CONTROLLING

 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: 

 the transmission of confidential information to competitors.

Introduction  the hiring of personnel way above the required number

- What Is  unethical conduct of an employee

Controlling  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.  This will not happen, however,
if adequate controls are instituted.

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 controlling is properly implemented, it will help the organization achieve its
goal in the most efficient and effective manner possible.

In any organization, deviations, mistakes, and shortcomings happen once in a

while.  When they occur, they contribute to unnecessary expenditures, which add
up to the cost of producing goods and services.  The introduction of effective
control measures minimizes the ill effects of such negative occurrences.  An
effective inventory control system, for instance, minimizes, if not totally eliminates
losses in inventory.

The importance of controlling may be illustrated as it is applied in a typical factory. 

IMPORTANCE If the required standard daily output for individual workers is 100 pieces, all
workers who do not produce the requirement are given sufficient time to improve;
OF if no improvements are forthcoming, they are asked to resign.  This action will help
CONTROLLING the company keep its overhead and other costs at expected levels.  If no such
control measure is applied, the company will be saddled with escalating production
costs, which will place the viability of the firm in jeopardy.

Controls can help managers:

Coping with uncertainty because of the standard set in advance, managers can
react quickly to any sudden events.
Detecting irregularities such as poor quality, cost overruns etc. and managers can
take remedial action as soon as when it arises.
 Three
Types of
Control
 Three Feedforward Control. When management anticipates problems and
prevents their occurrence, the type of control measure undertaken is

Types of called feedforward control.  This type of control provides the assurance

that the required human and nonhuman resources are in place before

Control operations begin. 

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.
 2. Concurrent Control. When operations are already ongoing and measures to

Three
detect variances are made, concurrent control is said to be undertaken.  It is
always possible that deviations from standards will heppen in the production
process.  When such deviations occur, adjustments are made to ensure

Types of compliance with requirements.  Information on the adjustments is also

necessary inputs in the pre-operation phase.

Control Examples of activities using concurrent control are the following:

The manager of a construction firm constantly monitors the progress of the company’s
activities.  When construction is behind schedule, corrective measures like the hiring of
additional manpower are made.

In a firm engaged in the production and distribution of water, the chemical

composition of the water procured from various sources is checked thoroughly before
they are distributed to the consumers.

The production manager of an electronics-manufacturing firm inspects regularly the

outputs consisting of various electronic products coming out of the production lines.
 Three 3. Feedback control. When information is gathered about a completed activity for

Types of purposes of evaluating and deriving required steps for improving the activity,
feedback control is undertaken.  Corrective actions aimed at improving future

Control
activities are features of feedback control.

Feedback control validates objectives and standards.  If accomplishments consist

only of a percentage of standard requirements, the standard may be too high or
inappropriate.

An example of feedback control is the supervisor who discovers that continuous

overtime work for factory workers lowers the quality of output.  The feedback
information obtained leads to some adjustments in the overtime schedule.
 1. Establishing Performance Objectives and Standards.

For effective controlling, what has to be achieved must be first determined.  Typical
examples of objectives and standards are as follows:

Steps in
Sales Target - are expressed in quantity or monetary terms;
Production Targets - are expressed in quantity and quality;

the Control Worker Attendance - is expressed in terms of rate of absences;

Safety Records - are expressed in number of accidents for given periods; and

Process Supplies Used - are expressed in quantity or monetary terms for given periods.

                  Once objectives and standards are established, the measurement of

performance will be facilitated.  Standards differ among various organizations.  In
construction firms, project completion dates are useful standards.  In chemical
manufacturing firms, certain pollution measures form the basis for standard
requirements.

                  After the performance of 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.
Steps in                   There is a need to measure actual performance so that when

the Control shortcomings occur, adjustments could be made.  The adjustments will depend on
the actual findings.

Process The measuring tools will differ from organization to organization, as each have has
its own unique objectives.  Some firms, for instance, will use annual growth rate as
standard basis, while other firms will use some other tools like the market share
approach and position in the industry.
 3. Comparing Actual Performance to Objectives and Standards.

Steps in                   Once actual performance has been determined; this will be compared with
what the organization seeks to achieve.  Actual production output, for instance, will

the Control be compared with the target output.  This may be illustrated as follows:

Process
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 least 10 kilometers to be constructed every month.  As such, this must be
verified every month, or if possible, every week.
 4. Taking Corrective (Necessary) Action.

Steps in                   The purpose of comparing actual performance with the desired result is to
provide management with the opportunity to take corrective action when necessary.

the Control If in the illustration cited above, the management of the construction firm found out

Process
that only 15 kilometers were constructed a fyer two months, then, any of the
following actions may be undertaken:
hire additional personnel;
use more equipment; or
require overtime work.
  ACCURATE- Information on performance must be accurate . Evaluating the
accuracy of the information they receive is one of the most important control
 
tasks that managers face.
CHARACTERISTIC
 Timely- information must be collected, route m and evaluated quickly if action is
OF EFFECTIVE to be taken in time to produce improvement,

CONTROL  Objectives and Comprehensible the information in a control system should be

understandable and be seen as objective by the individuals who use it.
SYSTEM
 Focused ion strategic control points- the control system should be focused on
those areas where deviations from the standards are most likely to take place or
where deviations would lead to the greatest harm.

 Economically realistic- the cost of implementing a control system should be less

tax, or at most equal to, the benefits derived from the control system.

 Organizational realistic- the control system has to be compatible with

organizational realities and all standards for performance must be realistic.
  Coordinated with the organizations work flow- control information needs to be
coordinated with the flow of work through the organization for two reasons: 1
 
each step in the work process may affect the success or failure of the entire
CHARACTERISTIC operation, the control information must get to all the people who need to receive
it.
OF EFFECTIVE
 Flexible- controls must have flexibility built into them so that the organizations
CONTROL can react quickly to overcome adverse changes o to take advantage of new
opportunities.
SYSTEM
 Prescriptive and operational- control systems ought to indicate, upon the
detection of the deviation from standards, what corrective action should be
taken.

 Accepted by organization members- for a control systems to be accepted by

organization members the controls must be related to meaningful and accepted
goals.

 These characteristics can be applied to controls t all levels of the organization.

  
1 Statistical data:
 
  Statistical  analyses  of  innumerable  aspects  of  a  business 
operation  and  the  clear presentation of statistical data,
Non-Budgetary whether of a historical or forecast nature are, of course,
important to control. Some managers can readily interpret
tabular statistical data, but most managers prefer presentation
Control of the data on charts.
 
Techniques  
2 Break- even point analysis:
An  interesting  control  device  is  the  break  even  chart. 
This  chart  depicts  the relationship of sales and expenses in
such a way as to show at what volume revenues exactly cover
expenses.
   3 Operational audit:
Non-Budgetary  
Another  effective  tool  of  managerial  control  is  the 
internal  audit  or,  as  it  is  now coming to be called, the
Control operational audit. Operational auditing, in its broadest sense, is
the regular and independent appraisal, by a staff of internal
Techniques auditors, of the accounting, financial, and other operations of a
business.
 
4 Personal observation:
In  any  preoccupation  with  the  devices  of  managerial 
control,  one  should  never overlook the importance of control
through personal observation.
 To effectively control activities, organizations adapt control systems consi1sting 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
COMPONENTS OF adoption of strategic plans.
ORGANIZATIONAL 2. Long-Range Financial Plan.
The planning horizon differs from company to company. Most firms will be satisfied
CONTROL SYSTEMS with a orne-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. The
financial plan recommends financial activities. If the goal does not appear to be
where the firm is headed, the control mechanism should be made to work.
3. The Operating Budget.
This indicates the expenditures, revenues, or profits planned to 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.
COMPONENTS OF 5. Statistical Reports.
ORGANIZATIONAL These are those that contain data on various developments within 5. the firm. Among
the information which may be found in a statistical report are the following:
CONTROL SYSTEMS a. labor efficiency rates
b. quality control rejects;
c. accounts receivable;
d. accounts payable;
e. sales reports;
f. accident reports;
g. and power consumption reports
 6. Policies and Procedures. Policies refer to the framework within which the objectives of
the organization must be pursued. An example of policy is, whenever two or more

  activities compete for the company's attention, the client takes priority.
Procedure is a plan that describes the exact series of actions or steps to be taken
COMPONENTS OF given situation. Following is an example of a procedure in the purchase of equipment:
a. The concerned manager forwards a request for purchase to the purchasing officer.
ORGANIZATIONAL b. The purchasing officer forwards the request to top management tor approval.
c. If approved, the purchasing officer makes a canvass of the requested items price; if
CONTROL SYSTEMS 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.
 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
The Various performance. It is necessary that certain measurements of financial
performance be made so that whenever deviations from standards are found
Types Of Budgets out, corrective actions may be introduced. A review of financial statements
reveals important facts about the company's performance. One statement, the
And Financial balance sheet, contains information about the company's assets, liabilities, and
capital accounts. Comparing the current balance sheet accounts with previous
Ratios For ones may reveal important changes which may provide clues to performance.
The income statement contains information about the company' s gross
Control income, 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.
 STRATEGIC CONTROL SYSTEMS
2. Financial Ratio Analysis. This is a more elaborate approach used in controlling
business activities. Under this method, one account appearing in the financial
statement is paired with another to constitute a ratio. The result is compared withn a
required norm, which is usually related to what other companies in the industry have
achieved, or what the company has achieved in the past. When deviations Occur,
explanations are sought in preparation for whatever action is deemed necessary.
The Various Financial ratios may be categorized into the following types:

Types Of Budgets a, Liquidity Ratios

These ratios are used to assess the ability of a company to meet its current
And Financial obligations. The following ratios are important indicators of liquidity:
i. Current Ratio- shows the extent at which current assets of the company can cover
Ratios For its current liabilities. The formula for computing current ratio is as follows:
Current ratio = Current Assets / current liabilities
Control ii. 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
 b. 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. Inventoy Turnover Ratio -measures the number ot times an inventory is turned over
(or sold) each year. This is computed with the use of the folowing formula:
inventory turnover ratio Costs of goods sold / inventory
ii. Fixed Assets Turnover is used to measure utilization of the company' s investment on
The Various its fixed assets, such as plant and equipment. The formula used is as follows:
Fixed assets turnover= 1et sales / net fixed Asset
Types Of Budgets c. Financial Leverage Ratios.
This is a grouping of ratios designed to assess the balance of financing obtained through
And Financial debt and equity sources. Some of the more important leverage ratios are the following:

Ratios For j. 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:

Control Debt to total assets ratio = totał debt/ total assct

ii. Times Interest Earned Ratio measures the number of times that earnings before
interest and taxes cover or exceed the company’s interest expense. Tt may be
computed by using the following formula:
Times interest earned ratio = profits before tax + interest expense/ Interest
expenses
 d. 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
The Various used is as follows:

Types Of Budgets Profit margin ratio = net profit/net sales

 
And Financial
ii. Return on Assets Ratio - shows how much income the company produces for every
Ratios For peso invested in assets. The formula used is as follows: Return on assets ratio = net

Control income/assets
iii. 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 income/equity