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Principles of ManagementControlling

Management Functions

Planning

Organizing Staffing Directing Controlling

What Is Control?

Control The process of monitoring activities to ensure that they

are being accomplished as planned and of correcting any significant deviations.

Need for control To measure progress

To uncover deviations

To indicate corrective actions

Need for Control

Adapt to environmental change

Limit the accumulation of error

Control helps the organization

Cope with organizational

complexity Minimize costs

Steps in the Control Process

Establishstandards

Measureperformance

Compareperformanceagainst standards

Maintain thestatus quo

Correct thedeviation

Changestandards

Determine needfor correctiveaction

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Steps in the Control Process Establish Standards

Control standard: A target against which subsequent performance will be compared.Control standards should be expressed in

measurable terms.Control standards should be consistent with

organizational goals.Control standards should be identifiable indicators

of performance.

Measure Performance Performance measurement is an ongoing process. Performance measures must be valid indicators (e.g.,

sales, costs, units produced) of performance.

Steps in the Control Process

Compare the Performance against Standards Define what is a permissible deviation from the

performance standard.

Utilize the appropriate timetable for measurement.

Determine the need for Corrective action Maintain the status quo (do nothing).

Correct the deviation to bring operations into compliance with the standard.

Change the standard if it was set too high or too low.

Types of Control Methods

Past oriented controls Post action controls

Measure results after the process

Can be used to plan future behavior in the light of past errors or successes

Accounting records, inspection of goods and services, etc.,

Future oriented controls Steering controls or feed- forward controls

Measure results during the process

They serve as warning post principally to direct attention rather then to evaluate.

Cash and fund flow analysis, on-time delivery, etc.,

Comparison of Control Methods

Inputs Process Outputs

Future oriented control

Past oriented control

-------------- Feedback __________ Feed forward

Control Techniques

Traditional Techniques

Budgeting Break Even Analysis Personal Observation Statistical Quality Control Internal and External Audits Balanced Scorecard Responsibility Accounting Financial Statements and Ratio Analysis

Modern Control Techniques

Linear Programming

Program Evaluation & Review Techniques (PERT)

Critical Path Method (CPM)

Benchmarking

Budgeting

Budgets are statements of anticipated results during a designed time period expressed in financial and non-financial terms.

The preparation of budgets is the step of establishing standards.

The budgeting process involves the use of cost standards. Purpose of budgeting:

Enable the actual financial operation of the business to be measured against the forecast.

Establish the cost constraint for a project, program, or operation.

Organization Budgeting

Boards of Directors

|

Top level managers

|

Middle level managers

|

Lower level managers

Budget department

or committee

Budgeting

Process of Budgeting

The various steps included in the preparation of budget are:

Top managers send down to the operating managers their views on the organizational goals, policies , resource position and its relationship with various environmental factors.

The lower-level or the operating managers prepare their budget proposals based on the guidelines.

The budget so prepared is sent to the top managers for their review , appraisal and approval.

Budgeting

If approved, the top managers coordinate these budgets with the overall budgets framed by them and prepare the master budget.

The master budget is then sent to the board of directors for their approval. Once approved, it is sent down the hierarchy again for its effective implementation.

Types of Budgets Operating budget: It relates to the operating

activities of an enterprise, which involve both revenue and expenses.

Financial budget: It predict various sources and uses of finance. It facilitates the working of operating budget.

Break Even Analysis

It involves the a chart which represents the overall volume of sales necessary to cover costs.

Break even analysis can be used both as an aid in decision making and as a control device.

The break-even point (BEP) is the point at which cost or expenses and revenue are equal.

BEP = TFC / (P-V)

Where,

TFC= Total fixed cost

P= Unit selling price

V= Unit variable cost

Personal Observation

Mangers can do close observation of subordinates while they are working.

Face-face interaction

It helps to know the worker’s attitude towards work.

It helps in correcting their work and methods, if necessary.

This technique is time consuming and costly.

Statistical Quality Control

It is statistical technique used to monitor quality of the products.

It is based on statistical theories and methods of probability to control the incoming materials, processes during production and final products.

It can be done in the following ways: Acceptance sampling

Process sampling

Control charts – X-Bar chart, R chart

Management Audit

Audit means periodic inspection of financial statements and verifying that the statement and are honestly and fairly prepared according to accounting principles. Audit thus provides the basis for control.

Two types of audit can be conducted by firm: External Audit

Internal Audit

Management Audit

External Audit: It refers to verification of financial statement. Company’s

assets, liabilities and capital accounts are checked and deviations are reported to managers for action.

Control is thus facilitated through verification of accounts against the standard principle. This is known as financial audit.

External audit checks fraudlent practices in preparing financial accounts.

Outside parties like, investors, bankers and financial institutions can enter into fair and honest dealing with the firm if its accounts are audited.

Management Audit

Internal Audit: It refers to verification of various statistical data and reports so

that correct and fair presentation of financial statements is made. It evaluates the firm's internal operations, determines where things have gone wrong and where corrective action is needed.

Objectives To appraise managerial efficiency with respect to objectives,

policies and procedures of the organization.

To asses whether organizational policies are being followed or not.

To evaluate management's performance with respect to standard performance.

Management Audit

If actual performance deviates from standard performance, to find out causes for the same.

To suggest remedial measures to remove deviation and improve managerial performance.

Balanced Scorecard

A performance measurement tool that looks at four areas- financial, customer, internal processes and people/innovation/ growth assets that contributes to a companies performance.

The four general perspective which have been proposed by balanced scorecard are as under: Financial perspective

Customer perspective

Internal processes perspective

Innovation and learning perspective

Balanced Scorecard

Limitations: Scores are not based on any proven economic or

financial theory. Balanced scorecard does not provide a bottom-line

score.

Responsibility Accounting

It divides the organization into small units where manager of each unit is responsible for achieving the targets of his unit.

These units are called responsibility centers and head of each responsibility centre is responsible for controlling the activities of his centre.

Performance of responsibility centre is judged by the extent to which targets of the centre are achieved .

There are four main types of Responsibility Centre are Control centre, Revenue Centre, Profit Centre and Investment Centre

Financial Statement

Financial statement depict the financial position of

the firm over a period of time, generally one year.

These statements are normally prepared along with

the last year’s statement so that the firm can

compare its present performance with the last year’s

performance and take necessary action to improve its

future performance.

As these statements are prepared at the end of the

financial year, as a measure of control, they provide

tips to managers to improve their future

performance.

Financial Statement

These statement offer information on the following aspects

Liquidity: The firm can know its cash position Financial Strength: Its assets and liabilities and its

equity position Profitability: The excess of revenue over cost

Two commonly used financial statement Balance Sheet: It is a statement of the company’s

financial position at a point of time, usually 31st of March. A balance sheet describes a company’s assets, liabilities and owner’s equity.

Financial Statement

Income Statement: An income statement depicts the company’s financial performance over a period of time(financial year : from April to march). It is a statement of company’s revenues and expenses.

Revenues are the inflows arising out of the company’s sale of goods and services.

Expenses are the outflows incurred to earn the revenues

Financial Ratio Analysis

Ratio: It means comparison of one figure with another relevant figure or figures. It may also be termed as number expressed in terms of another number.

No analysis is possible on the basis of absolute figures. Hence various ratios are calculated for financial analysis and control.

Some of such important ratios are as follows:-

Financial Ratios

Financial Ratios

Linear Programming

“linear programming is a planning technique that permits some objective function to be minimized or maximized within the framework of given situational restrictions.”

AX1 + BX2 ≤ Z

Requirements: Objective function. Constraints. Linearity. Non-Negativity. Finiteness.

PROGRAM EVALUATION AND REVIEW TECHNIQUE(PERT)

PERT: A time event network analysis system in which the various events in a project or program are identified with a planned time established for each.

Methodology: Preparation of the network Network analysis Scheduling Resource allocation Project control

Critical Path Method(CPM)

It is used for optimizing resource allocation and minimizing overall cost for a given project.

Procedure: Break down the project into various activities

systematically. Number all the events and activities. Calculate the earliest start time, earlier finish time,

latest start time and latest finish time. Determine total float time. Identify the critical activities and connect them with

double line arrow. Calculate total duration of project.

Benchmarking

Benchmarking: The search for best practices among the competitors or non-competitors that lead to their superior performance.

Benchmark: The standard of excellence against which to measure and compare.

The methodology adopted is as under: Identify the problem areas. Identify other industries. Identify organizations that are leaders in these areas.

Benchmarking

Survey companies for measure and practices. Visit the “best practice” companies to identify leading

edge practices. Implement new and improved business practices.

Gantt Chart

This chart system was developed by Henry L. Gantt. Gantt chart:

A bar chart that shows the time relationships between the “events” of a production program.

Milestone budgeting or milepost: Advanced technique of Gantt chart milestone breaks a

project down into controllable pieces.