Entrep finance chapter 12 monitor sales and control expenses

243 | P a g e H a n d o u t f o r E n t r e p r e n e u r s h i p 1 0 1

SESSION 12: MONITOR AND CONTROL

Overview: In Session 11, we focused on managing everyday business activities. But business is much more than routine transactions. It is about achieving goals. Are you achieving your goals? Specific questions: Are things going as planned? Are you getting the results you expect? Can you spot problems early on? How do you make sense of everything that is happening? Session 12 attempts to answer the questions above by showing you ways to control and monitor the health and performance of your business.

Sections:

1. Identifying And Measuring Problems a. The need for information b. Accounting reports c. The analysis

2. Tracing Causes 3. Taking corrective action

a. Separation of duties b. Transaction trail c. Error prevention and detection d. incentives

Learning Objectives

At the end of this session, the student should be able to: 1. Explain why controls are needed as businesses grow

2. Define monitoring and control. State their main activities 3. Describe an income statement and a balance sheet.

4. Apply variance-, vertical-, horizontal-, and trend analysis to a data set

5. Describe the cause-and-effect diagram and brainstorming as techniques to analyzing causes to problems

6. Cite and explain the traits of corrective actions that relate to internal controls 7. Provide examples of incentives or measures to prevent and detect errors

STORY FROM REAL LIFE

Capitol Hill Bikes is a retail bike store located in Washington DC. Ms. D’Amour started the business in 1999. She approached the local Small Business Development Center in September

2004. Ms. D'Amour was concerned about her financial systems. She was not receiving the

operating information she needed to make proper business decisions.

SBDC staff visited the business and did an evaluation of the operating systems and the financial systems. By analyzing the accounting reports, the SBDC staff recommended changes in the


financial situation. They also made some suggestions concerning the need for permanent

working capital and certain aspects of her cash flow. Now, the business is running better.

Source: Entrepreneur.com

Introduction

When the cat is away, the mice come out and play --- A Proverb

A one-man operation would have no need for control. If you are owner, manager, and worker all at the same time, there is no conflict of interest between the positions as you do them all. If you

steal money from the business, you end up cheating yourself, which does not make sense. If you work really hard and become successful, you are duly rewarded, whether you think of yourself as

worker, manager, or owner.

The need for control arises when the business grows and

more people join your team. Soon, it will not be possible for you to watch over your people all the time. Then, how

do you know that your staff will do the work the way you

want it done? When your people do something, are they doing it more for themselves than for your business? For

instance, if a manager invites a client to lunch, is he developing your business or is he taking some hours off?

These questions arise whenever you delegate or let someone else do the work for you.

We can state the problem more positively. People do things for their own reasons (just think about why you did

the things you did today!). If we can take this as a given, your task as an owner-manager is to put in measures that

align the interests of your people with that of your business. This task is what monitoring and

control is all about.

Control then is making sure that your business proceeds as planned. In the case of problems, you would like to spot them early on or prevent them from happening altogether. When things

are going well, then performance should be rewarded.

Glossary: Controls ensure your business proceeds as planned.

More formally, we define monitoring and control as the set of supervising activities that:

1. Identify and measure problems

2. Trace the causes for the problems. Take corrective action. 3. Provide reward when goals are met

We will take up each part of the definition in the next sections. The greater focus, however, is on

identifying and measuring problems. The tools for doing this task are fairly established. In

contrast, tracing the causes and taking corrective action depend largely on the specific circumstances of your business. They are no less important but are harder to generalize.


Ask yourself Have I ever had to control a process? Have I supervised employees before?

Have I ever tried to repair a broken item?

Have I ever encountered a problematic process? Did I successfully analyze the problem?

1. Identifying and Measuring Problems

You can’t manage what you don’t measure.

The need for information. For you to spot and measure problems, you must first have information. Information is different from data. Data are just plain facts. They are useless by

themselves. After data is ―worked‖–-sorted, organized, structured, or presented–-so as to make it useful, it becomes ―information.‖

Organizations are collections of resources and people that work to achieve goals. In business, the work is to deliver goods and services. The goal is to create value for you, the owner. Information

is needed to do good work and create more value. You would need to know what resources your business has, how these were funded or paid for, what results were achieved, and what things

were used in the process. Accounting is the system that provides such information in business.

We will not go into the details of preparing accounting records and reports. You will hire people

to do this for you. Our focus is to read the accountant’s reports and manage the business better.

Accounting reports. You have already seen one accounting report—the cash budget back in Session 8. The cash budget is your business plan expressed in money terms. We show the cash

budget format below to refresh your memory.


You made the cash budget to justify the funds you requested from the investor. But it is also

useful as a guide to set up and run your business. In fact, it is likely that you and the investor will use the cash budget to evaluate the progress of your efforts. How is this done? Simply by

comparing the actual cash flows with the budgeted cash flows, you get a sense of what went wrong (or right) and where. We will discuss this in greater detail later. For now, let’s get back to

the accounting reports that you can use to monitor your business.

Another important accounting report is the income or profit and loss statement. The income

statement is a performance report over a period. It answers the question: ―What has the business done for you lately?‖ It compares revenues—the value of the goods you delivered or the

services you provided—and expenses –the value of resources used to generate revenues. The resulting difference is profit—a measure of value the business created for you during the period.

Below is a simple format for an income statement followed by an example.

Glossary:

An income statement is a report on how your business did over a period. Profit: a measure of value the company created for you over a period.

Sample Template for a Cash Budget

Year 1 Year 2 Year 3 Year 4 Year 5

a. Beginning Cash

Cash In

Cash Out

Financing:

b. Net Cash Flow

c. Ending Cash before Financing

d. External Funding Needed/ Paid

e. Ending Cash after Financing

The Basic Income Statement Format Basic Balance Sheet Format

THE NAME OF THE COMPANY THE NAME OF THE COMPANYIncome Statement Balance Sheet

The Period of Time Covered A Specific Date

Revenue

Each type of revenue the business earns is

listed here. . . . . . . . . . . . . . . . . . . . . . . . Their amounts are shown here.

Expenses:

Each type of expense the business incurs

is listed here. . . . . . . . . . . . . . . . . . . . . . . Their amounts are shown here.

Net income or net loss

The expenses are subtracted from the revenues

and the balance is shown here.


In the example above, total revenues of Sr10,700 exceeded expenses of Sr7,635 resulting in a profit of Sr3,065.

At this point, you might ask: Isn’t the cash budget and income statement really one and the same? Are not revenues cash in and expenses cash out? Well, not exactly. Recall that you can

sell on credit so sales revenue is not the same as cash in. Likewise, just because you used things to generate revenue does not mean you have paid for them, so expenses need not be the same

as cash out.

If the cash budget and the income statement are not the same, where did the differences go?

The differences did not disappear into thin air; they went into the balance sheet. This is not the usual view of the balance sheet but one that shows you how the three important accounting

reports relate to each other.

The balance sheet is more typically described as the statement of condition. It answers the

question: ―How are you today?‖ It is similar to the results you get when you undergo a medical test. The results show your condition at the time the test is taken and is true only for that time.

After some time, the results no longer hold and new tests will have to be done to assess your present condition.

Glossary:

A balance sheet is a report on the condition or financial health of your business.

The balance sheet compares things your business owns (assets) and things it owes (liabilities). The difference is the value that belongs to you, the owner (equity). More formally, we say

Assets = Liabilities + Equity. The left side of the equation must always equal or balance the

right side, hence the term balance sheet. The balance sheet format follows this equation and is shown below followed by an example.

Revenue

Sign painting fees Sr 9,900

Installation fees 800

Total revenue 10,700

Expenses

Wages expense Sr 6,000

Electric expense 1,050

Telephone expense 285

Advertising expense 300

Total expense 7,635

Net Income Sr 3,065

Rafi's Painting Services

Income Statement

For the Month of September 2009


To summarize, you have learned three accounting reports—the cash budget, the income

statement and the balance sheet. Each period, say a year or a quarter, will have these reports. What you do with this information is the subject of the next section.

The analysis

STORY FROM REAL LIFE

THE NAME OF THE COMPANYBalance Sheet

A Specific Date

Assets Liabilities

Things you own are listed here Things you owe are listed here.

starting with cash. The other things They are reported according to when

are reported according to how they get paid.

quickly they turn to cash

Equity

The value of the business that belongs

to the owner is shown here. It is

computed as assets - liabilities

Assets = Liabilities + Equity

Basic Balance Sheet Format

Pots and Plants LandscapingBalance Sheet

As of September 2009

Assets Liabilities

Cash 12310 Accounts payable 9700

Accounts receivable 570

Supplies 820 Equity

Prepaid rent 2400 S. Al Salem, Capital 21750

Vans and Equipment 15350

31450 31450


The Landscape Doctor experienced substantial growth due to a strong real estate market

creating a demand for its products and services. Sales growth led to expansion--good for the business but uncomfortable for the owners. They felt as if they were not in control of the growth.

To address their problems, the owners sought the help of a consultant who led all employees

through two discussions. The open discussions began to pinpoint internal difficulties that should

be corrected. Due to the implementation of changes to correct those problems, the owners increased net profit even though sales remained at the same levels.

You now have the information and reports you need. How do we get from here to identifying and

measuring problems? In the first place, what do we mean by the term ―problem‖?

A problem is a condition that is not acceptable. It is usually shown as a deviation from a standard

or an expectation and this deviation creates a gap. For this reason, problems are sometimes called ―gaps, deviations or variances.‖ We can use these terms interchangeably.

You have a handful of tools to identify and measure problems:

Variance Analysis: This technique compares forecasts with actual data. The desired result is

that actuals should not be too far from forecasts as that would mean things went as planned. If

actuals are significantly different from forecast, you would like to know why. Below is an example of a variance analysis of sales for the first six months of the year.

Glossary

Variance analysis compares forecasts with actual data.

Month Forecast Actual Variance Variance

in amount in %

Jan 434 287 -147 -33% Feb 624 224 -400 -64%

Mar 545 622 77 14%

Apr 351 522 171 49% May 431 291 -140 -32%

June 493 540 47 10%

In the example above, the actual sales differed from forecast. The variances or differences are large. You may also notice that the differences go both ways, positive and negative. What caused

the gaps? There are a number of possibilities. Demand could be very unpredictable even on a month-by-month basis. Management may not know enough to come up with reasonable

projections. Delays in supply may have disrupted deliveries. Machines could have broken down. And so on.

The numbers themselves do seem to point to a specific reason but they do tell you to look into the matter. You will have to relate the numbers to business operations to get an answer.


Vertical Analysis: Vertical analysis converts amounts in a report into percents of a certain base or total. In the income statement, everything is turned into a percent of sales. In the balance

sheet, everything is turned into a percent of assets. The idea is that you should focus your attention on the significant percentages—be they revenues, costs, resources, or obligations. It is

called vertical analysis because the percentages line up in a vertical fashion along with the

numbers they were based on.

Glossary: Vertical analysis converts amounts to a percent of a base or total. It compares forecasts with actual data.

Below is our sample income statement again, this time with percentages:

We find that Rafi’s Painting Services gets most of its revenues from painting signs and spends the

most in wages. Income for the month seems to be a healthy 29% of sales.

What can the owner do with the information above? If he is happy with the performance of his business in September 2009, he might celebrate a bit, and then continue operating as before.

If not, he could think of ways to earn more from ―installations.‖ Installations only account for 7% of total revenue. Or he could look for ways to make his people more productive: you can see that

―wages‖ is a significant cost to his business. If he has the income statement of several months, he can spot the trend of some costs. He can take action to halt unfavorable trends.

Horizontal and trend analysis: Horizontal analysis looks at how numbers changed from one period to another in percentage terms by the formula:

(this period – last period) X 100

last period

Amounts Percents

Revenue

Sign painting fees Sr 9,900 93%

Installation fees 800 7%

Total revenue 10,700 100%

Expenses

Wages expense Sr 6,000 56%

Electric expense 1,050 10%

Telephone expense 285 3%

Advertising expense 300 3%

Total expense 7,635 71%

Net Income Sr 3,065 29%

Rafi's Painting Services

Income Statement

For the Month of September 2009


It converts amounts into growth rates and so may also be called by this term.

Glossary:

Horizontal analysis looks at the growth rate of items from one period to the next.

When vertical or horizontal analysis is applied over several periods, you might detect that some numbers move persistently in one direction. When numbers behave this way, we have what is

called a trend, hence the term trend analysis. Let us look at a hypothetical example below to see how this can happen.

Year 1 Year 2 Year 3 Year 4

Sales 2300 2500 2700 2900

- Cost of Materials and Labor 1400 1600 1800 2000

= Contribution 900 900 900 900

Glossary:

Trend analysis repeats horizontal or vertical analysis over several periods to detect persistent movements.

Before you read on, reflect on the numbers above. Do you find the results impressive, acceptable, or worrying? You might think them impressive. Sales have grown steadily over the

years. You might think them acceptable. In each year, the cost of materials and labor has increased by the same amount as sales, resulting in the same contribution throughout.

But if you convert the numbers into percentages, you are likely to discover something else. Below is the same table with their growth rates inserted.

What do we find by looking at the growth rates? Sales are increasing. But they increase at

smaller percentages. This may not be very worrying as the costs of materials and labor have the same trend. Note though, that the growth rate of costs has always been greater than the growth

rate of sales. This trend is persistent. Should you worry now, given this insight?

One way to find out is to do vertical analysis over several years, as shown in the table below:

This last table makes it clear that the cost of materials and labor as a percent of sales has steadily climbed over the years. As a result, ―profit as a percent of sales‖ has decreased. We do

Growth Growth Growth

Year 1 Rate Year 2 Rate Year 3 Rate Year 4

Sales 2300 8.7% 2500 8.0% 2700 7.4% 2900- Cost of Materials

and Labor 1400 14.3% 1600 12.5% 1800 11.1% 2000

= Contribution 900 900 900 900

As a % As a % As a % As a %

Year 1 of Sales Year 2 of Sales Year 3 of Sales Year 4 of Sales

Sales 2300 100.0% 2500 100.0% 2700 100.0% 2900 100.0%- Cost of Materials

and Labor 1400 60.9% 1600 64.0% 1800 66.7% 2000 69.0%

= Contribution 900 39.1% 900 36.0% 900 33.3% 900 31.0%


not know enough about the business to say if this is very bad news. For all we know, the

numbers may still be healthy. But the trends are not good news.

There are a couple of points you can take away from the discussion we just had.

First, trends are not always obvious. You may have to work the numbers in different ways before

trends become clear.

Second, a trend means that a behavior has persisted over several periods and is likely to do so in the near future. So the behavior and its effects cannot be dismissed lightly.

Ask yourself Have I ever made a list of monthly expenses?

Did I discover expenses that are unnecessary or perhaps even harmful? Did I notice trends in my pattern of expenses?

Did I notice trends, good or bad, in my other activities?

2. Tracing Causes

Why go after the causes of problems when the problems have already been identified? Would it not be more efficient to tackle the problem head on and come up with a solution right away?

We trace causes because the observed deviations may only be symptoms of a deeper problem. If you treat only the symptom, there might be temporary relief but the disease remains. You would

like to get to the root cause or causes to solve problems permanently.

Spotting a variance, a deviation or a trend is much easier than finding its cause. This is because

causes depend very much on the circumstances surrounding the observed trend or variance.

For example, let us suppose that sales increased significantly in one quarter. There could be many reasons why this happened. Among them: a price increase, an increase in volume, an

increase in volume that more than compensated for a decrease in price, new store openings that added to existing sales, or a customer ordered in bulk.


If a trend or variance can be caused my many things, then how do you go about finding the exact cause? The short answer is: very carefully. It would be unwise to come to a judgment so

hastily when there are so many possibilities. We now discuss some ways to accomplish this task.

If data is available, the cause may be traced by analyzing the data. This is usually done by tying

one piece of information with another. For example, if you relate a sales increase with a trend in the cost of materials and labor, the most likely cause or causes may be identified by logic alone

as shown in the table below:

Sales increased and . . . Cost of materials and labor … Most likely causes

amount remained the same but its percentage to sales reduced

1) A price increase

2) A volume increase coupled with a reduction in costs

increased by about the same rate An increase in volume increased more both in amount and in percentage terms

1) An increase in volume more than offset an decrease in price

2) The increase in volume was costly

As you consider more trends, the choices narrow further and the more confident you will be of

your interpretation. Nonetheless, it may be impossible to pin down the exact cause from the numbers alone. Much better for you to relate the numbers to other information you have about

your business.

A popular tool for tracing causes is the cause-and-effect diagram. This tool identifies the

causes and sub-causes of a gap and organizes the analysis by using a diagram. In fact, it is best explained by showing the diagram itself:


Glossary: A cause-and-effect diagram uses a diagram to trace the causes and sub-causes of a given problem.

The diagram shows that a gap may be caused by a problem in manpower, machines, materials,

environment, measurement, and/or methods. The arrows indicate that a gap may have several causes and that the causes may have sub-causes. You may have noticed that the diagram looks

like the bones of a fish. For this reason, it is also called a fishbone diagram.

The cause-and-effect diagram emphasizes that a gap may be due to not one but to many causes.

Another popular way to trace causes is brainstorming. Here, a group is presented with an

identified problem. The task of the group is to list as many causes as they can within a short time frame. All possible causes are listed, even the silly ones. The ―silly‖ causes may actually turn out

to be correct! Evaluation is done only after generating causes and giving time for the group to reflect on them.

Glossary:

Brainstorming is a technique to generate as many causes as possible, without judgment and within a short time frame.

Brainstorming promotes creativity because judgment is reserved until the end and silly ideas are encouraged. The same process can

also be used to generate solutions or corrective actions, our next

section.


Ask yourself

Have I ever worked with a team before to solve a problem? Did I identify the root causes of the problem?

Have I ever worked with a team before to attain an objective? Did we all achieve the desired effects?

3. Taking Corrective Action Like tracing causes of a problem, measures to correct a problem largely depend on the

circumstances that surround the observed trend or variance. Coming up with solutions requires as much logic as creativity. Just remember that your task is to address the root cause and not

just the problem that was first identified.

Solutions that relate to control and monitoring are called internal controls. They are likely to

share many of these traits:

1. Separation of duties

2. Transaction trail 3. Error prevention and detection

4. Incentives

Let us discuss each in turn.

Separation of duties. Separation of duties is achieved when no one person can complete an

entire transaction on his own. The chance of theft or fraud happening is much smaller when two

or more people are involved in an activity.

Separation of duties may be achieved in several ways: - The marketing function is separated from the operating function

- The one who authorizes a transaction is different from the one who does the actual transaction

- Someone checks a transaction that someone else made

- The one who records a transaction is different from the one who did it

Glossary: Separation of duties is achieved when no one person can complete an entire transaction.


Transaction trail. There is a transaction trail when there is a clear and correct record of all

transactions and the people that did them. Because of the transaction trail, you can go from the summarized information in the reports back to individual transactions when investigating a

variance.

Glossary: A transaction trail is a clear and correct record of all transactions and the persons that did them.

Central to achieving a transaction trail is to make sure that individual transactions are recorded in a document. All

necessary details to record a transaction are in the document. The document must be signed by the persons who authorized

and who executed the transaction. In a computer network, a

transaction trail is achieved through the use of ID’s and passwords.

When the transaction trails of your business are established, it

becomes much easier for you to trace common errors or staff

who need training. It also deters fraud. Employees will know that the person who does an abnormal transaction can easily

be identified through the transaction trail.

Error prevention and detection. Errors cannot be avoided. But you can take steps to minimize them. Errors can be expensive! It is cheaper to prevent errors than to fix them. Thus, the task of

control is to prevent errors from happening in the first place. When they do happen, the task of

control is to detect errors early on so that the problem does not get any bigger.

Here are some ways by which errors can be prevented or detected.

Preventive measures:

- Someone checks a transaction before it is processed - Limits are set in the system for certain transactions

- Only staff who are authorized to do a transaction can actually do so - Checklists to ensure all that needs to be done is done

Measures to detect errors: - Changes to a record require approval from a higher authority

- There is a control or audit unit that reports directly to you, the owner - Old records are kept for a reasonable period

- Values (e.g., reject rates) that fall outside acceptable ranges are brought to the attention of a higher authority

- Quality or continuous improvement programs are implemented

Preventing and detecting errors is just one side of the control coin. They tell staff what not to do.

They say little about what staff should do. To persuade employees to act in the right way, you need incentives.

Incentives. Incentives are rewards to encourage desired behavior and achieve desired results.

You would like to reward performance. Performance normally means the achievement of goals. It can also mean

teamwork or the ability to develop talent. Because incentives


promote the right behavior and send a clear message on what your business values, they are

powerful motivators.

Incentives and rewards are not just about money. You can motivate people by providing opportunities for:

Achievement

Learning

Working in groups Being respected

Knowing the meaning of the work they are doing

Variety, difficulty, and challenge

Prestige

Recognition

Ask yourself

Have I ever taken corrective action for a defective process?

Have I ever implemented improvements in a process that reduced the number of errors?

Conclusion The previous section was about taking corrective action. Errors have occurred and you tried to fix

them. It is wise to do something, to prevent errors from happening again.

If you know your business, you will have a good idea where the weak points are. You can then put control measures in place before you resume operations.

Controls involve a trade-off. Controls prevent errors and promote results. But they also restrict risk-taking and decision-making. You would not want your staff to be so limited by controls that

they no longer have room to move. You are running a business, not a prison.

On the other hand, neither would you want your staff to be reckless or to decide matters beyond their authority. What you are looking for is a balance between risk-taking and caution. As a

would-be entrepreneur, you are likely to understand the role of controls better than most. After

all, entrepreneurs decide on their own and take risks too.

Points to Remember

1. Controls ensure that your business proceeds as planned, and that the task you set out to

do is in fact done. More formally, monitoring and control are the set of supervising activities that identify and measure problems, trace their causes, and take corrective

action where needed.

2. To spot problems, one must first have information. Business information comes mainly in

the form of accounting reports.

a. The income statement is a report on performance over a given period.


b. The balance sheet is a report on the condition or financial health of your

business. You can apply any combination of analytical tools on the information in order to identify problems.

3. Variance Analysis – This technique compares forecasts with actual data.

4. Vertical Analysis – Vertical analysis converts amounts in a report into percents of a certain base or total. In the income statement, everything is turned into a percent of sales. It

allows you to see if profit is now 40% of sales; before it used to be 30% of sales.

5. Horizontal analysis – Horizontal analysis looks at how numbers changed from one period to another in percentage terms

6. When vertical or horizontal analysis is applied over several periods, you might detect that some numbers move persistently in one direction. When numbers behave this way, we

have what is called a trend, hence the term trend analysis.

7. After problems are identified, their causes are traced. This task is done because the

observed problem may only be a symptom to a deeper problem. Tools to trace the causes of problems include:

a. cause-and-effect diagram, a tool that helps identify the causes and sub-causes of

a gap and organizes the analysis by using a diagram, and b. brainstorming, where a group is presented with an identified problem. The task

of the group is to list as many causes as they can within a short time frame. All

possible causes are listed.

8. Finally, solutions to problems and root causes were discussed. Solutions that relate to control and monitoring are likely to have the following traits:

a. separation of duties,

b. a transaction trail, c. measures to prevent or detect errors, and

d. incentives.

Learning from the Internet 1. To know more about evaluating business performance: http://www.entrepreneur.com/tradejournals/article/17493704.html

2. To know more about internal controls:

http://www.cpaaustralia.com.au/cps/rde/xbcr/SID-3F57FECA-24F8CAD3/cpa/business_internal_controls_170108.pdf

Review Questions

1. Why are controls needed as a business grows?

2. What is monitoring and control?

3. What are the main activities in monitoring and control?

4. What does an income statement tell you?

http://www.entrepreneur.com/tradejournals/article/17493704.html




5. What does a balance sheet tell you?

6. What is variance analysis?

7. What is vertical analysis? What is horizontal analysis?

8. What is trend analysis?

9. Describe a cause and effect diagram.

10. What are the characteristics of brainstorming?

11. What are the main traits of corrective actions that relate to control and monitoring?

12. Give at least three ways to prevent or detect errors .

13. If a staff member is not very interested in money as a motivation, give three other ways

to motivate him to work better.

Questions For Discussion

1. ―You can’t manage what you don’t measure.‖ Discuss the meaning of this quote with

your group mates. Come up with examples.

2. Earlier, we came up with possible causes as to why sales would increase from one quarter to the next. In similar fashion, can you think of possible causes why the cost of

materials and labor may increase?

3. In using logic to trace causes, you could relate one piece of information to another to

narrow down possible causes. The table below was shown in the text as an example.

Sales increased and . . . Cost of materials and labor … Interpretation as to the most likely causes

amount remained the same but its

percentage to sales reduced

1) A price increase

2) A volume increase coupled with a

reduction in costs

increased by about the same rate An increase in volume

increased more both in amount

and in percentage terms

1) An increase in volume more than offset

an decrease in price 2) The increase in volume was costly

Can you say why each cause above is likely, given the trends?

4. Which do you think is the more powerful motivator: measures that punish unwanted behaviors or measures that promote desired behavior?

5. In groups, come up with examples of incentives that provide opportunities for achievement, learning, challenge, prestige, and recognition.


Case Study: Party Supplies Party Supplies is a fast-growing new business. The owner, Mahmoud, signs all cheques and

watches all parts of the business. He just has one staff member, Yousuf, who does all other

functions Mahmoud does not want to do. The sales staff are out in the field for most of the day. Following is a sequence of events that happened recently:

Week 1: A number of suppliers called wanting to be paid for overdue amounts. Mahmoud told

Yousuf to delay payments to conserve cash. The business was temporarily short of cash.

Week 2: Three important suppliers insisted on payment. Yousuf tried to get their invoices

processed but he could not find them. So he asked the suppliers to email a copy. The suppliers sent statements of the outstanding invoices. Mahmoud agreed to pay as some cash had arrived

in the bank account.

Week 3: At the end of the week, Mahmoud turned in a file of invoices to Yousuf who promptly

processed them without thinking, since he was in a hurry to catch a plane to Dubai that evening. Yousuf ended up paying the suppliers twice.

Case Analysis:

1. What were the causes for the double payment?

2. Do you think the suppliers will return the overpayment? If they do, what can prevent

Yousuf from depositing the checks to his account instead of to the business?

3. If copies are accepted, Yousuf could copy an invoice himself, have Party Supplies pay twice, ask for the refund, and pocket the overpayment. What can Mahmoud do to

prevent this from happening?

Glossary

Control: The set of supervising activities that makes sure business proceeds as planned. It consists of identifying and measuring problems, tracing their causes, and taking corrective

action.

Income statement: An accounting report on performance over a given period. It deducts

expenses from revenues to result in either a profit or loss.

Balance sheet: An accounting report on the condition or financial health of a firm. It consists of assets that must equal the sum of liabilities and equity.

Variance analysis: An analytical tool that compares forecasts from actual data to highlight

significant differences. It then looks for causes on the differences.

Vertical analysis: An analytical tool that converts amounts in a report to a percent of a certain

base or total. For example, all items in an income statement are turned into a percent of sales.


Horizontal analysis: An analytical tool that looks at the percentage change of items from one

period to the next. Also called growth rate.

Trend analysis: When vertical or horizontal analysis is applied over several periods in the hope of observing a persistent movement in the numbers.

Cause-and-effect diagram: An analytical tool that uses a diagram to represent the causes and sub-causes of a problem. Also called a fishbone diagram.

Brainstorming: A technique that lists as many causes (or solutions) to a problem within a short

time frame. No judgment or evaluation is made when ideas are generated in order to promote creativity.

Separation of duties: A basic trait of control whereby no one person is able to complete an entire transaction on his own.

Transaction trail: A clear and correct record of all transactions and the people that did them.

With a transaction trail, someone can trace items in the reports back to the individual

transactions that affected the item.

EXERCISES FOR SESSION 12: MONITOR AND CONTROL

Review Questions

1. Why are controls needed as a business grows?

2. What is monitoring and control?

3. What are the main activities in monitoring and control?


4. What does an income statement tell you?

5. What does a balance sheet tell you?

6. What is variance analysis?

7. What is vertical analysis? What is horizontal analysis?

8. What is trend analysis?


9. Describe a cause and effect diagram

10. What are the characteristics of brainstorming?

11. What are the main traits of corrective actions that relate to control and monitoring?

12. Give at least three ways to prevent or detect errors

13. If a staff member is not very interested in money as a motivation, give three other ways to motivate him to work better.


Exercises And Activities

1. Go through list of ways you can motivate staff below. Provide examples of each: Achievement

Learning

Working in groups

Being respected

Knowing the meaning of the work they are doing

Variety, difficulty, and challenge

Recognition

Prestige

2. In groups, discuss the effects of little or no control.

3. The table below shows the income statement of a firm over three years.

In groups, discuss the questions below (the term ―amounts‖ below refer to the riyal amounts) - What analytical techniques have been applied to the raw numbers?

- What insights can you come up? Is the firm’s performance improving or worsening? - Are the comparisons ―fair‖ across the amounts? Across the percents?

- What else can you do with the amounts to give you more insights?

Year 1 Year 2 First Half of Year 3

NET SALES 105875 100% 117842 100% 61737 100%

COST OF GOODS SOLD 82391 78% 90065 76% 45737 74%

SELLING GEN. ADMIN. EXPENSES 17658 17% 18520 16% 10202 17%

OPERATING PROFIT 5826 6% 9257 8% 5798 9%

DEPRECIATION 979 1% 1090 1% 562 1%

OTHER INCOME 0% 293 0% 165 0%

INTEREST EXPENSE 518 0% 784 1% 484 1%

ZAKAT 1515 1% 2686 2% 1721 3%

NET INCOME 2814 3% 4990 4% 3196 5%

INCOME STATEMENT