Unit V - Controlling PDF

CONTROLLING Page | 1  FUNCTIONS OF MANAGEMENT Learning Objectives: 1. Explain the concept of controlling, its nature and purpose. 2. Enumerate the importance of controlling as well as its limitations. 3. Discuss the relationship between planning a...

CONTROLLING Page | 1  FUNCTIONS OF MANAGEMENT Learning Objectives: 1. Explain the concept of controlling, its nature and purpose. 2. Enumerate the importance of controlling as well as its limitations. 3. Discuss the relationship between planning and controlling. 4. Elucidate the process of controlling. 5. Identify the different types and techniques of controlling. SEQUENTIAL FUNCTIONS OF MANAGEMENT Controlling Planning Directing/ Organizing Leading CONTROLLING Definition  Controlling is one of the important functions of management ensuring that activities in an organization are performed as per the plans.  It is a process which the manager assures that actual activities conform to planned activities.  Managerial control implies measurement of accomplishment against the standard and the correction of deviations to assure attainment of objectives according to plans (Koontz and O'Donnell).  Controlling is not the last function of management but is a function that brings back the management cycle back to the planning function.  Controlling function finds out how far actual performance deviates from standards, analyses the causes of such deviations and attempts to take corrective actions. This process helps in formulation of future plans in the light of the problems that were identified and thus, helps in better planning in the future periods. Page | 2   Controlling only completes one cycle of management process and improves planning in the next cycle. Nature and Purpose of Control  It is an essential and goal-oriented function of management  It ensures that everything occurs in conformities with the standards  An on-going process  It is forward – working because past cannot be controlled  Involves measurement  The essence of control is action  It is an integrated system  It is a pervasive function of a manager Importance of Controlling  Control is an indispensable function of management and without control; the best plans can go awry.  A good control system helps an organization in the following ways: 1. Accomplishing organizational goals  The controlling function measures progress towards the organizational goals and brings to light the deviations, if any, and indicates corrective action.  Thus, it guides the organization and keeps it on the right track so that organizational goals might be achieved. 2. Judging accuracy of standards  A good control system enables management to verify whether the standards set are accurate and objectives.  An efficient control system keeps a careful check on the changes taking place in the organization and in the environment and helps to review and revise the standards in light of such changes. 3. Making efficient use of resources  By exercising control, a manager seeks to reduce wastage and spoilage of resources.  Each activity is performed in accordance with predetermined standards and norms. This ensures that resources are used in the most effective and efficient manner. 4. Improving employee motivation  A good control system ensures that employees know well in advance what they are expected to do and what are the standards of performance on the basis of which they will be appraised.  Thus, it motivates them and helps them to give better performance. Page | 3  5. Ensuring order and discipline  Controlling creates an atmosphere of order and discipline in the organization. It helps to minimize dishonest behaviour on the part of the employees by keeping a close check on their activities. 6. Facilitating coordination in action  Controlling provides direction to all activities and efforts for achieving organizational goals.  Each department and employees is governed by predetermined standards which are well coordinated with one another. This ensures that overall organizational objectives are accomplished. Limitations of Controlling  Although controlling is an important functions of management, it suffers from the following limitations: 1. Difficulty in setting quantitative standards  Control system losses some of its effectiveness when standards cannot be defined in quantitative terms. This makes measurement of performance and their comparison with standards a difficult task.  Employee morale, job satisfaction and human behaviour are such areas where their problem might arise. 2. Little control on external factors  Generally and enterprise cannot control external factors such as government policies, technological changes, competition and others external factors. 3. Resistance from employees  Control is often resisted by employees. They see it as restrictions on their freedom.  For example, employees might object when they are kept under a strict watch with the help of Closed Circuit Televisions (CCTVs). 4. Costly affair  Control is a costly affair as it involves a lot of expenditure, time, and effort.  A small enterprise cannot afford to install an expensive control system. It cannot justify the expenses involved hence, the managers must ensure that the costs of installing and operating a control system should not exceed the benefits derived from it. Relationship between Planning and Controlling  Planning and controlling are inseparable twins of management.  A system of control presupposes the existence of certain standards. These standards of performance which serve as the basis of controlling are provided by planning. Page | 4   Once a plan becomes operational, controlling is necessary to monitor the progress, measure it, discover deviations and initiate corrective measures to ensure that events conform to plans.  Thus, planning without controlling is meaningless. Similarly, controlling is blind without planning. If the standards are not set in advance, managers have nothing to control. When there is no plan, there is no basis of controlling.  Planning is clearly a prerequisite for controlling. Without planning, there is no predetermined understanding of the desired performance.  Planning seeks consistent, integrated and articulated programmes while controlling seeks to compel events to conform to plans.  Planning is basically an intellectual process involving thinking, articulation and analysis to discover and prescribe an appropriate course of action for achieving objectives. Controlling, on the other hand, checks whether decisions have been made translated into desired action. Hence, planning is prescriptive whereas, controlling is evaluative.  Planning involves looking ahead and is called a forward-looking function while controlling is like a post-mortem of past activities to find out deviations from the standards hence, it is a backward-looking function. However, planning is guided by past experiences and the corrective actions initiated by control function aims to improve future performance. Thus, planning and controlling are both backward- looking as well as a forward-looking function.  Planning and controlling are interrelated and, in fact, reinforce each other in the sense that planning makes controlling easier and effective while controlling improves future planning by providing information derived from past experience. Control Process Comparison of Establishment Measurement of Corrective Performance of Standards Performance Actions against Standards 1. Establishment of Standards  The first step in the controlling process is setting up performance standards.  Standards are the criteria against which actual performance should be measured hence; it serves as benchmarks towards which an organization strives to work.  Standards can be set in both quantitative as well as qualitative terms.  Examples for the standards: a. Profitability standards  Indicate how much the company would like to make as profit over a given time period-that is, its return on investment. b. Market position standards  Indicate the share of total sales in a particular market that the company would like to have relative to its competitors. Page | 5  c. Employee attitude standards  Indicate what types of attitudes the company managers should strive to indicate in the company’s employees.  Improving goodwill and motivation level of employees. iv. Social responsibility standards  The contribution of the organization to the society. 2. Measurement of Performance  Information gathering through monitoring process.  It should be on a forward looking basis so that deviations may be detected in advance by appropriate actions.  The degree of difficulty in measuring various types of organizational performance, of course, is determined primarily by the activity being measured.  For example, it is far more difficult to measure the performance of highway maintenance worker than to measure the performance of a student enrolled in a college level management course. 3. Comparing Measured Performance to Stated Standards  A standard is the level of activity established to serve as a model for evaluating organizational performance.  The performance evaluated can be for the organization as a whole or for some individuals working within the organization.  In essence, standards are the yardsticks that determine whether organizational performance is adequate or inadequate. Performance Used in Functional Areas to Gauge Performance HUMAN RESOURCE FINANCE AND PRODUCTION MARKETING MANAGEMENT ACCOUNTING Capital Quantity Sales Volume Labour relations Expenditures Quality Sales expense Labour turnover Inventories Advertising Cost Labour absenteeism Flow of capital Expenditures Individual Sales Individual Job Liquidity Performance Performance 4. Taking Corrective Actions  After actual performance has been measured compared with established performance standards, the next step in the controlling process is to take corrective action, if necessary. Page | 6   Corrective action is managerial activity aimed at bringing organizational performance up to the level of performance standards.  In other words, corrective action focuses on correcting organizational mistakes that hinder organizational performance.  The standards should be properly established and the measurements of organizational performance are valid and reliable. Some Examples of Corrective Action Causes of Deviation Corrective Action to be Taken Change the quality specification for the 1. Defective material material used Repair the existing machine or replace the 2. Defective machinery machine if it cannot be repaired Undertake technological up-gradation of 3. Obsolete machinery machinery 4. Defective Process Modify the existing process 5. Defective physical conditions of work Improve the physical conditions of work Requirements for Effective Control 1. Control should be tailored to plans and positions  All control techniques and systems should reflect the plans they are designed to follow. 2. Control must be tailored to individual managers and their responsibilities  Controls must be tailored to the personality of individual managers.  Control systems and information are intended to help individual managers carry out their function of control. If they are not of a type that a manager can or will understand, they will not be useful. 3. Control should be objective  When controls are subjective, a manager’s personality may influence judgments of performance inaccuracy. 4. Control should be flexible  Controls should remain workable in the case of changed plans, unforeseen circumstances, or outsight failures. 5. Control should be economical  Control must worth their cost. Although this requirement is simple, its practice is often complex. Page | 7   This is because a manager may find it difficult to know what a particular system is worth, or to know what it costs. 6. Control should lead to corrective actions  A control system will be of little benefit if it does not lead to corrective action, control is justified only if the indicated or experienced deviations from plans are corrected through appropriate planning, organizing, directing, and leading. Types of Control Systems INPUT PROCESSS OUTPUT Feed Forward Concurrent Feedback Control Control Control 1. Feed forward controls  They are preventive controls that try to anticipate problems and take corrective action before they occur.  Example – a team leader checks the quality, completeness and reliability of their tools prior to going to the site. 2. Concurrent controls  They (sometimes called screening controls) occur while an activity is taking place.  Example – the team leader checks the quality or performance of his members while performing. 3. Feedback controls  They measure activities that have already been completed.  Thus corrections can take place after performance is over.  Example – feedback from facilities engineers regarding the completed job. Techniques of Managerial Control 1. Traditional Techniques a) Personal Observation  This is the most traditional method of control.  Personal observation enables the manager to collect first-hand information. It also creates a psychological pressure on the employees to perform well as they are being observed personally of their job. Page | 8   However, this method is very time-consuming ad cannot effectively be used in all kinds of jobs. b) Statistical Reports  Statistical analysis in the form of averages, percentages, ratios, correlations, and others present useful information to the managers regarding performance of the organization in various areas.  Such information when presented in the form of charts, graphs, tables and others enables the mangers to read them more easily and allow a comparison to be made with performance in previous periods and also with the benchmarks. c) Breakeven Analysis  Breakeven analysis is a technique used my managers to study the relationship between costs, volume and profits. It determines the probable profit and losses at different levels of activity.  The sales volume at which there is not profit, no loss in known as breakeven point. It is a useful technique for the managers as it helps in estimating profits at different levels of activities.  Breakeven point can be calculated with the help of the following formula:  Breakeven analysis helps a firm in keeping a close check over its variable costs and determines the level of activity at which the firm can earn its target profit. d) Budgetary Control  Budgetary control is a technique of managerial control in which all operations are planned in advance in the form of budgets and actual results are compared with budgetary standards.  A budget is a quantitative statement for a definite future period of time for the purpose of obtaining a given objective. It is also a statement which reflects the policy of that particular period. It will contain figures of forecasts both in terms of time and quantities.  Types of budgets: i. Sales Budget – a statement of what an organization expects to sell in terms of quantity as well as value. ii. Production Budget – a statement of what an organization plans to produce in the budgeted period. iii. Material Budget – a statement of estimated quantity and cost of materials required for production. iv. Cash Budget – anticipated cash inflows and outflows, for the budgeted period. Page | 9  v. Capital Budget – estimated spending on major long-term assets like new factory or major equipment. vi. Research and Development Budget – estimated spending for the development and refinement of products and processes.  Advantages of budgeting: i. Budgeting focuses on specific and time-bound targets thus, helps in attainment of organizational objectives. ii. Budgeting is a source of motivation to the employees who know the standards against which their performance will be appraised thus, enables them to perform better. iii. Budgeting helps in optimum utilization of resources by allocating them according to the requirements of different departments. iv. Budgeting is also used for achieving coordination among different departments of an organization and highlights the interdependence between them. For instance, sales budget cannot be prepared without knowing production programmes and schedules. v. It facilitates management by exception by stressing on those operations which deviate from budgeted standards in a significant way.  The effectiveness of budgeting depends on how accurately estimates have been made about future. Flexible budgets should be prepared which can be adopted if forecasts about future turn out to be different, especially in the face of changing environmental forces.  Budgeting should not be viewed as an end but a means to achieve organizational objectives. 2. Modern Techniques a) Return on Investment  Return on Investment (ROI) is a useful technique which provides the basic yardstick for measuring whether or not invested capital has been used effectively for generating reasonable amount of return.  ROI can be used to measure overall performance of an organization or of its individual departments or divisions.  ROI can be calculated as:  Total investment includes both working as well as fixed capital invested in business.  According to this technique, ROI can be increased either by increasing sales volume proportionately more than total investment or by Page | 10  reducing total investment without having any reductions in sales volume.  It provides top management an effective ways of control for measuring and comparing performance of different departments. It also permits departmental managers to find out the problem which affects ROI in an adverse manner. b) Ratio Analysis  Ratio Analysis refers to analysis of financial statements through computation of ratios. The most commonly used ratios used by organizations can be classified into the following categories: i. Liquidity Ratios o These ratios are calculated to determine short-term solvency of business. o Analysis of current position of liquid funds determines the ability of the business to pay the amount due to its stakeholders. o Examples of Commonly Used Ratios: Current Ratio and Quick Ratio ii. Solvency Ratios o These ratios are calculated to determine the long-term solvency of business. o It determines the ability of a business to service its indebtedness. o Examples of Commonly Used Ratios: Debt-Equity Ratio, Proprietary Ration, and Interest Coverage Ratio iii. Profitability Ratios o These ratios are calculated to analyse the profitability position of a business. o Such ratios involve analysis of profits in relation to sales or funds or capital employed. o Examples of Commonly Used Ratios: Gross Profit Ratio, Net Profit Ratio, Return on Capital Employed iv. Turnover Ratios o These ratios are calculated to determine the efficiency of operations based on effective utilization of resources. o High turnover means better utilization of resources. o Examples of Commonly Used Ratios: Inventory Turnover Ratio, Stock Turnover Ratio, Debtors Turnover Ratio Page | 11 c) Responsibility Accounting  Responsibility Accounting is a system of accounting in which different sections, divisions, and departments of an organization are set up as “Responsibility Centres”.  The head of the centre is responsible for achieving the target set for his centre.  Responsibility centres may be of the following types: i. Cost Centre o A cost or expense centre is a segment of an organization in which managers are held responsible for the cost incurred in the centre but not for the revenues. o For example, in a manufacturing organization, production department is classified as cost centre. ii. Revenue Centre o A revenue centre is a segment of an organization which is primarily responsible for generating revenue. o For example, marketing department of an organization may be classified as revenue center. iii. Profit Centre o A profit centre is a segment of an organization whose manager is responsible for both revenues and costs. o For example, repair and maintenance department of an organization may be treated as profit centre if it allowed to bill other production departments for the services provided to them. iv. Investment Centre o An investment centre is responsible not only for profits but also for investments made in the centre in the form of assets. o The investment made in each centre is separately ascertained and return on investment is used as basis for judging the performance of the centre. d) Management Audit  Management audit refers to systematic appraisal of the overall performance of the management of an organization.  The purpose is to review the efficiency and effectiveness of management and to improve its performance in future periods.  It is helpful in identifying the deficiencies in the performance of management functions.  Thus, the management audit may be defined as evaluation of the functioning, performance, and effectiveness of management of an organization. Page | 12   The main advantages of management audit are as follows: i. It helps locate present and potential deficiencies in the performance of management functions. ii. It helps to improve the control system of an organization by continuously monitoring the performance of management. iii. It improves coordination in the functioning of various departments so that they work together effectively towards the achievement of organizational objectives. iv. It ensures updating of existing managerial policies and strategies in the light of environmental changes.  Conducting management audit may sometimes pose a problem as there are no standard techniques of management audit.  Also, management audit is not compulsory under any law but managers should understand its usefulness in improving the overall performance of the organization. e) PERT and CPM  PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are important network techniques useful in planning and controlling.  These techniques are especially useful for planning, scheduling and implementing time bound projects involving performance of a variety of complex, diverse and interrelated activities.  These techniques deals with time scheduling and resource allocation for these activities and aims at effective execution of projects within given time schedule and structure of costs.  The steps involved in using PERT/CPM are as follows: i. The project is divided into a number of clearly identifiable activities which are then arranged in a logical sequence. ii. A network diagram is prepared to show the sequence of activities, the starting point and the termination point of the project. iii. Time estimates are prepared for each activity. PERT requires the preparation of three time estimates – optimistic (or shortest time), pessimistic (or longest time) and most likely time. In CPM only one time estimates is prepared. In addition, CPM also requires making cost estimates for completion of project. iv. The longest path in the network is identified as the critical path. It represents the sequence of those activities which are important for timely completion of the project and where no delays can be allowed without delaying the entire project. v. If required, the plan is modified so that execution and timely completion of project is under control. Page | 13   PERT and CPM are used extensively in areas like ship-building, construction projects, aircraft manufacturing, and others. f) Management Information System  Management Information System (MIS) is a computer-based information system that provides information and support for effective managerial decision-making.  A decision-maker requires up-to-date, accurate and timely information.  MIS provides the required information to the managers by systematically processing a massive data generated in an organization, thus MIS is an important communication tool for managers.  MIS serves as an important control technique. It provides data and information to the managers at the right time so that appropriate corrective action may be taken in case of deviations from standards.  MIS offers the following advantages to the managers: i. It facilitates collection, management and dissemination of information at different levels of management and across different departments of the organization. ii. It supports planning, decision-making and controlling at all levels. iii. It improves the quality of information with which a manager works. iv. It ensures cost effectiveness in managing information. v. It reduces information overload on the managers as only relevant information is provided to them. “If cybernetics is the science of control, management is the profession of control” Ω Anthony Stafford Beer Ω Page | 14