Budgeting is a very critical activity of any business. It is a multi-dimensional activity that provides a plan of action as well as direction to the management. The scope of budgeting is not limited to resource allocation and a roadmap provision.
Another important aspect of budgeting is ‘control.’ If budgeting helps you create an action plan for strategizing a business’s spending, control helps to follow and stick to the plan.
Budgetary control is a method or technique that facilitates the senior management of a firm or company to follow the budgetary limits and ensure compliance.
According to the definition in CIMA Official Terminology(2005),
In management accounting, control means ensuring that activities planned and undertaken lead to the desired outcomes. So, the scope of control is effective and efficient operations, internal financial control, and compliance with laws and regulations.
Feed Forward Control is a type of budgetary control that is an important driver of financial management decision-making. This article will walk through the types of controls, Feedforward control, how managers use it, its pros and cons.
Let’s get into the article.
Types Of Control Systems
Generically, there are two types of control systems.
- Open Loop Systems are those which do not encompasses the corrective actions. Such systems are often referred to as non-feedback systems. These control systems are continuous and the result has no influence on the outcome or output of the business operations. These control systems lack a feedback loop.
- Closed-loop systems are those which fully take into account the corrective actions necessary for aligning expected performance with the actual performance. Such control systems are often named feedback systems. The closed-loop budgetary control system is further subdivided into feedback control and feedforward control.
Feedforward is an important tool in budgetary control systems.
It has been described very elaboratively in CIMA Official Terminology (2005) as,
The Feedforward control encompasses the forecasting of the differences between the actual and planned outcomes. It also includes the implementation of corrective actions to avoid the differences before the event actually happens.
To completely understand the concept of feedforward control, you must understand feedback control.
In the feedback control, the simple phenomenon of comparing the actual outcomes with the budgeted results. The actions are taken for the future budgets and financial period.
Therefore, the main difference between the two is that feedforward control is a proactive approach that encompasses the corrective actions before the negative outcomes are actually shown up. The scope of feedforward control implies taking action before it’s too late.
Breaking Down Feedforward Control
Let’s break down the concept of feedforward control to understand it completely.
Unlike feedback control, feedforward control is a technique employed to prevent any deviation from the planned outcomes. The inputs are monitored, and a response action is generated accordingly.
If the feedforward control is broken down into different steps, it would be:
- A careful and comprehensive analysis of the planning and control system
- Regular review of the system for input variables and the inter-relationships for a consolidated output
- To collect the data about input variables and synchronizing it with the developed system
- Regular analysis of actual input data variations from planned inputs and assessing its effect on the expected result
- Based on the analysis, taking the corrective actions to align the planned and actual paths.
It is a future-oriented control that is mostly undertaken in between the financial period. Feedforward control has been implemented in the budgetary control procedures because time-lag decisions do not contribute positively. Feedback control is obsolete from a budgeting perspective because it is like a post-mortem.
Therefore, with the forecasts of feedforward control, managers are better able to take corrective actions. The feedforward control helps devise different techniques for different purposes.
The most common use of this future-directed control is planning cash availability, sales targets, and PERT(Programme Evaluation and Review Technique).
Let’s understand the practical implication of Feedforward control to understand this control system in business management better.
A sales manager of company XYZ reviews the monthly control reports about the revenues values. According to the budget, the sales for the year ending Dec 31, 2020, are $800,000 in total. The said product line has a total of 3 products.
The feedback control report for May looks like something in the table below:
|Sales Report For May
The feedforward control report of the same month will look different. It will be something like the table given below.
|Sales Report For May
|Latest Forecast for the year
Example no 2:
Here is another example to enhance your understanding of the concept.
A firm, Layman Co., has prepared its budget for the financial year 2020. According to the budget, the firm will generate around $2 million in sales during 12 months, starting from January to December.
At the end of April 2020, the firm can generate sales of around $600K. By December, they should be generating sales of around $1,800K. This amount is still $200K below the budgeted sales.
Now, these forecasts are based on the feedforward control system. The firm is better able to address the expected variations and take corrective measures. In this way, the firm will not be deprived of a sales generating opportunity.
How Can Manager Use The Feedforward Control Systems?
The control systems are a combination of integrated controls that collectively contribute to the internal control and organizational goals. There are different controls, including management control, financial control, performance management, and managing information systems.
No control can be fully implemented in isolation. The managers use different integrated tools to make decisions. For instance, the organizational goals are achieved by the integration of management, finance, HR, marketing, information systems, and project management.
Similarly, let’s go deep down in financial control. Financial control is a series of activities starting from planning, budgeting, management, accounting, and auditing. By feedforward control, the managers can decide their course of action for the expected variations.
The benefit of feedforward control is that business managers do not have to wait for the year-end: regular analysis and interpretation help in aligning the budget and actual performance.
Here are some advantages of feedforward control to the managers of any business and the business itself.
The most promising benefit of the feedforward control system is that it is proactive instead of reactive. The advanced forecasting of any unexpected event or fluctuations helps the business managers take corrective measures and find a solution to the problem before even if the problem occurs.
Time-Saving For Year-End
Feedforward control requires more cost and effort. But the final result is worth it. The forecasting and forecasting approach of the software on a monthly and recurring basis can be a time-saving activity. The feedforward control can help a lot in completing quarterly and annual budgets due to already collected data.
Besides, the monthly analysis and corrective measures save a lot of time for the year-end accounting.
The management Is Prepared For Unknown
Since the scope of the approach is to forecast the problems and be prepared for them. If the feedforward control is always in line, the management will be prepared for the unknown and unexpected.
With many good points, there are some downsides of this control system too.
Technology has blessed every field with new advancements, discoveries, and facilitation. Generally, a budget is prepared by following the budget templates. However, the integration of feedforward control with the accounting software requires additional costs. Therefore, it might not be a feasible solution for most small businesses.
Main Focus Is Budget
In the feedforward control system, the whole focus of activities is toward forecasting and budgeted values. The day-to-day operations and their activity become irrelevant, and managers are spending most of their time ensuring compliance.
As a result, product quality assurance, customer dealing, manufacturing, and other critical business functions might get ignored.
Time Consuming Activity
Another downside of feedforward control is its continuous nature. As a result, most of the managers’ time is eaten up in preparing monthly budgets and comparing the results with the expected amounts.
The scope of the article was to discuss the feedforward control system as a budgetary control system. It must be clarified here that the feedforward control is not a dedicated control system for business management or financial management. The application of this control system is extended in different fields, from project management to genetic engineering.
However, our focus was to discuss the application of the control system for better budgetary estimates and the overall financial performance of the firms.
By applying feedforward controls, companies can better forecast the contingencies and variations in the set targets. The corrective actions can be taken well within time to save the business from a major setback.