SH1710

Controlling

I. Definition and Nature of Management Control

In earlier times, controlling was associated with the concept of just being a corrective action.
Present-day management, however, applies it as a foreseeing activity that sets standards in
determining actual performance to correct previous decisions or actions. Management,
therefore, must focus on management control and the control process.

Importance of Management Control

Management control makes sure:
• That the firm's operating cash flow is sufficient, efficient, and, if possible, profitable
when invested
Working capital, when properly controlled, must be adequate enough for daily
operations such as financing, inventories, credit payments to suppliers, reinvestment of
cash surplus, and salaries of employees, or, in general, maintaining an acceptable
capital structure.
• That the decision to seek funds should be appropriate, so as not to incur expenses as well
since borrowing would be subjected to payment of interest
Needless to say, spending without thinking of how it could be regained in the future could
put any starting business, or even a well-established one, in jeopardy.
• That there is a continuous monitoring of the organization's activities, followed by
corrective actions based on previously planned programs of action
• That tasks are completed with fewer errors by comparing these with previously set
standards or with competitor's standards or standards prevailing in their particular
industry setting

The Control Process

Control techniques used for controlling financial resources, office management, quality
assurance, and others are essentially the same. The typical control process involves
establishing standards, measuring, and reporting actual performance and comparing it with
standards, and taking action.

Establishing standards means setting criteria for performance. Managers must be able to
identify priority activities that have to be controlled; followed by determining how these
activities must be properly sequenced. In doing so, managers will be able to set key
performance standards that need to be achieved. The value chain, or the proper sequencing of
activities needed to convert the company's raw materials into finished products, is a valuable
instrument for helping managers determine and establish key performance standards.

Measuring and reporting actual performance and comparing it with set standards is
essentially the monitoring of performance. To be able to do this, managers must be able to
develop appropriate information systems, which will help them identify, collect, organize,
and disseminate information; through these, managers are able to control facts and figures
called data, and information, which have been given meaning and considered to have value.
Analyses of data/information gathered measure actual performance and comparing it with set

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standards serve as a means for detecting deviations from what should be, hence, such
deviations must be revealed as early as possible in order to correct them.

Taking action involves the correction of deviations from set standards. This activity clearly
shows the control function of management. Managers may rectify deviations by modifying
their plans or goals, by improving the training of employees, by firing inefficient
subordinates, or by practicing more effective leadership techniques.

II. The Link between Planning and Controlling

The relationship between planning and controlling could be easily established. Control is
integrated planning. Planning involves a thorough process essential to the creation and
refinement of a blueprint or its integration with other plans that may combine forecasting of
developments in preparation for future scenarios in order to eventually react to them.

As one plans, the elements of control immediately take place to consider how every turnout
of the plan may be evaluated and rectified. On a periodic basis, it is useful to create a pro
forma financial statement which serves as a forecast of the balance sheet, income statement,
and cash flow statement in order to make projections. This may be used as an aid to present
plans to creditors and future investors, but, primarily, it is used for internal planning and
control purposes.

As Smart (2003; as cited by Cabrera, Altarejos, & Riaz, 2016) states, "by making
projections of sales volume, profits, fixed asset requirements, working capital needs, and
sources of financing, the firm can predict any liquidity problems with enough lead time to
have additional financing sources available when needed.”

Shim, et al. (2012; as cited by Cabrera, Altarejos, & Riaz, 2016) emphasized that “any CPO
(chief financial officer) must prepare short-term, company-wide, or division-wide planning
reports. These reports may relate to product distribution by territory and market, product line
mix analysis, warehouse handling, salesperson performance, and logistics. Long-range
planning reports may include five- to 10-year projections for the company and its major
business segments.”

Specialized planning and control reports may include effects of cost-reduction programs,
production issues in cost or quality terms, cash flow plans for line-of-credit agreements,
evaluation of pension or termination costs in plant costing, contingency and downsizing
plans, and appraisal of risk factors in long-term contracts.

The Balance Sheet

The balance sheet is a financial statement defined by most accounting books as the
"snapshot" of any entity's financial condition because it presents the financial balances of a
particular period. It follows a pro forma accounting entry: A = L + C, or that the total assets
(A) must be equivalent to the aggregate summation of liabilities (L) and capital (C) or
owners' equity. Thus, others may also call this as either the statement of financial position or
statement of condition.

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The asset side keeps track of all the properties, tangible and intangible, owned by the
organization, while the other side (liabilities) records all the obligations to settle and actual
capitalization of the firm. It must be noted that there must always be a dual entry respective
of the account titles.
Assets Liabilities & Equities
Cash on hand xxxxx Accounts Payable xxxxx
Marketable Securities xxxxx Accruals xxxxx
Prepaid Expenses xxxxx Total Current Liabilities xxxxxx
Accounts Receivable xxxxx
Total Current Assets xxxxx Long-term Debts xxxxx
Mortgages xxxxx
Property and Equipment xxxxx Total Long-term Liabilities xxxxx
Land xxxxx Total Liabilities xxxxx
Total Fixed assets xxxxx

For newly established smaller business organizations with budget constraints, planning and
control start with available dedicated capital that needs monitoring and would serve as the
budget with posting an entry in the balance sheet as cash and owner's equity. For example,
one who has a Php 500,000 capitalization may have a pro forma entry of:
Debit Cash……………………………………Php 500,000
Credit Owner’s Capital……………………….Php 500,000
For this set-up, with the assumption that the capital is all in cash, the latter amount may
diminish depending on what was spent for. Assuming you would purchase equipment to be
used in the business amounting to P 100,000, you would now have:
Assets Liabilities and Capital
Cash……………………………………Php 400,000 Owner’s Capital…………………………Php 500,000
Equipment……………………………...Php 100,000
Total Assets……………………………Php 500,000 Total Liabilities and Capital………….....Php 500,000

One has to note that it did not change the total amount of capital which is Php 500,000 since
it was just deducted from cash. The pro forma accounting entry which is Assets = Liabilities
plus Capital is still intact and balanced on both sides.

Further, if you placed orders or suppliers on credit terms or future payments amounting to
Php 30,000:
Assets Liabilities and Capital
Cash………………………………………...Php 400,000 Owner’s Capital…………………...Php 500,000
Equipment………………………………….Php 100,000 Supplies…………………………….Php 30,000
Supplies ……………………………………..Php 30,000
Total Assets………………………………Php 530,000 Total Liabilities and Capital………Php 530,000

The presentation on the balance sheet would clearly state what had been the allocation of the
capital in its business operation. Thus, its appearance may depend on how the entity plans to
progress, but through strict monitoring and recording, a simple control function is applied
and implemented. However, the account titles must be in accordance to its liquidity.

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The Income Statement

The income statement is also known as the profit and loss statement, revenue and expenses
statement, statement of financial performance, or earnings statement. It displays the cost and
expenses charged to recognize revenues in a specific period. Basically, it shows whether the
company made money or lost money.

Any business entity in progress may incur expenses and later on garner income or profit. Its
pro forma statement may start on how many units of quantity it plans to sell in a given
period. For example, if the final product would cost Php 50 each for sale in the market and
the projected number of units to be sold would be 1,000, it would follow that the gross sale
would be Php 50,000 for a particular period derived as Php 50 x 1,000 units.

If in its operation, there would be the anticipation of expenses such as operating expenses of
Php 25,000 or administrative costs of Php 20,000, the gross income would then be Php 5,000.
The income statement may appear to have an initial pro forma of:

Gross Sales Php 50,000

Less: Operating Expenses Php 25,000
Administrative Costs Php 20,000 ₱45,000
Gross Income Php 5,000

The complexity of the financial statements would depend also on how complicated the
business transactions are. As transactions progress, additional expenses, accounts, and taxes
imposed may be included. The process of creating pro forma financial statements varies from
firm to firm, but you may observe some common elements among them.

The Cash Flow Statement

Without adequate cash for the timely payment of obligations, funding operations and growth,
and for compensating owners, the firm will fail. The statement of cash flow summarizes the
inflow and outflow of cash during a given period. Inflow activities are those that result in
providing the firm with sources of funds, while outflows result in cash leaving the firm due
to disbursements or expenses that utilize cash. It is important to note that this statement
includes and recognizes only the movement of cash in its entire operations.

Summaries of Significant Accounting Policies and Assumptions

The management's intent of preparing the prospective financial statements should be stated
and it must be mentioned that prospective results may not materialize. It should be clearly
stated that the assumptions used by management are based on information and circumstances
that existed at the time the financial statements were prepared.

Organizational Performance Control

All managers must know which measures will give them data and information about overall
organizational performance control. The usual measures are organizational productivity,
organizational effectiveness, and rankings in industry.

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Organizational productivity is the amount of goods or services produced (output) divided by

the inputs needed in order to produce the said output. In general, all organizations and their
work units aim to be productive. In other words, they want to produce the biggest amount of
outputs, using the least input.

The output may be measured by the sales income, which an organization gains when goods
are sold. Inputs, on the other hand, may be measured by the amount spent on acquiring and
transforming resources into outputs. Decreasing inputs by being more efficient in work
performance will decrease the organization's expenses, thus, increasing the ratio of output to
input and achieving what management wants.

Organizational effectiveness is a measure of the organizational goals' suitability to

organizational needs and how well these said goals are being attained. Managers make use of
this in their decision-making regarding the design of organizational strategies and work
activities, and in linking the various work endeavors of their employees.

Rankings in the industry are a way commonly used by managers to measure organizational
performance. Being on Fortune Magazine's list of Most Admired Companies, 100 Best
Companies to Work For, 100 Fastest Growing Companies, and others is a good measure of
an organization's success in the business world. Being ranked high, middle or low indicates
the company's performance in comparison with others.

Other Performance Controls in Organizations

Computer-based control systems are common in many companies today. Managers have easy
access to their firms' databases which could provide meaningful information for performance
evaluation. Performance may be controlled by quantifiable measures such as the number of
customer transactions handled, the frequency of errors committed by their human resources,
or the length of time taken to deliver goods to customers.

Bureaucratic control makes use of strict rules, regulations, policies, procedures, and orders
from formal authority. Negative performance evaluation is given to human resources who do
not comply with the said control measures.

Clan control is based on compliance with norms, values, expected behavior related to the
firm's organizational culture, and other cultural variables of the country where the company
is located. Positive performance evaluation ratings are given to employees or teams who
quickly adapt to possible changes in norms and values in the firm's internal and external
environment.

III. Control Methods and Systems

Control methods are techniques used for measuring an organization's financial stability,
efficiency, effectiveness, production output, and organization members' attitudes and morale.
From the general point of view, managerial effectiveness must be concerned with the
maximizing of the abovementioned factors that are measured by the control methods.
Therefore, the challenge for present-day managers is to devise control methods and systems
that are aligned or consistent with and will help attain these concerns.

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Methods of Control
A firm may apply control techniques or methods either quantitative or non-quantitative.

Quantitative Methods
Quantitative methods make use of data and different quantitative tools for monitoring and
controlling production output. Budgets and audits are among the most common quantitative
tools.

By far, the most widely recognized quantitative tool is the chart. Charts used as control tools
normally contrast time and performance. The visual impact of a chart often provides the
quickest method of relating data. A difference in numbers is much more noticeable when
displayed graphically.
• Budgets. The budget remains the best-known control device. Budget and control are, in
fact, synonymous. An organization’s budget is an expression in financial terms of a plan
for meeting the organization's goals for a specific period. A budget is an instrument of
planning, management, and control. Budgets are used in two (2) ways: to establish facts
that must be taken into account during planning and to prepare a description and financial
information to be used by the chain of command to request for and manage funds. At
present, two (2) major budget systems are used: the zero-based budgeting (ZBB); and the
planning, programming, and budgeting system (PPBS).
• Audits. Internal auditing involves the independent review and evaluation of the
organization's non-tactical operations such as accounting and finances. As a management
tool, the audit measures and evaluates the effectiveness of management controls. Audit
service provides an independent audit of programs, activities, systems, and procedures. It
also provides an independent audit of other operations which involve the utilization of
funds and resources as well as the fulfillment of management goals.

Non-quantitative Methods
Non-quantitative methods refer to the overall control of performance instead of only those of
specific organizational processes. These methods use tools such as inspections, reports, direct
supervision, and on-the-spot checking and performance evaluation or counseling to
accomplish goals.

Other control methods include the following:

• Feed forward control prevents problems because the managerial action is taken before
the actual problem occurs.
• Concurrent control takes place while work activity is happening. The best example of
this type of control is direct supervision or management by walking around.
• Feedback control is control that takes place after the occurrence of the activity. It is
disadvantageous because by the time the manager receives the information, the problem
had already occurred and waste or damage had already resulted.

When the above control methods are compared, managers choose the feed forward
method as the most desirable because of its preventive action. The concurrent control’s
advantage is that it can help managers to correct problems before they become too costly
or damaging. Feedback control's advantage is the exhibiting of variance between the
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standard and the actual work performance. Little variance indicates that planning is
successful while significant variance may give managers an idea of how to plan better.

• Employee discipline is a control challenge for managers. Enforcing discipline in the

workplace is not easy. Concerns regarding this include workplace privacy, employee
theft, and workplace violence, among others. From simple monitoring of employees'
computer usage at work to protecting employees at work from psychologically unstable
workers who may have hidden desires to harm them, managers need discipline control to
ensure that tasks can be efficiently and effectively carried out as planned.
• Project management control ensures that the task of getting a project's activities done on
time, within the budget, and according to specifications, is successfully carried out.
Project managers need technical and interpersonal skills in order to control the
implementation of the project efficiently and effectively. The project planning process
controls include the defining objectives, identifying activities and resources, establishing
sequence and estimating time for activities, determining the project completion date, and
comparing with objectives and determining additional resource requirements.

IV. Application of Management Control in Accounting and Marketing Concepts and

Techniques
Management control in accounting and finance is the control that makes use of the balance
sheet, income statement, and cash flow statement to analyze and examine financial
statements in order to determine the company's financial soundness and viability, as well as
financial ratios to determine the company's stability. Meanwhile, management control in
marketing is the control that makes use of projected sales or forecasts, statistical models,
econometric modeling, surveys, historical demand data, and actual consumption of their
products.

Sales are considered to be the “lifeblood of the business.” No matter how good the product is,
if it is not sold in the market, there is no way that a business can survive. Thus, the projected
sales often guide the sales manager or the marketing head on how much the target or the
quota must be. In a way, this will also guide of the operations manager in determining the
number of units to be produced. Excess production may mean cost, and unsold items may
resort to inventory expenses or worse, the obsolescence or degradation of the product.
Indeed, the sales forecast requires consideration.

For more established businesses or those that had been in the industry for quite some time,
the most commonly used technique is to look at the historical demand and actual
consumption, with the assumption of the same economic condition.

A firm may generate a set of assumptions regarding the macroeconomic environment to

which all divisions must adhere as their guide, but forecasts can still be generated from the
customer level and taken into account. Some firms produce two (2) sets of forecasts: one that
uses a statistical approach and another that relies on customer feedback. Senior managers
then compare the two (2) forecasts to see how far apart they are before setting a final sales
objective.

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Accounting/Financial Control Ratios

The goal of businesses is to gain profit. In order to achieve this, managers need
accounting/financial controls. Managers must also analyze the organization's financial
condition; done with the help of the following financial ratios.
• Liquidity ratio – tests the organization's ability to meet short-term obligations; it may also
refer to acid tests done when inventories turn over slowly or are difficult to sell
Current ratio = current assets ÷ current liabilities

• Leverage ratio – determines if the organization is technically insolvent, meaning that the
organization’s financing is mainly coming from borrowed money or from the owner’s
investments
Debt-to-assets ratio = total debt ÷ total assets

• Activity Ratio – determines if the organization is carrying more inventory than what it
needs; the higher the ratio, the more efficiently inventory assets are being used
Inventory turnover= cost goods sold ÷ average inventory

• Profitability ratio – determines the profits that are being generated;

Net profit taxes ÷ total sales

Or measures the efficiency of assets to generate profit

Return on investment = net profit taxes ÷ total assets

In addition to the above ratios, asset management is also practiced to achieve

organizational goals. Asset management is the ability to use resources efficiently and
operate at minimum cost.
Inventory turnover = sales ÷ average inventory

Strategic Control
As mentioned earlier, planning and controlling are closely related. Strategic plans serve as
control points for strategic control – a systematic monitoring at control points that leads to
change in the organization's strategies based on assessments done on the said strategic plans.
Control provides a chance for comparing the plan's intended goals with the actual
organizational performance. This, then, becomes the basis or modifications or changes in the
firm's strategies.
Benchmarking
Benchmarking is an approach or process of measuring a company's own services and
practices against those of recognized leaders in the industry in order to identify areas for
improvement. It is a widely used and well-accepted approach because it helps organizations
gather data and information against which performance can be measured and controlled.
There are three (3) types of benchmarking: a) strategic benchmarking, “which compares
various strategies and identifies the key strategic elements of success;” b) operational
benchmarking, "which compares relative costs or possibilities for product differentiation;”

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and c) management benchmarking, “which focuses on support functions such as market

planning and information systems, logistics, and human resource management.”
Many companies use benchmarking. Some prefer to benchmark only the top 10 or the best
companies in their particular industry. Others benchmark global best practices and go further
away from their own industry and reason out that their goal is competitive superiority and not
just competitive parity.
The benchmarking process begins with determining, which company functions are to be
benchmarked and the key performance indicators to be measured. Then, the best industry
performers have to be identified. Data gathering and analysis follow and these become the
foundations for performance goals. New programs are implemented, and during this step,
performance is measured at regular intervals. Corrective actions are taken in order to close
the gap between the organization and the best-in-class companies. The monitoring of results
must be continuous to ensure benchmarking success.
V. Role of Budgets in Planning and Control
An organization's ability to have a good control system is also dependent on its budget
process. Budgets are plans to monitor, control, and implement the resource of the firm on its
operation based on its objectives or goals. Adjustments are made by top-level management
on a periodic basis, if necessary, to remedy conflicts, difficult situations, or unrealistic
settings, or when unforeseen events transpire.
A fixed budget allocates a fixed amount of resources for a specific purpose. Meanwhile, a
flexible or variable budget allows allocation of resources to change depending on or in
proportion to different levels of activity in the organization.
Planning is the initial step and it includes the development of the firm's objectives and the
creation of the budget. Operating takes on the decision-making that is aided and guided by
budgeting. The control process then checks and guarantees whether the set objectives are
fulfilled or accomplished.
Budgeting is the responsibility and an activity of the management that requires extensive
planning throughout the organization's entire units and departments. Producing a budget
requires time, prudence, and diligence. The final budget must be justified by its originator
and must appear realistic.
The budget may be presented in aggregated values for the entire year, but, often, there is a
monthly budget that puts into detail the expectations to be met. Deviations on such may be
rectified or adjusted as the need for them arises such as those caused by unforeseen
circumstances), subject to the approval of the higher authority.
Budget preparation may either utilize historical budgeting or zero-based budgeting. The
former uses the past data or actual figures of previous periods based on actual experiences of
the firm. Certain percentage adjustments are made to formulate the new forecast. The latter is
created by starting from nothing and relying on the expertise, anticipations, and experiences
of each head. Indeed, it appears to be more challenging to produce a budget applying the
zero-based method, hence, it may require the full participation and cooperation of
organization members.

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In every organization, there must only be one (1) concrete and recognized budget for a
certain period of time. It may be considered as the master budget since it comprises of the
submitted and justified budgets of different units and is approved by the top management for
implementation.
The sales department or the marketing division may create its sales budget for purchases and
selling expenses to eventually determine the value of the actual products or services to be
sold as well, which in turn may serve as the quota for its sales force. It may regard sales
trends for the company, its competitors, or even the industry of its category. This budget may
also include the factors that may affect their sales, price changes, advertising plans, political
and legal events, and the like.
The operations and production departments usually generate short-term budgets, which,
customarily, cover less than a year since it must take into account economic trends such as
inflation, costs, and personal spending for the desired inventory and final production.
It is important to keep in mind that, regardless of the size of the company, the cash budget
must be focused. A manager who disregards this would most likely suffer from illiquidity or
cash shortage. Such scenario may adversely affect the whole organization since it may
impede its entire operation. The worst case would be that the anticipated obligations may not
be fully settled leading to legal cases.
A basic summary of a cash budget may have the following format:
beginning cash balance
+ cash receipts
= total cash available
- cash disbursement
= cash balance before borrowing/repayment
+/- borrowing from/repayment of line of credit
- interest of line of credit
= ending cash balance
Steps toward Better Budget-making
The budget may be improved upon in order to address the needs of the organization and to
consider the input of all concerned. Below are the steps in improving the budget.
• Collaborate and communicate with organization administrations and selected members so
the budget becomes more acceptable to all.
• Practice flexibility as the budget adapts to the organization's needs.
• Relate the budget to company goals since their achievement is the primary objective/goal
of the firm; deviation from goals will prolong achievement and will not be good for the
firm's stability.
• Coordinate the budget with all the company departments so that they may be able to
make full use of the budget allocations given to their respective units.
• Use computer software or applications when needed to facilitate accurate computations
and proper dissemination of information related to the budget.

Reference:
Cabrera, H., Altarejos, A., & Riaz, B. (2016). Organization and management. Quezon City, Philippines: VIBAL
Group, Inc.

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