SESSION 07: MANAGERIAL CONTROL

DR. TISSA RAVINDA PERERA

Senior Lecturer

Department of Management and Organization Studies

Faculty of Management and Finance
University of Colombo

DM 142 Principles of Management

Semester I ( 2020 )
Diploma in Marketing

August 16, 2020

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 SKETCH OF THE SESSION
 SESSION OBJECTIVES

 INTRODUCTION TO MANAGERIAL CONTROL

 PURPOSE OF CONTROL

 TYPES OF CONTROL

 LEVELS OF CONTROL

 CONTROL PROCESS

 SESSION OUTCOMES

 FURTHER READINGS
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 SESSION OBJECTIVES

 To help participants to understand the basic principles in

managerial control

 To help the participants to mange their organizations by using

the theories and techniques learned.

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 INTRODUCTION
 ORGANIZATIONAL CONTROL refers to the systematic process of
regulating organizational activities to make them consistent with the
expectations established in plans, targets, and standards of performance.
 When things go smoothly as planned, they are considered to be under control.

 Controls are there to ensure that events turn out the way they are indented to
do.

 MANAGERIAL FUNCTION PLANNING AND CONTROL ARE CLOSELY RELATED.

 Without proper controls planning itself has little meaning.

 Planning involves the establishment of organization objectives and the

development of strategies, while controlling establishes standards of
performance and compare actual results with the planned results to determine
whether operations are being performed according to plans.

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MANAGERIAL FUNCTION PLANNING AND CONTROL
ARE CLOSELY RELATED

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 THE NATURE OF CONTROL IN ORGANIZATIONS
 Control is the regulation of organizational activities so that some targeted element
of performance remains within acceptable limits. Without this regulation,
organizations have no indication of how well they perform in relation to their
goals.

THE PURPOSE OF CONTROL

 ADAPTING TO ENVIRONMENTAL CHANGE: A properly designed control system can
help managers anticipate, monitor and respond to changing environment

 LIMITING THE ACCUMULATION ERROR: small mistakes and errors do not often
seriously damage an organization's financial health. Over time however small
errors may accumulate and eventually become very serious

 COPING WITH ORGANIZATIONAL COMPLEXITY: when an organization purchase

only one raw materiel and produce only one product has a simple organizational
design and control is also easy

 MINIMIZING COSTS: when practiced effectively control can also help reduce costs
and boost output.
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 AREAS OF CONTROL

 AREAS OF CONTROL : control can focus on any area of an organization.

Most organizations define areas of control in terms of the four basic types
of resources they use: PHYSICAL, HUMAN, INFORMATION AND
FINANCIAL RESOURCES.

 PHYSICAL RESOURCES: inventory management, quality control,

equipment control

 HUMAN RESOURCES: selection and placement, training and development,

performance appraisal

 INFORMATION RECOURSES: public relations, production scheduling,

marketing forecasting

 FINANCIAL RESOURCES: managing organization's debs, ensure that

enough cash in hand
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 LEVELS OF CONTROL
 LEVELS OF CONTROL can be broken down into areas. They are: strategic control,
structural control, operations control and financial control

 OPERATIONAL CONTROL FOCUSES on the processes the organization uses to

transform resources into products and services ( quality control)

 FINANCIAL CONTROL IS CONCERNED with the organization's financial

resources( monitoring receivables to make sure that customers are paying their bills
on time)

 STRUCTURAL CONTROL IS CONCERNED with the elements of the organization's

structure are serving their indented purposes (monitoring administrative ratio to
make sure that staff expenses do not become excessive)

 STRATEGIC CONTROL FOCUSES on how effectively the organization's corporate ,

business ,and functional strategies are succeeding in helping the organization meet
its goals and objectives. (if a corporation has been unsuccessful in implementing its
strategy, its mangers need to identify the reasons and either to change the strategy
or renew their effort to implement it)

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 STEPS IN CONTROL PROCESS
 ESTABLISH STANDARDS: A control standard is a target against which
subsequent performance will be compared.

Eg: empty table will be cleaned within five minutes after being vacated

 MEASURE PERFORMANCE: performance measurement is a constant and

ongoing activity in an organization.

 COMPARE PERFORMANCE AGAINST STANDARDS: performance may be

higher than, lower than or identical to the standards.

 CONSIDER CORRECTIVE ACTIONS: decisions regarding corrective actions

draw heavily on a managers analytic skills. After comparing the
performance one can maintain the status quo, correct the deviations and
or change standards.
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STEPS IN CONTROL PROCESS

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FEEDBACK CONTROL MODEL

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 OPERATIONS CONTROL
 PRIMARY CONTROL (FEEDFORWARD CONTROL): attempts
to monitor the quality or quantity of financial, material,
human and information resources BEFORE THEY ACTUALLY
BECOME PART OF THE SYSTEM

 SCREENING CONTROL(Concurrent control ): focuses on

meeting standards for products or service quantity and
quality DURING THE ACTUAL TRANSFORMATION PROCESS

 POST ACTION CONTROL(feedback control): monitor the

outputs or results of the organization AFTER THE
TRANSFORMATION PROCESS IS COMPLETE ( Eg: final
inspection after the product is completed)
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 FINANCIAL CONTROL
 FINANCIAL CONTROL IS THE CONTROL OF FINANCIAL RESOURCES AS THEY FLOW
INTO THE ORGANIZATION ( revenues, share holders investments) ARE HELD BY THE
ORGANIZATION ( working capital, retained earning) AND FLOW OUT OF THE
ORGANIZATION ( pay expenses).

 BUDGETARY CONTROL: one of the most commonly used methods of managerial

control, is the process of setting targets for an organization’s expenditures,
monitoring results and comparing them to the budget, and making changes as
needed. As a control device, budgets are reports that list planned and actual
expenditures for cash, assets, raw materials, salaries, and other resources. In
addition, budget reports usually list the variance between the budgeted and
actual amounts for each item.

 Budget is a plan expressed in numerical terms. Organizations establish budgets for

work groups, departments, divisions and the whole organization. The usual time
period for a budget is one year, although breakdowns of budgets by the quarter or
month are also common.

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 FINANCIAL CONTROL
 Begets are generally expressed in financial terms but some
times they are expressed in output, times or other
quantifiable factors. Because of their quantitative nature,
budgets provide yardsticks for measuring performance and
facilitate comparisons and facilitate comparisons across
departments and from one time period to another.

 There are DIFFERENT TYPES OF BUDGETS in organizations

they are such AS CASH BUDGET, SALES BUDGET, LABOR
BUDGET, PRODUCTION BUDGET

 Who is responsible for preparing budgets? TRADITIONALLY

TOP MANAGEMENT IS RESPONSIBLE FOR BUDGETS.

 There are many strength and weaknesses of budgets

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 FINANCIAL CONTROL
RESPONSIBILITY CENTER: an organizational unit under the supervision of a single person
who is responsible for its activity. There are different types of budgets which are related to
responsibility centers.

1. EXPENSE BUDGET: An expense budget includes anticipated and actual expenses for each
responsibility center and for the total organization
2.REVENUE BUDGET: A revenue budget lists forecasted and actual revenues of the
organization
3.CASH BUDGET: The cash budget estimates receipts and expenditures of money on a daily
or weekly basis to ensure that an organization has sufficient cash to meet its obligations.
4.CAPITAL BUDGET : The capital budget lists planned investments in major assets such as
buildings, heavy machinery, or complex information technology systems, often involving
expenditures over more than a year
5.TOP-DOWN BUDGETING: A budgeting process in which middle- and lower-level managers
set departmental budget targets in accordance with overall company revenues and
expenditures specified by top management.
6.BOTTOM-UP BUDGETING : A budgeting process in which lower-level managers budget
their departments’ resource needs and pass them up to top management for approval.

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 FINANCIAL CONTROL
 FINANCIAL STATEMENTS: Financial statements provide the basic information
used for financial control of an organization. Two major financial statements—
the balance sheet and the income statement—are THE STARTING POINTS FOR
FINANCIAL CONTROL

 The balance sheet shows the firm's financial position with respect to assets and
liabilities at a specific point in time

 The income statement, sometimes called a profit-and-loss statement or P&L for

short, summarizes the firm's financial performance for a given time interval,
usually one year.

 FINANCIAL ANALYSIS: INTERPRETING THE NUMBERS: A MANAGER NEEDS TO

BE ABLE TO EVALUATE FINANCIAL REPORTS THAT COMPARE THE
ORGANIZATION’S PERFORMANCE WITH EARLIER DATA OR INDUSTRY NORMS.
These comparisons enable the manager to see whether the organization is
improving and whether it is competitive with others in the industry. The most
common financial analysis focuses on ratios, statistics that express the
relationships between performance indicators such as profits and assets, sales,
and inventory.

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FINANCIAL CONTROL

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 THE BALANCED SCORECARD
 Many firms are now taking a more balanced perspective of company
performance, integrating various dimensions of control that focus on markets and
customers as well as employees and financials.

 Organizations recognize that relying exclusively on financial measures can result

in short-term, dysfunctional behavior.

 Nonfinancial measures provide a healthy supplement to the traditional financial

measures, and companies are investing significant sums in developing more
balanced measurement systems as a result.

 THE BALANCED SCORECARD is a comprehensive management control system that

balances traditional financial measures with operational measures relating to a
company’s critical success factors

 A balanced scorecard contains FOUR MAJOR PERSPECTIVES, such as FINANCIAL

PERFORMANCE, CUSTOMER SERVICE, INTERNAL BUSINESS PROCESSES, AND THE
ORGANIZATION’S CAPACITY FOR LEARNING AND GROWTH

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 THE BALANCED SCORECARD
 The FINANCIAL PERFORMANCE perspective reflects a concern that the organization’s
activities contribute to improving short- and long-term financial performance.

 CUSTOMER SERVICE indicators measure such things as how customers view the
organization, as well as customer retention and satisfaction.

 BUSINESS PROCESS indicators focus on production and operating statistics, such as

order fulfillment or cost per order.

 The final component of the balanced scorecard looks at the organization’s POTENTIAL
FOR LEARNING AND GROWTH, focusing on how well resources and human capital are
being managed for the company’s future. Metrics may include such things as employee
retention and the introduction of new products.

 Managers record, analyze, and discuss these various metrics to determine how
well the organization is achieving its strategic goals.

 The balanced scorecard is an EFFECTIVE TOOL FOR MANAGING AND IMPROVING

PERFORMANCE only if it is clearly linked to a well-defined organizational strategy and
goals

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THE BALANCED SCORECARD

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HIERARCHICAL VERSUS DECENTRALIZED APPROACHES
 Managers’ approach to control is changing in many of today’s
organizations. In connection with the shift to employee participation
and empowerment, many companies are adopting a decentralized
rather than a hierarchical control process.

 HIERARCHICAL CONTROL involves monitoring and influencing

employee behavior through extensive use of rules, policies, hierarchy
of authority, written documentation, reward systems, and other
formal mechanisms

 DECENTRALIZED CONTROL relies on cultural values, traditions, shared

beliefs, and trust to foster compliance with organizational goals.
Managers operate on the assumption that employees are trustworthy
and willing to perform effectively without extensive rules and close
supervision.

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HIERARCHICAL VERSUS DECENTRALIZED APPROACHES

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 QUALITY CONTROL
 Another popular approach based on a decentralized control philosophy is TOTAL
QUALITY MANAGEMENT (TQM), an organization-wide effort to infuse quality into every
activity in a company through continuous improvement.

 The implementation of total quality management involves the use of many techniques,
including QUALITY CIRCLES, BENCHMARKING, SIX SIGMA PRINCIPLES, REDUCED CYCLE
TIME, AND CONTINUOUS IMPROVEMENT

 QUALITY CIRCLES One technique for implementing the decentralized approach of TQM is
to use quality circles. A quality circle is a group of 6 to 12 volunteer employees who meet
regularly to discuss and solve problems affecting the quality of their work. At a set time
during the workweek, the members of the quality circle meet, identify problems, and try
to find solutions. Circle members are free to collect data and take surveys.

 BENCHMARKING is defined as “the continuous process of measuring products, services,

and practices against the toughest competitors or those companies recognized as
industry leaders to identify areas for improvement

 SIX SIGMA is a highly ambitious quality standard that specifies a goal of no more than 3.4
defects per million parts. That essentially means being defect-free 99.9997 percent of the
time

 CONTINUOUS IMPROVEMENT, or kaizen, is the implementation of a large number of

small, incremental improvements in all areas of the organization on an ongoing basis.23
 TRENDS IN QUALITY AND FANATICAL CONTROL
 ISO 9000 STANDARDS

 ECONOMIC VALUE-ADDED (EVA) measurement systems as a new way to gauge financial

performance.

 MARKET VALUE-ADDED (MVA) adds another dimension because it measures the stock
market’s estimate of the value of a company’s past
and projected capital investment projects.

 Traditional methods of costing assign costs to various departments or functions, such as

purchasing, manufacturing, human resources, and so on. With a shift to more horizontal,
flexible organizations has come a new approach called ACTIVITY-BASED COSTING (ABC),
which allocates costs across business processes

 CORPORATE GOVERNANCE, refers to the system of governing an organization so that the

interests of corporate shareholders are protected
.

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 CHARACTERISTICS OF EFFECTIVE CONTROL
 INTEGRATION WITH PLANNING: as goals are set during the
planning process, attention should be paid to developing standards
that will reflect how well plans are realized.

 FLEXIBILITY: the control system itself must be flexible enough to

accommodate change

 ACCURACY

 TIMELINESS: control system should prove information as often as is

necessary

 OBJECTIVITY: the control system should provide information as

objective as possible
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 SESSION OUTCOMES

 Helped participants to understand the basic principles in

managerial control

 Helped the participants to mange their organizations by using

the theories and techniques learned.

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Questions?

Thank you !

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