Chap 8 Controlling

D ecision Mak ing

P lanning

O rganizing

Leading

C ontro lling

Managem ent Functions

R esearch

D esign

Production

Q uality

Marketing

Project Managem ent

Managing Technology

Tim e Managem ent

E thics

C areer

Personal Technology

Managing Engineering and Technology

Advanced Organizer

Chapter Objective

Explain different financial and non-financial systems

Definition of “Controlling”

“compelling events to conform to plans” -- Goetz

“Control techniques and actions are intended to insure, as far as possible, that the organization does what management wants it to do.”

Steps in the Control Process

4. Corrective Action

2. Measuring Actual Performance

3. Comparing Performance with Standards

1. Establish Standards

Planning

Controlling

Closed-Loop vs. Open-Loop Control

Closed-loop control (also known as automatic or cybernetic control) monitors and manages a process by means of a self-regulating system.

 Open-loop control (or non-cybernetic control) requires an external monitoring system and/or an external agent to complete the control loop.

3 Perspectives on the Timing of Control

Feed-back control. Screening or concurrent control. Feed-forward (or preliminary or steering) control.

Timing of Control

Feedback Control (Output)Measures system output and variance

with predetermined standardAdjusts system to maintain variance

within a specified range

Timing of Control

Screening Control (Concurrent)Control applied concurrently with

effort being controlled

Timing of Control

Feedforward Control (Steering or Preliminary)Attempts to predict the impact of

current actions/eventsCurrent decisions are refined to

facilitate goal attainment

Characteristics of Effective Control

Effective. Efficient. Timely. Flexible. Understandable. Tailored. Highlight deviations. Lead to corrective action.

Three Types of Control

Financial

Human Resource

Social

FINANCIAL CONTROLSFinancial statements provide the

basic information for the control of cash and credit, which are essential to the survival of a company.

 The balance sheetThe income statement, and The cash flow statement.

Balance SheetBalance sheet shows the firm's financial

position at a particular instant in time (a financial "snapshot.“)

Assets are what the company "owns" current assets (assets that can be converted into cash within a year)fixed assets (property, plant, and equipment at original cost, less the cumulative depreciation of plant and equipment [but not land] and depletion of natural resources since they were purchased).

Balance SheetLiabilities are what the firm "owes" current liabilities (must be paid within

a year) long-term debt.

Net worth or Equity (difference between assets and liabilities) original investment (what was paid in

for common and preferred stock) retained earnings (the cumulative

profits over the years after dividends are paid).

TABLE 8-1 Balance Sheet, Sterling Chemicals, Inc.,

December 31, 2001AssetsCurrent assets

Cash $150,724Securities (at cost) 99,866 $250,590Accounts receivable 416,304Inventories (at lower of cost or market)

Raw materials and supplies 208,046Work in progress 182,702Finished goods 289,610 680,358

Prepaid expenses 29,498Total current assets 1,376,750

Property, plant, and equipment 4,461,150Less accumulated depreciation 2,402,024Net property, plant, and equipment 2,059,126

Total Assets $3,435,876

Liabilities and Stockholders' EquityCurrent liabilities

Accounts payable $105,056Installments due within 1 year 26,836Federal income and other taxes 239,194Other accrued liabilities 120,768Total current liabilities 491,854

Long-term debt 968,664Total Liabilities $1,460,518 Stockholders' equity

Capital stock 505,130Retained earnings 1,470,228 1,975,358

Total liabilities and equity $3,435,876

Balance Sheet, Johnson & Johnson and SubsidiariesMed-Year, 2000

AssetsCurrent assets

Cash and cash equivalent $2,937MMarketable Securities 1,562MAccounts receivable, trade, net4,441MInventories 3,060MOther current assets 2,366M

Total current assets 14,366MMarketable Securities, non-current 398MProperty, plant, and equipment, net 6,692MIntangible assets, net 7,395MOther Assets 1,454MTotal Assets $30,305M

Liabilities and Stockholders' EquityCurrent liabilities

Loans and notes payable $870MAccounts payable 1,785MAccrued and other liabilities 3,950MTotal current liabilities 6,605M

Long-term debt 2,434MOther liabilities 3,287MShareholders' equity

Common stock 1,535MNote receivable from employee stock ownership plan

(35M)Accumulated other comprehensive income(350M)Retained earnings 17,839M

18,989MLess common stock held in treasury, at cost1,010M

Total shareholders' equity 17,979MTotal liabilities and shareholders' equity 30,305M

Income Statement

Income statement (also called a profit and loss or revenue and expense statement) shows the financial performance of the firm over a period of time (usually three months or a year).

Sterling Chemicals, Inc., Gross sales $3,246,386

Less returns and allowances 150,050Net sales $3,096,336

Less expenses and costs of goods soldCost of goods sold 2,002,376Depreciation and depletion 258,502Selling expenses 104,500General and admin. expenses 180,076

2,545,454Operating profit 550,882

Plus interest and other income 59,480Gross income 610,362

Less interest expense 33,260Income before taxes 577,102

Provision for income taxes 261,142Net income 315,960Retained earnings January 1, 2001 1,370,988

1,686,948Dividends paid

216,720Retained earnings December 31, 2001 1,470,228

Cash Flow Statement

Cash flow statement (or sources and uses of funds statement) shows where funds come from (net profit plus depreciation, increased debt, sale of stock, sale of assets) and what they are used for (plant and equipment, debt reduction, stock repurchase, and dividends).

Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows

operating activitiesoperating activities,

investing activitiesinvesting activities, and

financing activitiesfinancing activities.

operating activitiesoperating activities,

investing activitiesinvesting activities, and

financing activitiesfinancing activities.

This statement reports cash inflowsinflows and outflowsoutflows based on the firm’s

A summary of a firm’s payments during a period of time.

Statement of Cash Flows

Cash Flow from Operating Activities

Shows impact of transactions not defined as investing or financing

activities.

These cash flows are generally the cash effects of transactions that enter into the determination of net income.

Cash Flow From Operating Activities

Cash InflowsCash InflowsFrom sales of goods or servicesFrom interest and dividend income

Cash OutflowsCash OutflowsTo pay suppliers for inventoryTo pay employees for servicesTo pay lenders (interest)To pay government for taxesTo pay other suppliers for other operating

expenses

Statement of Cash FlowsStatement of Cash Flows

Cash Flow from Financing ActivitiesCash Flow from Financing Activities Shows impact of all cash transactions with

shareholders and the borrowing and repaying transactions with lenders.

Cash Flow from Financing ActivitiesCash Flow from Financing Activities Shows impact of all cash transactions with

shareholders and the borrowing and repaying transactions with lenders.

Cash Flow from Investing ActivitiesCash Flow from Investing Activities

Shows impact of buying and selling fixed assets and debt or equity securities of other entities.

Cash Flow From Investing Activities

Cash InflowsCash InflowsFrom sale of fixed assets (property, plant,

equipment)From sale of debt or equity securities (other than

common equity) of other entities

Cash OutflowsCash OutflowsTo acquire fixed assets (property, plant,

equipment)To purchase debt or equity securities (other than

common equity) of other entities

Cash Flow From Financing Activities

Cash InflowsCash InflowsFrom borrowingFrom the sale of the firm’s own equity

securities

Cash OutflowsCash OutflowsTo repay amounts borrowedTo repurchase the firm’s own equity

securitiesTo pay shareholders dividends

Ratio Analysis Financial ratios are ratios of two financial

numbers taken from the balance sheet and/or the income statement. compared with average values for the industry the firm is in to evaluate relative financial health, and compared with earlier values from the same firm to evaluate trends.

Liquidity RatiosLiquidity ratios measure the ability

to meet short-term obligations. Current ratio = Current Assets / Current

Liabilities (Min. 2)

Acid test ratio = [Current Assets – Inventory] / Current

Liabilities (Min. 1)

Leverage RatiosLeverage ratios identify the relative

importance of stockholders and outside creditors as a source of the enterprise's capital.

Debt-to-assets ratio = Total Debt / Total AssetsDebt-to-equity ratio = Total Debt / Total Equity

Activity RatiosActivity ratios (also known as

operating ratios) show how effectively the firm is using its resources. Inventory turnover = [Cost of good sold] / InventoryAsset turnover = [Net sales] / Total assetsAccounts receivable turnover = [Net sales] /[Accounts receivable]

Profitability RatiosProfitability ratios describe the

organization's profit. Profit margin = [Net income] / [Net sales]Return on total assets =[Net income] / [Total assets]Earning per share = [Net income – Dividends (P.S.)] / [# of outstanding shares]

Budgets

Financial budgets describe where the firm intends to get its cash for the coming period and how it intends to use it. Cash budgets Capital expenditure budgetsBalance sheet budget

Responsibility Centers

Expense or cost centers (expense budget)Revenue center (revenue budget)Profit centers (profit budget)

Budgeting Process

Top-down approachBottom-up approachCombination

Cost Accounting Allocating cost among products

 Product A Product B Total

Production 4,000 1,000 5,000Direct Labor $40,000 $10,000 $50,000Overhead $4,000 $1,000 $5,000Set-up Cost $4,000 $4,000 $8,000Total Cost $48,000 $15,000 $63,000Unit Cost $12 $15

Audits of Financial Data

Audits are investigations of an organization's activities to verify their correctness and identify any need for improvement. accounting and financial systems and records internal or external.

NONFINANCIAL CONTROLSHuman Resource ControlsTo assure that human and

organizational performance conform to expectations. Performance appraisal (individual)Management audit (group) (Figure 8-2)Human resource accounting (group) Social controls.

Non-financial ControlsSocial Controls

StandardsComparison with outcomesCorrective action

Non-financial Controls

Effectiveness of research activitiesSystems for release of drawing releaseInventory controlQuality control