basic elements of control copyright © houghton mifflin company. all rights reserved.20–1
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Basic Elements of Control
Copyright © Houghton Mifflin Company. All rights reserved. 20–1
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ControllingProcess of evaluating and regulating ongoing activities
to ensure goals are achieved.
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Functions of Management
Plan Organize Direct Control
Review and Modify
Control links us back to Planning function where we set our goals.
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20.1 The Purpose of Control
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Areas of Control
•Physical resources—inventory management, quality control, and equipment control.
•Human resources—selection and placement, training and development, performance appraisal, and compensation.
•Information resources—sales and marketing forecasts, environmental analysis, public relations, production scheduling, and economic forecasting.
•Financial resources—managing capital funds and cash flow, collection and payment of debts.
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The Control Function1. Set
standards 2. Monitor actual performance
3. Compare actual performance against standard
4. Take corrective action
From planning function
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-Establish standards
•Control standard—a target against which subsequent performance will be compared. Set during the Planning function. Should be expressed in measurable terms and consistent with organizational goals.
-Measure performance
•Performance measurement is a constant, ongoing process.
•Performance measures must be valid indicators (e.g., sales, costs, units produced) of performance.
-Compare performance against standards
• Define the permissible deviation from the performance standard.
-Consider corrective action
1. Maintain the status quo (do nothing).
2. Correct the deviation to bring operations into compliance with the standard.
3. Change the standard if it was set too high or too low.
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Forms of Operations Control
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Financial Control
Control of financial resources as they:
•Flow into the organization revenues
•Are held by the organization as working capital, retained earnings
•Flow out of the organization as payment of expenses
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Budgetary Control
–Budgets
•May be established at any organizational level.
•Are typically for one year or less.
•May be expressed in financial terms, units of output, or other quantifiable factors.
–Purposes of budgets
•Help managers coordinate resources and projects.
•Help define the established standards for control.
•Provide guidelines about the organization’s resources and expectations.
•Enable the organization to evaluate the performance of managers and organizational units.
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•Financial Statements
–Financial statement
•A profile of some aspect of an organization’s financial circumstances.
–Balance sheet
•A listing of assets (current and fixed), liabilities (short- and long-term), and stockholders’ equity at a specific point in time (typically, year-ending) that summarizes the financial condition of the organization.
–Income statement
•Summary of financial performance—revenues less expenses as net income (i.e., profit or loss)—over a period of time, usually one year.
Other Tools for Financial Control
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•Ratio Analysis
–The calculation of one or more financial ratios to assess some aspect of the organization’s financial health.
•Liquidity ratios
•Debt ratios
•Operating ratios
•Financial Audit
–An independent appraisal of an organization’s accounting, financial, and operational systems.
•External audits
•Internal audits
Other Tools for Financial Control
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–Integration with planning
–Flexibility
–Accuracy
–Timeliness
–Objectivity
Characteristics of Effective Control
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Overcontrol
Inappropriate Focus
Rewards for Inefficiency
Too much accountability
Why Resistance to Control?