would be an adverse variance.
By monitoring performance monthly, it is possible to alert cost centre managers to variances so that they can take appropriate corrective action or justify the new level of spend. At all stages the Senior Management team of Kraft is fully aware of any material variances that are derived from comparing actual spend vs budgeted figures.
Periodic reviews which are organised by the Budget Accountant, allow there to be a forum within which any feedback can be given on current actual spend vs plan, ensure that it is possible to reforecast the plan or alter current activity.
- Single loop feedback involves making correction to current activities in order to 'get back on course'.
- Double loop feedback involves amending the original plans so that they more accurately reflect current business reality.
In a company like Kraft, this ability to amend the budget is an important aspect of management. Kraft's operating environment is subject to rapid change, for example, in consumer demand patterns, in production technology, in competitor activity. So Kraft has to remain flexible and ready to respond to any challenges that it faces. Any one budget may be altered a number of times during a year, although there would always be a considered reason for doing so.