INTRODUCTION The long-term existence of many companies is placed in jeopardy because of difficulties caused by problems, which could have been avoided in the first place. Examples of such problems are as follows: 1. The Transmission of Confidential Information to Competitors. For instance, if the introduction of a new product by the company is known in advance by the competitor, much of the advantage of such introduction is negated. 2.» The Hiring of Personnel Way above the Required Number, Unnecessary additions to the existing workforce mean waste of manpower and scarce resources. 3. Unethical Conduct of an Employee. For instance, the loan officer of a bank, for consideration; connives with a borrower for loan approval in spite of defective collaterals. The bank suffers in the end when it forecloses on the mortgage. The above-cited examples are typical errors, which happen every now and then. If left unchecked, they may be enough to get some businesses bankrupt. When this happens, unemployment occurs and there will be some disruptions in the provision of products and services to the public. These will not happen, however, if adequate controls are instituted. WHAT IS CONTROLLING? Controlling refers to the process of ascertaining whether organizational objectives have been achieved; if not, to determine why not; and determining what activities should be taken to achieve objectives better in the future, Controlling completes the cycle of management functions. Objectives and goals at any given point in the organizing and implementing stage are verified as to achievement or completion. When expectations are not met at scheduled dates, corrective measures are usually undertaken,Sere a eee IMPORTANCE OF CONTROLLING ~~ When controlli rolling is properly i e most efficie: 's properly implemented, it will hel anizati ieve i inthe efficient ard etfecte antes a ie will help the organization achieve its goal In any organizatic i - ‘ation, deviatis wiien they Oe ne ee ations, mistakes, and shortcomings happen once in a while. producing goods and one don to unnecessary expenditures, which add up to the oat Bi . The introduction of effective control measures minimizes the i effects of such ne case eters Bative occurre imizes, e hice VAMC Hatin 2 minimizes, if not totally eliminates loses in invent nnd OMe! system, for instance, entory. The importance of controlli the required een Controlling may be ilustrated as itis applied in a typi porpnoddiee che ae output for individual workers i 100 pies al es whe a0 Potheoming, they eamement at given sufficient time to improve; i sis in provements are Dilek ease to resign. This action will help the company keep its averher Sidled with esealetee eves no such contol measure is applied, the company will be Production costs, which will place the viability ofthe fain jeopardy, STEPS IN THE CONTROL PROCESS The control process consists of four steps, namely (Figure 56): Establish Performance Objectives and Standards I Measure Actual Performance ‘Actual Performance Match the Standards Take Corrective Action Figure 56 Steps in the Control Process Do Nothing 3 and Standards. For effective controlling, what ‘shing Performance Objective 1 determined, Typical examples of objectives and has to be achieved must first be standards are aS follows: Sales Targets — are expressed in quantity or monetary terms i Production Targets — are expressed in quantity and quality; 115Buses Ongercnmun wrt Marae < Worker Attendance ~ is expressed in terms of rate of absences; 4. Safely Records ~ are expressed in number of accidents for given periods; and 4 Used ~ are expressed in quantity or monetary terms for given periods, Once objectivesand standards areestablished, the measurement of performance will be facilitated, Standards differ among, various organizations. In construction tion dates are useful standards. In chemical manufacturing form the basis for standard requirements. After the performance objectives and standards are established, the methods for measuring performance must be designed. Every standard established must be provided with its own method of measurement. 2. Measuring Actual Performance. There is a need to measure actual performance so that when shortcomings occur, adjustments could be made. The adjustments will depend on the actual findings. The measuring, tools will differ from organization to organization, as each have has its own unique objectives. Some firms, for instance, will use annual rate as standard basis, while other firms will use some other tools like the market share approach and position in the industry. ‘Comparing Actual Performance to Objectives and Standards. Once actual performance has been determined, this will be compared with what the organization seeks to achieve. Actual production output, for instance, will be compared with the target ‘output. This may be illustrated as follows: A.construction firm entered into a contract with the government to construct a 100-kilometer road within ten months. It would be, then, reasonable for management to expect at Jeast 10 kilometers to be constructed every month. As such, this must be verified every month, or if possible, every week. 4. Taking Necessary Action. The purpose of comparing actual performance with the desired result is to provide management with the opportunity to take corrective action when necessary. ©. Supplies firms, project complet firms, certain pollution measures e Jf in the illustration cited above, the management of the construction firm found out that only 15 kilometers were constructed after two months, then, any of the following actions may be undertaken: : 4, hire additional personnel; b, use more -uipment; or © requise overtime work. TYPES OF CONTROL Centro) comsivns of Aree distinct types, namely (Figure 57);PRE- OPERATIONS Feedforward Contro} ACTUAL, 1 ' OPERATIONS Concurrent ' PHASE Control ! ' ' 1 ' ' Post fl OPERATIONS ) «--------- ieee ee ‘ontrol PHASE Figure 57 Types of Control and Their Relation to Operations Feedforward Control. When management anticipates problems and prevents their occurrence, the type of control measure undertaken is called feedforward control. This type of control provides the assurance that the required human and nonhuman resources are in place before operations begin. An example is provided as follows: ‘The manager of a chemical manufacturing firm makes sure that the best people are selected and hired to fill jobs. Materials required in the production process are carefully checked to detect defects. The foregoing control measures are designed to prevent wasting valuable resources. If those measures are not undertaken, the likelihood that problems will occur is always present. - Concurrent Control. When operations are already ongoing and measures to detect Variances are made, concurrent control is said to be undertaken. It is always possible that deviations from standards will happen in the production process. When such deviations occur, adjustments are made to ensure compliance with requirements. Information on the adjustments is also necessary inputs in the pre-operation phase. Examples of activities using concurrent control are the following: of a construction firm constantly monitors. the progress of the /e activities. When construction is behind schedule, corrective measures like the company zi hiring of additional manpower are made. ngaged in the production and distribution of water, the chemical Sia a the water procured from various sources is checked thoroughly before ition o! compos istibuted to the consumers Zl jon manager of an electronics-manufacturing firm inspects regularly ane Ee aate mf various electronic products coming out of the production lines. the outputs consis The managerBusiness Organization and Management 3. Feedback Control. When information is gathered about a completed activity for purposes of evaluating and deriving required steps for improving the activity, feedback control ts undertaken, Corrective actions aimed at improving future activities are features of feedback control. Feedback conti ofa percentag ‘An example of feedback control is the overtime work for factory workers lowers the obtained leads to some adjustments in the overtime schedule. I validates objectives and standards. If accomplishments consist only indard requirements, the standard may be too high or inappropriate. supervisor who discovers that continuous quality of output. The feedback information COMPONENTS OF ORGANIZATIONAL CONTROL SYSTEMS To effectively control activities, organizations adapt control systems consisting of the following components: 1. Strategic Plan. The strategic plan (discussed in chapter 6) provides the basic control mechanism for the organization. When there are indications that activities undertaken do not facilitate the accomplishments of strategic goals, these activities ‘are set aside, modified, or expanded. These corrective measures are made possible with the adoption of strategic plans. 2. Long-Range Financial Plan, The planning horizon differs from company to company. Most firms will be satisfied with a one-year plan. Engineering firms, however, will require longer-term financial plans. This is because of the long lead times needed for capital projects. An engineering firm assigned to construct a modern airport within three years is a good example. In such case, the three-year financial plan will be very useful. As presented in Chapter 6, the financial plan recommends a direction for financial activities. If the goal does not appear to be where the firm is headed, the control mechanism should be made to work. 3. Site Operating Budget. This indicates the expenditures, revenues, or profits planned “ for.some future period regarding operations. The figures appearing in the budget are used as standard requirements for performance. 4. Performance Appraisal. This measures employee performance. As such, it provides employees with a guide on how they could do their jobs better in the future Performance appraisals also function as effective checks on new policies and programs. For example, if new equipment has been acquired for the use of an employee, it would be useful to find out if it had a positive effect on performance. 5. Statistical Reports. These are those that contain data on various developments within the firm. Among the information which may be found in a statistical report are the following: a. _ labor efficiency rates; b. quality control rejects; © accounts receivable; d. accounts payable; e. sales reports; f accident reports; and & power consumption reports.ave 58 shows a sample statistical report a 1 eens. BILLY BOY MANUFACTURING COMPANY Sales Reports For the Six-Month Period Ending June 30, 2012 Amount Percent Sales Volume P 6,800,000 Sales Expenses Salaries 181,600 15.0 Commission 340,000 28.1 Promotion 160,600 13.3 Travel 275,400 22.8 Entertainment 40,300 33 Freight 179,200 148 Depreciation, taxes, and insurance 17,500 14 on service vehicles Miscellaneous 15,400 13 TOTAL SALES EXPENSES P 1,210,000 100.0 Prepared by: LEOPOLDO P. AMPARO Chief Accounting Division Figure 58 ‘A Sample Statistical Report 6. feo icies and Procedures. the organization must activities compete for Policies refer to t be pursued. An example he company’s attention, the cli he framework within which the objectives of of policy is, whenever two or more ient takes priority.Procedure is a plan that describes the exact series of actions or steps to be taken in a given situation, Following is an example of a procedure in the purchase of equipment: a. Theconcerned manager forwards a request for purchase to the purchasin, officer. : b. The purchasing officer forwards the request to top management for approval. c If approved, the purchasing officer makes @ canvass of the requested item’s price; if disapproved, the purchasing officer returns the request form to the requesting manager. d. For approved requests, the purchasing officer negotiates with the lowest complying bidder. It is expected that policies and procedures laid down by management are followed When they are breached once in a while, management must have some means to directly inquire on the deviations. Occasional breaches notwithstanding, policies and procedures provide a good way of controlling activities. STRATEGIC CONTROL SYSTEMS To be able to assure the accomplishment of the strategic objectives of the company, strategic control systems become necessary. These systems consist of: 1. Financial Analysis. The success of most organizations depends heavily on its financial performance. It is necessary that certain measurements of financial performance be made so that whenever deviations from standards are found out, corrective actions may be introduced. A review of financial statements reveals important facts about the company’s performance. One statement, the balance sheet, contains information about the company’s assets, liabilities, and capital accounts. Comparing, the current balance sheet accounts with previous ones may reveal important changes which may provide clues to performance. The income statement contains information about he company’s grossineomt expenses, and profits. When compared with previous year’s income statement, any change in the figure provided will help management determine if the company did well on the current year, Figures 59 and 60 show samples of financial statements.DANNY BOY CHEMICAL COMPANY Income Statement for 2012 (O00) Sales (9,200 units) P 92,000 Cost of Goods Sold: Initial Inventory none Manufacturing Costs (9,900 units mfg.) Materials 8,990 Labor 12,160 Plant Overhead Applied 24,750 Plant Overhead Under applied 2,000 Total Manufacturing Costs 47,900 Final Inventory (700 units) 3.388 Cost of Goods Sold 44,512 Gross Profit AZA88 Operating Costs: Distribution Costs: 17,880 Administrative Costs 17.940 Total Operating Costs 35, 820 Net Profit (pretax) P1668 Figure 60 ‘A Sample Income Statement a statement is paired a required norm, which is usually related to what other have achieved, or what the company has a occur, explanations are sought in preparation necessary. Financial Ratio Analysis. This is a more elaborate approach used business activities. Under this method, one account appearing in with another to constitute a ratio. The result is comy companies in the industry in controlling the financial pared with chieved in the past. When deviations for whatever action is deemedFinancial ratios may be categorized into the following types: a. Liquidity Ratios. These ratios are used to assess the ability of a company to meet its current obligations. The following ratios are important indicators of liquidity: i. Current Ratio ~ shows the extent at which current assets of the company can cover its current liabilities. The formula for computing current ratio. is as follows: Current ratio = current assets | current liabilities Acid-Test Ratio - is a measure of the firm's ability to pay off short-term Obligations with the use of current assets and without relying: on the sales of inventories. The formula used is as follows: Acid-test ratio = current assets — inventories / current liabilities Efficiency Ratios. These ratios show how certain assets or liabilities are used efficiently in the production of goods and services. Among the more common efficiency ratios are: i. Inventory Turnover Ratio - measures the number of times an inventory is turned over (or sold) each year. This is computed with the use of the following formula: Inventory turnover ratio = costs of goods sold / inventory Fixed Assets Turnover ~ is used to measure utilization of the company’s investment on its fixed assets, such as plant and equipment. The formula used is as follows: Fixed assets turnover = net sales / net fixed assets Financial Leverage Ratios. This is a grouping of ratios designed to assess the balance of financing obtained through debt and equity sources. Some of the more important leverage ratios are the following: i. Debt to Total Assets Ratio - shows how much of the firm’s assets are financed by debt. It may be computed by using the following formula: Debt to total assets ratio = total debt / total asset ii. Times Interest Earned Ratio - measures the number of times that earnings before interest and taxes cover or exceed the company’s interest expense. It may be computed by using the following formula: Times interest earned ratio = profits before tax + interest expense ao a eer eee Interest expenses Profitability Ratios. These ratios measure how much operating income or net income a company is able to generate in relation to its assets, owner's equity and sales. Among the more notable profitability ratios are the following: i. Profit Margin Ratio - compares the net profits with the level of sales. The formula used is as follows: Profit margin ratio = net profit/net salesi. Return on Assets Ratio ~ shows how much income the company produces for every peso invested in assets, The formula used is as follows: Return on assets ratio = net income/assets ili, Return on Equity Ratio ~ measures the returns on the owner's investments, It may be determined by using the following formula: Return on equity ratio = net incomeequity IDENTIFYING CONTROL PROBLEMS Recognizing the need for control is one thing; actually implementing it is another. When operations become complicated, the managers must consider useful steps in controlling. The following approaches may be useful: 1 Executive Reality Check. Employees manning the frontlines often complain about management's imposition of certain requirements that are not realistic. This happens because, most often, the manager is inaccessible to his subordinates and he has no way of knowing what is really happening inside the workplaces. In a certain state university, for instance, without the knowledge of the president, requests for purchase of classroom materials and supplies take last priority. This is irregular because requests of such kind must be of the highest priority considering that the organization is an educational institution. Ironically, because certain officers of the non-academic staff have direct access to the president, their purchase requests, no matter how trivial, almost always get top priority. Later on, when the president made an inspirational speech on quality teaching, many members of the faculty just shrugged their shoulders and listened passively. ‘One school, the Central Luzon State University, provides a good example of how the executive reality check may be exercised. It requires its executives to handle at least one subject each. Even the president is required to teach. What these executives will experience in the classrooms will make them more responsive in the preparation, execution, and controlling of academic plans. The manager of a construction firm. could, once in a while, perform the work ‘of one of his laborers. In doing so, he will be able to see things he could not see inside the confines of his air-conditioned office. Because the said action exposes the \ger to certain realities, the term “executive check” is very appropriate. Comprehensive Internal Audit. An internal audit is undertaken to determine the efficiency and effectiveness of the activities of an organization. Among the many aspects of operations within the organization, a small activity that is not done right may be done continuously and without anybody noticing it until it snowballs into a full-blown problem. ‘An example is the resignation of an employee after serving the company for 15 years. After one week, another employee with ten years of service also resigned. Both were from the same department. When after another week, a third employee was resigning, a full investigation was in order. Even if the source of the problem is identified, it may already have caused considerable losses to the organization. ‘To minimize the occurrence of such problems, it is necessary to use the comprehensive internal audit, which aims to detect dysfunctions in the organizatio! before they bring bigger troubles to management -Symptoms of Inadequate Control. If a comprehensive internal audit cannot be availed of for some reason, the checklist for symptoms of inadequate control may be usSome of the more common symptoms of inadequate control are the following: ® anunexplained decline in income and Profits b. customers complaining about Poor service they get from the company; < employee dissatisfaction characterized by complaints, grievances and resignations; : d. cash shortage caused by overstocking of inventories or delinquent accounts receivables; & idle facilities or personnel; £ disorganized Operations characterized by work flow bottlenecks, excessive Paperwork, etc.; & excessive costs; h. evidence of waste and It must be noted that behind ever the problem is clearly identified, no e are easily recognized if adequate con inefficiency such as scrap rework. Ty symptom is a problem waiting to be solved. Unless fective solution can be derived. Nevertheless, problems trol measures are in place. SUMMARY Controlling is one of the mai comes after planning, organizing, and directing. Controlling is aimed at determining if objectives were realized and by providing means for achieving unrealized goals, Controlling is important because it complements the other management functions. Controlling is a process consisting of various steps, namely: establishing performance objectives and standards, measuring actual performance, comparing actual performance te objectives and standards, and taking the necessary action based on the results of the comparison, Control may be classified either as feed forward, concurrent, or feedback. Organizational control systems consist ofthe strategic plan, the long-range financial plan, the operating budget, performance appraisals, statistical reports, policies and procedures. Strategic control systems consist of financial analysis and financial ratio analysis, There are means to identify control problems. They consist of the executive re ty check, the comprehensive internal audit, and the general checklist of symptoms of inadequate conta, in functions of management. It CHAPTER EXERCISES. 1. Explain how controlling ensures achievement of organizational plans and objectives, 2. Contrast the basic types of control. 3. How would you integrate control in setting organizational objectives? 4. Choose one control system and briefly explain. 5. Briefly discuss how analyses of financial performance ai ind ratio as examples of control are useful in the achieving organizational targets, SUGGESTED ITEM FOR RESEARCH List down the control activities that may be useful to any of the following: a. The construction of a bridge b. The manufacture of microchips c. The installation of a power plant d. Operating on a cancer patient in a hospital