CHAPTER 9

CONTROLLING

CHAPTER 9 - CONTROLLING What is controlling?

Controlling refers to the “process of ascertaining whether organizational objectives have been achieved; if not, why not; and determining what activities should then be taken to achieve objectives better in the future.”

Control refers to the actions made to ensure that activities performed match the desired activities and goals that have been set.

Importance of Controlling

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

Steps in the Control Process

The control process consists of four steps, namely:1. Establishing performance objectives and

standards.2. Measuring actual performance.3. Comparing actual performance to objectives and

standards, and4. Taking necessary action based on the results of

the comparisons.

1. Sales targets – which are expressed in quantity or monetary terms;

2. Production targets – which are expressed in quantity or quality

3. Worker attendance – which are expressed in terms of rate of absences;

4. Safety record – which is expressed in number of accidents for given periods.

5. Supplies used- which are expressed in quantity or monetary terms for given periods.

Establishing Performance Objectives and Standards

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 their 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.

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.

Example: A construction firm entered into a contract with the government to construct a 100 km road within ten months. It would, then, reasonable for management to expect at least 10kms to be constructed every month. As such, this must be verified every month, or if possible, every week.

Comparing Actual Performance to Objectives and Standards

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.

Citing the previous example if the management of the construction firm found out that only 15kms were finished after 2 months, then any of the following actions may be undertaken:

1. Hire additional personnel;2. Use more equipment; or3. Require overtime.

Types of Control

Control consists of three distinct types, namely:Feedforward Control When management anticipates potential problems

and prevents their occurrence.Concurrent Control

Undertaken when operations are already on going and activities to detect variances are made.

Feedback ControlUndertaken when information is gathered about a completed activity in order that evaluation and steps for improvement are derived. Corrective actions aimed at improving future activities are features of feedback control.

The Long-Range Financial Plan

The planning horizon differs from company to company. Most firms will be satisfied with one year. Engineering firms, however, will require long term financial plans. This is because of the long lead times needed for capital projects.

Example: An Engineering firm assigned to construct the Light Railway Transit (LRT) within three years. As such the 3-year financial plan will be very useful.

Components of Organizational control systems

1. Strategic plan2. The long-range financial plan3. The operating budget4. Performance appraisals5. Statistical reports6. Policies and procedures.

Strategic Plan

The output of strategic planning which spells out “the decision about long-range goals and the course of action to achieve these goals.” It provides the basic control mechanism for the organization.

When there are indications that activities do not facilitate the accomplishment of strategic goals, these activities are either set aside, modified or expanded. These corrective measures are made possible with the adoption of strategic plans.

Indicates the expenditures, revenues, or profit planned for some future period regarding operations.

The figures appearing in the budget are used as standard measurements for performance.

The Operating Budget

Performance Appraisals

Measures employee performance. As such, it provides employees with a guide on how to do their jobs better in the future.It also functions as effective checks on new policies and programs.

Example: If a 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 his performance

Statistical Reports

Statistical Reports pertain to those that contain data on various developments within the firm.

1. Labor efficiency rates2. Quality control rejects3. Accounts receivable4. Accounts payable5. Sales reports6. Accident reports7. Power consumption report

Policies and Procedures

Policies refer to “the framework within which the objectives must be pursued.”

Procedure is “a plan that describes the exact series of actions to be taken in a given situation.”

It is expected that policies and procedures laid down by management will be followed. When they are breached once in a while, management is provided with a way to directly inquire on the deviations.

STRATEGIC CONTROL SYSTEMS

To be able to assure the accomplishment of the strategic objectives of the company, strategic control systems, become necessary.

1. Financial analysis2. Financial ration analysis

Financial Analysis

The success of most organization depends heavily its financial performance. It is just fitting that certain measurements of financial performance be made so that whatever deviations from standards are found out, corrective action may be introduced.

Financial Ratio Analysis

Financial ratio analysis is a more elaborate approach used in controlling activities.

Under this method, one account appearing in the financial statement is paired with another to constitute a ratio.The result will be compared with 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 necessary

Categories of Financial Ratio

1. Liquidity Ratios- assess the ability of a company to meet its current obligations

2. Efficiency Ratios- show how effectively certain assets or liabilities are being used in the production of goods and services.

3. Financial Leverage Ratios- designed to assess the balance of financing obtained through debt and equity sources.

4. Profitability 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

IDENTIFYING CONTROL PROBLEMS

Recognizing the need for control is one thing, actually implementing it is another. When operations become complex, the engineer manager must consider useful steps in controlling.

Executive Realty Check

Employees at the frontline often complain that management imposes certain requirements that are not realistic.

Comprehensive Internal Audit

An internal audit is one undertaken to determine the efficiency and effectively of the activities of an organization.

Symptoms of Inadequate Control

If a comprehensive internal audit cannot be availed of for some reason, the use of a checklist for symptoms of inadequate control may be used.

Symptoms of Inadequate Control (Kreitner)

1. An unexplained decline in revenues and profits2. A degradation of service (customer complaints)3. Employee dissatisfaction (complaints,

grievances, turnover)4. Cash shortages caused by bloated inventories or

delinquent accounts receivable.5. Idle facilities or personnel.6. Disorganized operations (workflow bottlenecks,

excessive paperwork).7. Excessive costs.8. Evidence of waste and inefficiency (scrap,

rework)