Lesson 11: Controlling Flashcards
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.
Controlling
Importance of Controlling
- When controlling is properly implemented, it will help the organization achieve its goal in the most efficient and effective manner possible.
- Proper control measures minimize the ill effects of such negative occurrences (Deviations, mistakes, and shortcomings).
This completes the cycle of management functions.
Controlling
Steps in the Control Process
- Establishing performance objectives and standards.
- Measuring actual performance.
- Comparing actual performance to objectives and standards.
- Taking necessary action based on the results of the comparisons.
Examples of Establishing Performance Objectives and Standards
- Sales Targets
- Production Targets
- Worker Attendance
- Safety Record
- Supplies Used
Expressed in quantity or monetary terms.
Sales Targets
Expressed in quantity or quality.
Production Targets
Expressed in terms of the rate of absences.
Worker Attendance
Expressed in many accidents for given periods.
Safety Record
Expressed in quantity or monetary terms for given periods.
Supplies Used
Three Distinct Types of Control
- Feedforward Control
- Concurrent Control
- Feedback Control
When management anticipates problems and prevents their occurrence, the type of control measure undertaken.
This type of control provides the assurance that the required human and nonhuman resources are in place before operations begin.
Feedforward Control
When operations are already ongoing and activities to detect variances are made, this type of control is said to be undertaken.
Concurrent Control
When information is gathered about a completed activity, and in order that evaluation and steps for improvement are derived, this type of control is undertaken.
This type of control also validates objectives and standards.
Feedback Control
Components of Organizational Control Systems
- Strategic Plan
- Long-Range Financial Plans
- The Operating Budget
- Performance Appraisals
- Statistical Reports
- Policies and Procedures
Provides the basic control mechanism for the organization.
Strategic Plans
The process of budgeting for operations and growth and renewal for buildings, infrastructure, and land.
Long-Range Financial Plans
Indicates the expenditures, revenues, or profits planned for some future period regarding operations. The figures appearing in the budget are used as standard measurements for performance.
Operating Budget
Measures employee performance. As such, it provides employees with a guide on how to do their jobs better in the future.
Also function as effective checks on new policies and programs.
Performance Appraisals
Pertain to those that contain data on various developments within the firm.
Statistical Reports
Informations which may be found in a Statistical Report
- Labour Efficiency Rates
- Quality Control Rejects
- Accounts Receivable
- Accounts Payable
- Sales Reports
- Accident Reports
- Power Consumption Report
Refer to the framework within which the objectives must be pursued.
Policies
A plan that describes the exact series of actions to be taken in a given situation.
Procedure
Strategic Control Systems
- Financial Analysis
- Financial Ratio Analysis
The success of most organizations depends heavily on 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 actions may be introduced.
Financial Analysis
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.
Financial Ratio Analysis
Types of Financial Ratios
- Liquidity Ratios
- Efficiency Ratios
- Financial Leverage Ratios
- Profitability Ratios
These ratios assess the ability of a company to meet its current obligations.
Liquidity Ratios
Important Indicators of Liquidity
- Current Ratio
- Acid-Test Ratio
This shows the extent to which current assets of the company can cover its current liabilities.
Current Ratio
This is a measure of the firm’s ability to pay off short-term obligations with the use of current assets and without relying on the sale of inventories.
Acid-Test Ratio
Formula for Computing Current Ratio
Current ratio = current assets / current liabilities
Formula for Computing Acid-Test Ratio
Acid-Test ratio = (current assets - inventories) / current liabilities
These ratios show how effectively certain assets or liabilities are being used in the production of goods and services.
Efficiency Ratios
More Common Efficiency Ratios
- Inventory Turnover Ratio
- Fixed Asset Turnover
This ratio measures the number of times an inventory is turned over (or sold) each year.
Inventory Turnover Ratio
This ratio is used to measure utilization of the company’s investment in its fixed assets, such as its plant and equipment.
Fixed Asset Turnover
Formula for Computing Inventory Turnover Ratio
Inventory turnover ratio = cost of goods sold / inventory
Formula for Computing Fixed Asset Turnover
Fixed asset turnover = net sales / net fixed assets
This is a group of ratios designed to assess the balance of financing obtained through debt and equity sources.
Financial Leverage Ratios
More Important Leverage Ratios
- Debt to Total Assets Ratio
- Times Interest Earned Ratio
This ratio shows how much of the firm’s assets are financed by debt.
Debt to Total Assets Ratio
This ratio measures the number of times earnings before interest and taxes cover or exceed the company’s interest expense.
Times Interest Earned Ratio
Formula for Computing Debt to Total Assets Ratio
Debt to total assets ratio = total debt / total assets
Formula for Computing Times Interest Earned Ratio
Times Interest Earned Ratio = (profit before tax + interest expense) / interest expense
These 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.
Profitability Ratios
More Notable Profitability Ratios
- Profit Margin Ratio
- Return on Assets Ratio
- Return on Equity Ratio
This ratio completes the net profit to the level of sales.
Profit Margin Ratio
This ratio shows how much income the company produces for every peso investment in assets.
Return on Assets Ratio
This ratio measures the returns on the owner’s investment.
Return in Equity Ratio
Formula for Computing Profit Margin Ratio
Profit Margin Ratio = net profit / net sales
Formula for Computing Return on Assets Ratio
Return on Assets Ratio = net income / assets
Formula for Computing Return on Equity Ratio
Return on Equity Ratio = net income / equity
Identifying Control Problems
- Executive Reality Check
- Comprehensive Internal Audit
- Symptoms of Inadequate Control
Undertaken to determine the efficiency and effectiveness of the activities of an organization.
Internal Audit
Kreitner’s List of Common Symptoms for Inadequate Control
- An unexplained decline in revenues and profits.
- A degradation of service (customer complaints).
- Employee dissatisfaction (complaints, grievances, turnover)
- Cash shortages caused by bloated inventories or delinquent accounts receivable.
- Idle facilities or personnel.
- Disorganized operations (workflow bottlenecks, excessive paperwork)
- Excessive costs.
- Evidence of waste and inefficiency (scrap, rework).
