Managers' Role - Controlling

8/19/2019 Managers' Role - Controlling

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Controlling

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Steps in the Control Process

Three types of Control

Characteristics of Effective Control Systems

Financial Controls

a. Financial Ratios used in Ratio Analysis

b. Financial and Operating Budgetsc. Nature of Budgeting Process

Other nonfinancial Controls



Controlling

Definition of Controlling Compelling Events to Conform to Plans

Steps of Controlling

1. Establishing

Standards

Planning

2. Measuring

Actual

Performance

3. ComparingPerformance

with Standards

4. Corrective

Action

Controlling



Controlling

Closed-Loop versus Open-Loop Control Closed-Loop: Automatic Control which monitors and manages a process

by means of a self-regulating system

Open-Loop: Requires an external monitoring system

In Engineering Management, last step in control usually requires

Human judgment

Example; Machining process fails to maintain

a specific tolerance

The machining problem (fixing)

Operator is not skilled enough (training)

Tolerance cannot be achieved for that material



Controlling

Three Perspectives on the Timing of Control

Feedback Control: Thermostat example

Screening or concurrent control: Step-by-step control

Feedforward (or preliminary or steering control): Predict the

impact of current actions or events on future outcomes and

adjust the current decisions to meet the future goals



Controlling

Characteristics of Effective Control Systems

Effective: Measure what needs to measured and controlled

Efficient: Economical and worth their cost

Timely: Enough time for corrective action

Flexible: should be adjustable to changing conditions

Understandable: should be easy to understand

Tailored: Deliver the information according to each level of manager

Highlight Deviations: Flag parameters deviating from planned values

Lead to corrective action: should incorporate means of corrective actions



Controlling

Delegation and Control

In human aspects of organizing, we have seen delegating the authority.

Delegation requires effective control systems.

You have to apply the rules for making the controls more effectiveafter delegating the authority.



Controlling

Financial Controls

Provide basic information for the control of cash and credit which are

essential for company survival.

There are 3 major types of financial statements:

1. Balance Sheet: Company’s financial position at a particular

instant in time

2. Income statement: Financial performance of the firm over

a period of time.

3. Cash Flow: Statement showing where funds come from



Controlling Balance Sheet (EXAMPLE: Company X, December 2002)

What company

Owns

What company

Owes



Controlling Statement of Income and Retained Earnings(EXAMPLE:

Company X,

End of 2002)



Controlling Financial Ratios (EXAMPLE: Company X, 2002)

Liquidity Ratios

Current Ratio

Current AssetsCurrent Liabilities

1400000

450000= 3,11

Measure the abilityto meet short-term

obligations.

As minimum 2.0 is used

but it varies. A current

ratio of 10 shows

assets are not using

efficiently.




Liquidity Ratios

Acid Test Ratio

Current Assets-InventoryCurrent Liabilities

1400000-700000

450000= 1,56

For quickly convertingto cash we calculate

this ratio.

It is difficult to convert

inventories to cash,

Therefore, inventory is

extracted.

Over 1.0 is OK.




Leverage Ratios

Debt-to-assets ratio

Total DebtTotal Assets

1450000

4400000= 0,33

Relative importance of stockholders and

outside creditors as a

source of enterprise’s

capital.

Rate is dependent on

the industry.




Activity Ratios

Inventory Turnover

Cost of Goods SoldInventory

2000000

700000= 2,86




Activity Ratios

Accounts Receivable

Turnover

Net Sales

Accounts Receivable

4000000

400000= 10




Activity Ratios

Asset Turnover

Net SalesTotal Assets

4000000

4400000= 0,91




Profitability Ratios

Profit Margin

Net IncomeNet Sales

1050000

4000000= 26,3%




Profitability Ratios

Return on Total Assets

Net IncomeTotal Assets

1050000

4400000= 23,8%



Controlling

BudgetsPlans for the future allocation and use of resources

over a fixed period of time.

Financial BudgetsPlanning of cash for the coming period and how thecompany intends to use it.

Three Types of Financial Budgets1.Cash Budgets: Estimate future revenues and

expenditure and their timing during budgeting period

2.Capital Expenditure Budgets: Describes futureinvestments in plant and equipment

3.Balance Sheet Budget: Uses the first twoestimates to predict what balance sheet look like at theend of budgeting period



Controlling

BudgetsPlans for the future allocation and use of resources

over a fixed period of time.

There are responsibility centers in organizations.

Cost Center: Primary financial concern is control of

costs

Revenue Center (Sales or Marketing): The manager

has revenue targets to meet

Profit Centers: For manipulating costs to increase profit.

Operating budgets can be created like expense budget,

revenue budget and profit budget.



Controlling

Budgeting ProcessBudgets can be prepared by a central group and imposed

on everyone by top management (top-down approach).This does not take the advantage of information fromlower management.

Alternatively, budgets can be prepared in responsibilitycenters.They tend to be inflated and doesn’t consider uppermanagement goals and objectives.



Controlling

Audits of Financial DataAudits are investigations of an organization’s activities

to verify their correctness and identify any need forimprovement.

External Audits: required at least once a year for publicly

held organization by independent companies

Internal Auditing Staff: They spend their times inauditing several units of organization



Controlling

Non-financial Controls

Human Resource Control: Seen in Human Aspects of organizing

Management Audit: By answering some questions

about management such as planning, organizing andstaffing, directing, control, resource planning and control

Human Resource Accounting: Investments in acquiringpeople and in extensive training

Social Control: Building an organizational culture andcontrolling.

Managers' Role - Controlling

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