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Pamantasang Lungsod ng ManilaMBA-TEP

Organization and ManagementDr. Neri Pescadera,Ph.D.

Narciso D. Isidro Jr.

2Controlling

Controlling – is a management function that involves comparing actual performance with planned performance and taking corrective action if needed, to ensure the objectives are achieved.

Three Phases of Controlling:

1. Anticipating the things that could go wrong and taking preventive measures to see that they don’t.

2. Monitoring or measuring performance in some way in order to compare what is actually happening with what is supposed to be happening.

3. Correcting performance problems that occur. This is the therapeutic aspect of control.

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Control’s Close Link to Planning

Planning and Controlling might be thought of as a Siamese Twins because they are so closely related. Planning sets the ship’s course and controlling keeps it on course. When the ship begins to veer off the course, the navigator notices it and recommends a new heading designed to return the ship to its proper course. Essentially, management control works the same way. Management set goals and seek information on whether they are being reached as planned. If not, management make adjustments.

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Importance of Controls

Control is important in view of the many variables that can put things off track. Because anything involving human is imperfect, management must use control to monitor progress and to make intelligent adjustments as required.

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Examples of Controls

- Delegation (Accountability)

- Evaluation (Performance)

- Financial Statement (Budget Management)

- Performance Management (Observation and Feedback)

- Policies and Procedures (Behaviors in Workplace)

- Quality Control and Operations Management

- Risk, Safety and Liabilities

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Characteristics of Effective Control System

1. Controls need to focus on appropriate activities – Effective controls must focus on critical factors that affect both the individual’s and the organization’s abilities to achieve objectives.

2. Controls should be timely – Information needed for comparisons and control purposes needs to be in the management’s hands in order to make effective corrective action. Delays in generating, gathering or disseminating information can prolong the occurrence and extent of deviation.

3. Controls must be cost effective – The benefit of using appropriate controls should be worth their cost of installation and operation. Too much control can be worse than too little. The key is to provide appropriate for the situation and provide savings greater that the costs involved.

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Characteristics of Effective Control System

4. Controls should be accurate and concise – Controls must provide information about operations and people in sufficient quality and quantity to enable managers to make meaningful comparisons to operations standards. As with control, too much information can be as bad as too little.

5. Controls should be accepted by the people they affect – Controls and their applicability to specific situations should be communicated clearly to those responsible for implementing them and to those who will be governed by them.

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Types of Control Systems1. Feed forward controls – are preventive controls that try to anticipate

problems and take corrective action before they occur. Example – a team leader checks the quality, completeness and reliability of their tools prior to going to the site.

2. Concurrent controls – (sometimes called screening controls) occur while an activity is taking place. Example – the team leader checks the quality or performance of his members while performing the cpm on equipments in the site.

3. Feedback controls – measure activities that have already been completed. Thus corrections can take place after performance is over. Example – feedback from facilities engineers regarding the completed job.

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Input Processes Output

Types of Control

Feed forwardControl

Anticipates problems

Corrects problemsas they happen

FeedbackControl

Corrects problemsafter they occur

ConcurrentControl

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Steps in the Control Process

1. Establishing Performance Standards – A standard is a unit of measurement that can serve as a reference point for evaluating results. Management should set its sights on something it wants to accomplish. Managers should exercise control by comparing performance to some standards or goals.

Types of Standards

A. Tangible – clear, concrete specific and generally measurable.

1. Numerical Standards – expressed in numbers - items produced, absences, percentage of sales, etc.

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Steps in the Control Process

2. Monetary Standards – measured in terms of money – profit margins, costs, etc.

3. Physical Standards – quality, durability, size, weight and other factors related to physical composition.

4. Time Standards – refer to the speed with which the job is to be done – project completion dates.

B. Intangible Standards – relate to human characteristics which are not expressed in terms of numbers, money, physical

qualities or time – desirable attitude, high morale, ethics and cooperation.

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Steps in the Control Process2. Measuring Performance – After setting the standards, managers must

monitor performance to ensure that it complies with the established standards.

How Often to Measure Performance – Determining how often to measure performance is an important decision. A strategic control point is a performance measurement point located sufficiently early in an activity to allow any necessary corrective actions to be taken to accomplish the objective.

How to Measure – This can be done through the following:1. Personal observation.2. Written or oral reports by or about employees.3. Automatic methods.4. Inspections, test or samples.

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Steps in the Control Process

3. Comparing Performance with Standards and Analyzing Deviations. – Information receive regarding a serious departure from standards should be investigated in order to determine what caused the deviation. Jumping into conclusion without analyzing the problem might produce ineffective corrective action.

It is also important to check results that are substantially above standards in order to determine why they varied from standards. Operating procedures should be check to determine if these are being followed correctly or if there is an improvement in operations that should be included in the new standards.

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Steps in the Control Process4. Taking Corrective Action if Necessary – This is the final step in the

control process. Adjustments, fine-tuning, and perhaps drastic action may be necessary to pull off important tasks or to maintain standards.

Examples of Corrective Actions- Making a decision to retrain a new employee whose performance has not progressed as expected.- Shifting several employees from their normal jobs to help meet a deadline on another job.- Counseling an employee whose performance has recently been

below standard.- Reprimanding an employee for failure to adhere to safety rules.- Shutting down a piece of equipment for maintenance after

defective output is traced to it.

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Management by Exception

Even under the best of circumstances, deviations from performance standards are bound to occur. Given the broad range of areas over which control is being exerted, it is essential to distinguish between critical and less-critical deviations.

Under management by exception, a manager focuses on critical control needs and allows employees to handle most routine deviations from standards. The attention should be focused on exceptional rather than routine problems.

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Control Techniques

Besides budgets, there are other accounting and financial concepts and techniques which are used as control devices.

This include responsibility accounting, cost accounting, standard cost approach, direct costing, and ratio analysis.

This position of the financial study gauges the projects profitability, liquidity, cash solvency, and growth overtime.

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Test of liquidity

These measures are used to determine a firm’s ability to meet short-term obligations, and to remain solvent in the event of adversities.

Current assetsa. Current ratio = Current Liabilities

Current assets-inventoriesb. Quick or acid-test ratio = Current liabilities

Cost of salesc. Liquidity of inventories = Average Inventory

Cash + marketable securities + receivablesd. Defensive Position = Projected operating expenditure/ No. of

days

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Test of the debt service

These test are employed to present the project’s ability to meet long-term obligations.

Total liabilities

a. Debt to network ratio = Total Equities

Long term liabilities

b. Total Capitalization = long term liabilities & equities

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Test of Profitability

These show the operational performance and efficiency of the project.

Net income after Taxa. Net Profit Margin = Sales

Profit before interest and taxesb. Operating profit margin = Sale

Gross profitc. Gross profit margin = Sales

Net Income + interestd. Return on financier’s investment = Stock equity & long term liability

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Net income

e. Return on owner’s investment = Stock Equity

Profit before interest & taxes

f. Return on net operating profit = Total tangible assets

Sales

g. Asset turnover = Total Tangible assets

Net Income

h. Return on assets, earning power = Total Tangible Assets

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Internal Control

Internal control encompasses the policies and procedures than an organization establishes to ensure that it operates in accordance with management’s intention and that accountability is maintained for all transactions. This includes the methods adopted by the organization to safeguard its assets, to check the accuracy and reliability of its accounting data, to promote operational efficiency and to encourage adherence to prescribed policies and procedures.

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Internal Control

Two Aspects of Internal Control

1. Administrative (Operational) Controls – are generally aimed at improving operating efficiencies or otherwise controlling the activities of the organization.

2. Internal Accounting Controls – primarily directed at reliable financial reporting (ensuring the accuracy and reliability of financial data and safeguarding of assets).

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Purpose of Internal Control

Internal Controls are put into place to allow management to monitor operations, identify business risks and generate pertinent financial and non-financial information. These controls are designed and implemented so that management can run the organization. Internal controls also ensure that responsibilities are met.

Generally speaking, internal controls are established to provide reasonable assurance that:

1. Transactions are executed in accordance with management’s authorization.

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Purpose of Internal Control

2. Transactions are recorded as necessary to permit the preparation of accurate financial statements and to maintain accountability for the organization’s assets.

3. Access to assets is restricted to instances authorized by the management.

4. Assets are periodically compared with the accounting records, both to determine the accuracy of records and to account for the assets.

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Thank You!!!