Chapter 8 Controlling

Controlling refers to the process of measurement of performance against the standards, measuring deviations and taking corrective action to achieve predetermined goals.

The principle that a manager should considered while dealing with deviations effectively is management by exception.

An organisation’s control system loss its effectiveness when standards are to be defined in qualitative terms. Standard defined in qualitative terms make measurement of performance and their comparison with standards, difficult.

The two standards that can be used by a company to evaluate the performance of its Finance and Accounting department are Capital expenditure and inventories.

The term that is used to indicate the difference between standard performance and actual performance is the deviation.

Planning involves setting objectives and deciding the future course of action to achieve them. Thus, it is regarded as forward looking. Controlling involves a post-mortem of the past activities of an enterprise and finding out deviations from the targeted standard. Thus, it is regarded as a backward looking function.

Both the statements are partially true because planning is guided by past experiences. And the process of control necessarily involves analysing deviations and taking corrective action, which aims to improve future performance and achievement of predetermined goals.

If a manager tries to control everything, he may end up by controlling nothing. To make control effective and economical, it must focus attention on factors critical to performance. Thus, in this context, it is stated that managers should first handle the deviations, which are beyond the specific range and he should not waste time and energy in finding solutions of minor deviations. e.g. 2% increase in labour cost is acceptable range of deviation. If the labour cost exceed beyond 2%, immediate action should be taken. In a large organisation, keeping a close check on each and every activity will be very time consuming and expensive.

Therefore, managers should pay serious attention to only such cases, which are critical to success, i.e. KRAs.

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. This comparison reveals the necessary actions to be taken so that organisational objectives are accomplished.

A budget is a quantitative statement foe a definite future period of time for the purpose of obtaining a given objective. It is a statement which reflects the policy of that particular period. It will contain figures of forecasts both in terms of time and quantities. However, 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. Managers must remember that budgeting should not be viewed as an end but a means to achieve organisational objectives.

Management audit refers to systematic appraisal of the overall performance of the management of an organisation. 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. The effectiveness of management audit for controlling can be judged from the following points:

1. It helps to locate present and potential deficiencies in the performance of management functions.
2. It helps to improve the control system of an organisation by continuously monitoring the performance of management. 
3. It improves coordination in the functioning of various departments so that they work together effectively towards the achievement of organisational objectives.
4. It ensures updating of existing managerial policies and strategies in the light of environmental changes.

The principle of management control that Ms Vasundhara should consider while taking her decision is management by exception. It means if a manager tries to control everything, he may end up by controlling nothing. To make control effective and economical, it must focus attention on factors critical to performance. Therefore the manager should pay serious attention to only such cases, which are critical to success. In the above case Mr. Bhanu Prasad, fell short of his daily production target by only 10 units. This is very small deviation and it is not right to terminate him on the basis of this small deviation.

The following steps involved in the process of controlling process.

1. Setting Performance Standards: Standards are the criteria, against which actual performance would be measured. These serve as benchmarks, towards which an organisation strives to work.

The first step of the control process is to establish standards, against which actual results are to be evaluated. Standards are set in quantitative as well as qualitative terms. But, managers should try to set standards in quantitative terms, which can be easily measured and compared later on. If standards are set in qualitative terms, an effort must be made to define them clearly for easy measurement. Due to changes taking place in internal and external environment, standards need to be revised regularly.

2. Measurement of actual performance: Once the standards are fixed, the next step is to measure the actual performance. Generally, it is conducted by the managers to analyse the overall efficiency level of the employees. While measuring the performance, objective and reliable methods should be used, such as sample checking, preparing reports, personal observation, etc.

Measurement should be done after the task is completed. However, sometimes performance can be measured during the performance to ensure regular control over the activities. Usually, in large organisations, certain pieces are checked at random, instead of checking the whole lot. This is called sample checking.

3. Comparing Actual Performance with Standards: This step involves comparison of actual performance with the standard. Such comparison helps in revealing the deviations between actual and desired results. Comparison becomes easier when standards are set in quantitative terms.

4. Analysing Deviations: Under this step, deviations in key areas of business need to be attended on urgent basis as compared to deviations in certain insignificant areas. There is a need to determine the acceptable range of deviations in all operational areas. Following points should be kept in mind, while analysing deviations:

• Critical point control: According to this principle, control system should first focus on Key Result Areas (KRAs) which are critical to the success of the organisation. It is because, it is not possible to keep a check on all the activities of the enterprise. Therefore, if anything goes wrong at the critical points or key areas, immediate action should be taken.

• Management/control by Exception: It suggests that, if manager tries to control everything, he may end up in controlling nothing.

5. Taking corrective Action: This is the final step in which manager takes corrective measures to bring back everything on track in the organisation i.e. according to set plans, corrections are required in KRAs, which are critical to the success of the success of the organisation, or, in areas where deviations go beyond the permissible limits.

Corrective action may involve training of employees, hiring labour for extra time, replacement of machinery, etc. sometimes, if deviations cannot be corrected despite the best efforts of managers, standards may be revised.

The various techniques of managerial control may be classified into two broad categories: traditional techniques and modern techniques.

Traditional Techniques: traditional techniques are those which have been used by the companies for a long time now. However, these techniques have not become obsolete and are still being used by companies. The following are traditional techniques of managerial control.

1. 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 aware that they are being observed personally on their job. However, it is a very time- consuming exercise and cannot effectively be used in all kinds of jobs.

2. Statistical Reports: Statistical analysis in the form of averages, percentages, ratios, correlation, etc., present useful information to the managers regarding performance of the organisation in various areas. Such information when presented in the form of charts, graphs, tables, etc., enables the managers to read them more easily and allow a comparison to be made with performance in previous periods and also with the benchmarks.

3. Breakeven Analysis: Breakeven analysis is a technique used by managers to study the relationship between costs, volume and profits. The sales volume at which there is no profit, no loss is known as breakeven point. It helps the manager in estimating profits at different levels of activities.

4. Budgetary Control: Budgetary control is a technique or managerial control in which all operations are planned in advance in the form of budgets and actual results are compared with budgetary standards. This comparison reveals the necessary actions to be taken so that organisational objectives are accomplished.

Modern Techniques: Modern techniques of controlling are those which are of recent origin and are comparatively new in management literature. These techniques provide a refreshingly new thinking on the ways in which various aspects of an organisation can be controlled. Following are the modern techniques of managerial control.

1. 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.

2. Ratio Analysis: Ratio Analysis refers to analysis of financial statements through computation of ratios. The most commonly used ratios used by organisations can be classified into the following categories:

                      a. Liquidity Ratios
                      b. Solvency Ratios
                      c. Profitability Ratios
                      d. Turnover Ratios

3. Responsibility Accounting: Responsibility accounting is a system of accounting in which different sections, divisions and departments of an organisation are set up as ‘Responsibility Centers’. The head of the centre is responsible for achieving the target set for his centre.

Responsibility centres may be of the following types:

                      a. Cost Centre
                      b. Revenue centre
                      c. Profit Centre
                      d. Investment Centre

4. Management Audit: Management audit refers to systematic appraisal of the overall performance of the management of an organisation. 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.

5. 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 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.

Controlling is an indispensable function of management. Controlling refers to the process of measurement of performance according to standards, measuring deviations and taking corrective action to achieve predetermined goals. Following are the factors that highlighted the importance of controlling:

1. Accomplishing Organisational Goals: It measures progress towards the organisational goals and find out deviations. In the absence of control system, activities may not be carried out according to plans. Thus, we can say, it guides the organisation and keeps it on the right track, so that it can attain its goals.

2. Judging Accuracy of Standards: Through an effective control system, managers can easily judge the accuracy of standards. It also keeps a careful check on the changes taking place in the organisation and in the environment, which facilitates the review of standards, in the 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, which helps in effective and efficient utilization of resources.

4. Improving Employees Motivation: It helps employees in realising, what they are expected to do and what are the standards of performance, on the basis of which they are appraised. This motivates them to perform better.

5. Ensuring Order and Discipline: By keeping a check on the activities of the workers, controlling creates an atmosphere of order and discipline among them. It also helps to keep a check on the dishonest behaviour of employees.

6. Facilitating Coordination in Action: It provides direction to all activities and each department and employees is governed by predetermined standards, which helps in establishing coordination among them.

The problems faced by the organisation in implementing an effective control system are:

1. Difficulty in setting Quantitative Standards: Control system is effective when standards are defined in quantitative terms. But in some cases, like employee morale, job satisfaction, etc, it is not possible to set quantitative standards. In the absence of these standards, measurement and comparison becomes difficult.

2. Little Control on External Factors: There are certain external factors like change in government policies, technological changes, competition, etc, which are beyond the control of the organisation. Thus, controlling such factors becomes difficult.

3. Resistance from Employees: Employees often resist control as they consider it as restriction or boundation on their freedom. e.g. employees might resist working under close supervision of CCTV’s and cameras.

4. Costly Affair: Control is a costly affair as it involves a lot of expenditure, time and effort. A small firm cannot afford to install an expensive control system. The cost of control system should not exceed the benefits derived from it.

Planning and controlling are inseparable twins of management. They are interrelated and interdependent functions of management. Without planning, there lies no basis for controlling, and vice versa.

Planning is the base of controlling function, as controlling involves measurement of performance against the standards to analyse deviations and take corrective action. Thus, controlling is impossible without planning. Planning without controlling is meaningless, because in the absence of controlling, it is impossible to monitor the progress and keep a check on the proper implementation of plans. Thus, without controlling, planning will fail to achieve objectives.

Planning is a thinking process while controlling is an executive function. While planning involves creative thinking, imagination and sound judgement, controlling ensures that such decisions are converted into desired actions. Thus, planning is prescriptive, whereas, controlling is evaluative.

On the basis of the above discussion, it is concluded that planning and controlling are interrelated and reinforce each other because:

i. Planning based on facts makes controlling easier and effective.
ii. Controlling improves future planning by providing information derived from past experiences.

a. Identify the benefits the company will derive from a good control system.

ANS. When company starts following a good control on operations, it leads to certain benefits which are:

1. Helpsinachievingdesiredgoals.
2. Judging accuracy of operations and standards.
3. Making efficient and effective use of resources.
4. Improving Employees Morale.
5. Ensuring proper flow of orders and that the whole system is in discipline.
6. Facilitates coordination and improves the performance of every individual.
    

b. How can the company relate its planning with control in this line of business to ensure that its plans are actually implemented and targets attained.

ANS. Company relates its planning with control in this line of business by implementing effective control system. This will help in two aspects: planning makes controlling effective and efficient, whereas, controlling improves future planning because it is like a post-mortem of past activities to find out deviations from the standards and in orders to ensure that its plans are actually implemented and targets are attained.

They will take the help from controlling process as it is a systematic process and it leads to various benefits. The process of controlling involves:

• Setting up of standards: In this step, company sets some targets against which the actual performance is measured.
• Measuring of performance: In this step, company is able to measure the performance and evaluate what is actually done by the employees.
• Compare performance: After evaluating the actual result, company compares the actual performance with the planned one. This helps in knowing that the desired goal is achieved or not.
• Analysing deviations: This refers to the difference between actual and desired performance. It helps the company in knowing that the deviation is positive or negative. It needs to focus on a part rather than analysing the whole.
• Taking corrective measures: Final step is to know the type of deviations and try to remove this deviation, so that in future it matches with the plans.
   

c. Give the steps in the control process that the company should follow to remove the problems it is facing.

ANS. The company should follow these steps in a systematic manner:

1. Setting performance standards.
2. Measurement of actual performance.
3. Comparing actual performance with standards.
4. Analysing deviations.
5. Taking corrective action.

a. Describe any two features of controlling highlighted in the above situation.

ANS. The two features of controlling highlighted in the above situation are:

i. Goal-oriented process: Since, controlling ensures that an organisation’s resources are effectively and efficiently utilized for achievement of goals, it is regarded as a goal-oriented process.

ii. Continuous: Control should not be misunderstood as the last function of the management process. By analysing deviations and taking corrective action, it helps in formulating better plans for the future. Thus, it is a function that brings the management cycle back to planning and is regarded as a continuous function.

b. Explain any four points of importance of controlling.

ANS. Importance of controlling in management are:

1. Accomplishing Organisational Goals: It measures progress towards the organisational goals and find out deviations. In the absence of control system, activities may not be carried out according to plans. Thus, we can say, it guides the organisation and keeps it on the right track, so that it can attain its goals.

2. Judging Accuracy of Standards: Through an effective control system, managers can easily judge the accuracy of standards. It also keeps a careful check on the changes taking place in the organisation and in the environment, which facilitates the review of standards, in the 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, which helps in effective and efficient utilization of resources.

4. Improving Employees Motivation: It helps employees in realising, what they are expected to do and what are the standards of performance, on the basis of which they are appraised. This motivates them to perform better.