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Chapter 9

Controlling

The long – term existence of many companies, most often, is placed in jeopardy when some
aspects of their activities go out control. Consider the following examples:

1. A news report indicated that the fire which destroyed the Hp800 million Superferry 7
luxury ship on March 26, 1997 was caused by illegal connections made on its electrical
system. If this is true, the losses could be attributed to inadequate management control.
2. The tragedy that happened at the Ozone Disco in March 18, 1996 clearly manifested
management’s lack
3. of control over the day-to-day operations of the firm. Even the failure to detect earlier
the violations in the Building Code spells lack of effective government control.
4. The management of a telephone company could not stop the unauthorized use in lines
assigned to many of its subscribers. Costumers become angry when they are billed for
calls they never made.

The examples presented constitute a very small percentage of unwanted occurrences that
happen every day in the business world. Apart from the distraction of lives and property,
normal business operations are hampered causing discontinuities in employment and the
provisions of products and service. These could not have happened only adequate controls
were instituted.

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.” Controlling completes the cycle of management functions.
Objectives and goals that are set at the planning stage are verified as to achievement or
completion at any given point in the organizing and implementing stages. When expectations
are not met at scheduled dates, corrective measures are usually undertaken.

IMPORTANCE OF CONTROLLING

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

Deviation, mistakes, and shortcomings happen inevitably. When they occur in daily
operations, they contribute to unnecessary expenditures which increase the cost of producing
goods and services. Proper control measures minimize the ill effects of such negative
occurrences. An effective inventory control system, for instance, minimize if not totally
eliminates losses in inventory.

The importance of controlling maybe illustrated as it is applied in a typical factory. If the

required standard daily output for individual works is 100 pieces, all workers who do not
produce the requirement are given sufficient time to improve; if no improvements are forth
coming, they are asked to resign. This action will help the company keep its over head and
other costs at expected levels. If no such control is made, the company will be faced with
escalating production costs, which will place the viability of the firm in jeopardy.
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STEPS IN THE CONTROL PROCESS

The control process consist of four steps, namely

1. Establishing performance objectives and standards

2. Measuring actual performance
3. Comparing actual performance to objective and standards, and
4. Taking necessary action based on the result of the comparisons.

Establishing Performance Objectives and Standards

In controlling, what has to be achieved must first be determined. Examples of such objectives
and standards are as follows:

1. Sales targets- which are expressive in quantity or monetary terms;

2. Production targets- which are expressive in quantity or quality;
3. Worker attendance- which are expressive in terms of rate of absences;
4. Safety record- Which is expressive in number of accidents for given periods;
5. Supplies used – which are expressed in quantity or monetary terms for given periods;

Once objectives and standards are established, the measurement of performance will be
facilitated. Standards offer among various organizations. In construction firms, project completion
dates are useful standards. In chemical manufacturing firms, certain pollution measures form the
basis for standards requirements.

After the performance objectives and standards are established, the methods for measuring
performance must be designed. Every standard established must be provided with its owned
method for measurement.

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.

Comparing Actual Performance to Objectives and Standards

Once actual performance has been determine, this will be compared with what the organization
seeks to achieve. Actual production output, for instance, will be compared with the target output;
this may be illustrated as follows:

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

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.
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If in the illustration cited above, the management of the construction firm found out that only 15
kilometers were finished after two months, then, any of the following actions may be
undertaken:
1. hire additional personnel;
2. use more equipment; or
3. require overtime.

Steps in the Control Process

ESTABLISH PERFORMANCE
OBJECTIVE AND STANDARDS

MEASURE ACTUAL
PERFORMANCE

Do nothing

DOES ACTUAL PERFORMANCE YES

MATCH THE STANDARDS?

NO

TAKE
CORRECTIVE
ACTION

TYPES OF CONTROL

Control consists of three distinct types, namely:

1. feed forward control

2. concurrent control, and
3. feedback control.

Feedforward Control

When management anticipates problems and prevents their occurrence, the type of control
measure undertaken is called feedforward control. This type of control provides the assurance
that the required human and nonhuman resources are in place before operations begin. An
example is provided as follow:

The manager of a chemical manufacturing firm makes sure that the best people are selected and
hired to fill jobs. Materials required in the production process are carefully checked to detect
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defects. The foregoing control measures are designed to prevent wasting valuable resources. If
these measures are not undertaken, the likelihood that problems will occur is always present.

Concurrent Control

When operations are already ongoing and activities to detect variances are made, concurrent
control is said to be undertaken. It is always possible that deviations from standards will happen
in the production process. When such deviations occur, adjustments are made to ensure
compliance with requirements. Information on the adjustments is also necessary inputs in the
pre-operational phase.

Examples of activities using concurrent control are as follows:

The manager of a construction firm constantly monitors the progress of the company’s projects.
When construction is behind schedule, corrective measures like the hiring of additional manpower
are made.

In a firm engaged in the production and distribution of water, the chemical composition of the
water procured from various sources is checked thoroughly before they are distributed to the
consumers.

The production manager of an electronics manufacturing firm inspects regularly the outputs
consisting of various electronics products coming out of production line.

Feedback control

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

Feedback control validates objectives and standards. If accomplishments consist only of a

percentage of standards requirements, the standard may be too high or inappropriate.

An example of feedback control is the supervisor who discovers that continuous overtime work
for factory workers lowers the quality of output. The feedback information obtained leads to
some adjustments in the overtime schedule.

COMPONENTS OF ORGANIZATIONAL CONTROL SYSTEMS

An organizational control system consists of the following:

1. Strategic plan
2. The long-range financial plan
3. The operating budget
4. Performance appraisals
5. Statistical Reports
6. Policies and Procedures

Strategic Plans

A strategic plan provides the basic control mechanism for the organization. When there are
indications that activities do not facilitate the accomplishment of strategic goals, these activities
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are either set aside, modified or expanded. These corrective measures are made possible with
the adoption of strategic plans.

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 longer term financial plans. This is because of the
long lead times needed for capital projects. An example is the engineering firm assigned to
construct the Light Rail Transit (LRT) within three years. As such, the three-year financial plan
will be very useful.

The financial plan recommends a direction for financial activities. If the goal does not appear to
be where the firm is headed, the control mechanism should be made to work.

The Operating Budget

An operating budget 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.

Performance Appraisals

Performance appraisal measures employee performance. As such, it provides employees with a

guide on how to do their jobs better in the future. Performance appraisals also function as
effective checks on new policies and programs. For 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.
Among the information which may be found in a statistical report pertains to the following:

1. labor efficiency rates

2. quality control rejects
3. accounts receivable
4. accounts payable
5. sales reports
6. accident reports
7. power consumption report

Policies and procedures

Policies refer to “the framework within which the objectives must be pursued.” A procedure is “a
plan that describes the exact series of actions to be taken in a given situation.”

An example of policy is as follow:

“Whenever two or more activities compete for the company’s attention, the client takes priority.”

An example of a procedure is as follows:

“Procedure in the purchase of equipment:

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1. the concerned manager forwards a request for purchase to the purchasing officer;
2. the purchasing officer forwards the request to top management for approval;
3. when approved, the purchasing officer makes a canvass of the requested item; if
disapproved, the purchasing officer returns the form to the requesting manager;
4. the purchasing officer negotiates with the lowest complying bidder.”

It is expected that policies and procedures laid down by management will followed. When they
are breached once in a while, management is provided with a way to directly inquire on the
deviations. As such, policies and procedures provide a better means of controlling activities.

STRATEGIC CONTROL SYSTEMS

To be able to assure the accomplishment of the strategic objectives of the company, strategic
control systems become necessary. These systems consist of the following:
1. financial analysis
2. financial ratio analysis

Financial Analysis

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

A review of the financial statements will reveal important details about the company’s
performance. The balance sheet contains informat6ion about the company’s assets, liabilities,
and capital accounts. Comparing the current balance sheet with previous ones may reveal
important changes, which, in turn, provide clues to performance.

The income statement contains information about the company’s gross income, expenses, and
profits. When also compared with previous years’ income statements, changes in figures will help
management determine if it did well.

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
ration. The result will be compared with a required norm which is usually related to what other
companies in the industry has achieved, or what the company has achieved in the past. When
deviations occur, explanations are sought in preparation for whatever action is necessary.

Financial ratios may be categorized into the following types:

1. liquidity
2. efficiency
3. financial leverage
4. profitability

Liquidity Ratios. These ratios assess the ability of a company to meet its current obligations. The
following ratios are important indicators of liquidity:
1. Current ratio – this shows the extent to which current assets of the company can cover
its current liabilities. The formula for computing current ratio is as follows:

Current ratio = current assets/current liabilities

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2. Acid-test ratio – this is a measure of the firm’s ability to payoff short-term obligations
with the use of current assets and without relying on sale of inventories.

Acid-test ratio = current assets – inventories/current liabilities

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

1. Inventory turnover ratio – this ratio measures the number of times an inventory is turned
over (or sold) each year. This is computed as follows:

Inventory turnover ratio = cost of goods sold/inventory

2. Fixed asset turnover – 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 = net sales/net fixed assets

Financial Leverage Ratios. This is a group of ratios designed to assess the balance of financing
obtained through debt and equity sources. Some of the more important leverage ratios are as
follows:

1. Debt to total assets ratio – this ratio shows how much of the firm’s assets are financed
by debt. It may be computed by using the following formula:

debt to total assets ratio = total debt/total assets

2. Times interest earned ratio – this ratio measures the number of times that earnings
before interest and taxes cover or exceed the company’s interest expense. It may be
computed by using the following formula:

Times interest earned ratio= profit before tax = interest expense/interest expense

Profitability Ratios. 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. Among the more notable
profitability ratios are as follows:

1. Profit margin ratio – this ratio compares the net profit to the level of sales. The formula
used is as follows:

Profit margin ratio = net profit/net sales

2. Return on assets ratio – This ratio shows how much income the company produces for
every peso invested in assets. The formula used is as follows:

Return on assets ratio = net income/assets

3. Return on equity ratio – this ratio measures the returns on the owner’s investment. It
may be arrived at by using the following formula:

Return on equity ratio = net income/equity

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IDENTIFYING CONTROL PROBLEMS

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

1. Executive reality check

2. Comprehensive internal audit
3. General checklist of symptoms of inadequate control

Executive Reality Check

Employees at the frontline often complain that management imposes certain requirements that
are not realistic. In a certain state college for example, requests for purchase of classroom
materials and supplies take last priority. This is irregular because requests of such kind must be
of the highest priority considering that the organization is an educational institution. Ironically,
because certain officers of then nonacademic staff have direct access to the president, their
purchase requests almost always get top priority. Later on, when the president made an
inspirational speech on quality teaching, many members of the faculty just shrugged their
shoulders and listened passively.

One school, The Central Luzon State University, provides a good example on how the executive
reality check may be exercised. It requires its executives to handle at least one subject load
each. What the executives will experience in the classroom will make him more responsive in the
preparation of plans and control tools.

The manager of a construction firm could, once in a while, perform the work of one of his
laborers. In doing so, he will be able to see things that he never sees inside the confines of his
air-conditioned office. Because the said action exposes the manager to certain realities, the term
“executive check” is very appropriate.

Comprehensive Internal Audit

An internal audit is one undertaken to determine the efficiency and effectivity of the activities of
an organization. Among the many aspects of operations within the organization, a small activity
that is not done right may continue to be unnoticed until its snowballs into a full blown problem.

An example is the resignation of an employee after serving the company for 15 years. After one
week, another employee with ten years of service also resigned. Both were from the same
department. If after another week, another employee is resigning, a full investigation is in order.
Even if the source of the problem is identified, it may already have caused considerable losses to
the organization. A comprehensive internal audit aims to detect dysfunctions in the organization
before they bring bigger troubles to management.

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 maybe used.

Kreitner has listed some of the common symptoms as follows:

1. An unexplained decline in revenues and profits.

2. A degradation of service (customer complaints)
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3. Employee dissatisfaction (complaints, grievances, turnover).

4. Cash shortages caused by bloated inventories or delinquent accounts receivables.
5. Idle facilities or personnel.
6. Disorganized operations (work flow bottlenecks, excessive paperwork).
7. Excessive costs.
8. Evidences of waste and inefficiency (scrap, rework)

It must be noted that behind every symptom is a problem waiting to be solved Unless this
problem is clearly identified, no effective solution may be derived. Nevertheless, problems are
easily recognized if adequate control measures are in place.

QUESTIONS FOR REVIEW AND DISCUSSION

1. Why is controlling a very important management function?

2. What is controlling? Is it applicable to the day-to-day activities of the manager?
3. Why is the establishment of performance objectives and standards an important step in the
control process?
4. Compare and contrast the three distinct types of control.
5. How do strategic plans provide a basis of control?
6. What are policies? In what ways do they facilitate control?
7. When the manager reviews the financial statements of the company under his supervision,
what benefits does he derive?
8. What are financial ratios? How may they be categorized?
9. What is measured in the debt to total assets ratio? How may it be computed?
10. Do you consider “idle facilities or personnel” as a symptom of inadequate control? Why or
why not?

SUGGESTED ITEM FOR RESEARCH

1. List down the control activities that may be useful to any of the following:
a. the construction of bridge
b. the manufacture of microchips
c. the installation of power plant
d. the manufacture of tricycles