CONTROLLING

Control
● Control is the process of comparing actual performance with the
established standards and initiating corrective steps if deviations
occur.
● It is making something happen the way it was planned to happen.
● It involves keeping organisational activities and functions on the
right track and aligned with plans and goals.
● Planning and controlling are inseparable twins. Effective planning
ensures effective control and control facilitates planning.
Controlling
● It is the process managers go through to control.it is the process of
regulating organizational activities so that actual performance
conforms to expected organizational standards and goals.
Controlling means that managers develop-
1) Appropriate standards
2) Compare ongoing performance against those standards
3) Taking steps to ensure that connective actions are taken when
necessary
a good controlling system is generally designed to keep things from going
wrong, not just correct them afterward.
Features of Controlling
a) Control is a positive force-the primary objective is to find where
failures are occurring, who is responsible for them, and what should
be done about them. It is a positive force aimed at securing
performance.
b) Control is a continuous process-it is a continuous process of
checking and rechecking to ensure actions flow along desired lines
c) Control is forward-looking -control involves analyzing past
actions so that they are not repeated in the future. A good control
process is one that affects corrections before a deviation occurs.
d) Control process is universal-control is a primary function of
every manager and it has to be undertaken at every level.
e) Control process is dynamic-control is not static, it is dynamic as
from the time a goal is made and established many things happen
in between which disrupt things Therefore a properly designed
control system can help managers anticipate, monitor and respond
to changes.
f) Control is goal oriented-the primary focus is on achieving results
checking deviations if any and initiating remedial steps.
 g) Delegation is the key to control-to put activities along the right
path a manager requires enough authority so that he can control
anything and everything under his jurisdiction.
Relationship between planning and control
● Once plans are made control is necessary to measure progress
● Planning is useful only if effective control is possible.
● It is said planning is looking ahead and controlling is looking back.
Plans are prepared keeping present conditions in mind and likely
future changes controlling on the other hand seeks to improve
performance on the basis of experience gained in the past. It is both
looking ahead and back and find out where things went wrong and
how to correct them
●

Basis Planning controlling

Focus Impersonal, long-range Personal, immediate
problems issues
Relies on Estimates Specific data
Time Top management's top Operating and lower-level
priority people spend more time
on this
Structure Less structured Highly structured
evaluation Difficult, takes time to Results are visible,
visualize especially when
situations are stable and
not so complex.

Importance of Control
Control is an essential part of every organization. A good system of
control, however, has the following advantages:-
● Achievement of goals-it is a goal-oriented process. Whenever
things go off the plan remedial steps are undertaken immediately.
● Execution and revision of plans-it measures progress, uncovers
deviations and indicates corrective steps. It offers valuable feedback
 information, reveals shortcomings in plans, and thereby helps in
preparing other future plans.
● Facilitates decentralization of authority-a control system
ensures that work delegated by managers to subordinates goes as
predetermined. The feedback information helps managers check
whether actions taken at the lower level are in line with what has
been planned or not.
● Promotes coordination-control and facilitates coordination
between different departments and divisions by providing them with
unity of direction. Such unified focus ensures the accomplishment of
results efficiently and effectively.
● Cope with uncertainty and change-the environment in which
organizations work is complex and ever-changing. Constant
monitoring of key areas helps management encash opportunities
that are thrown open from time to time. Timely actions can be taken
to prevent mistakes
Limitations of Control
● The organization cannot control external factors like government
policies, changes in technology, etc.
● Employees resist control and as a result, the effectiveness of control
is reduced and the responsibility of employees cannot be fixed
● Control is an expensive process and requires a good amount of time
and effort
● When quantitative measurement is not possible control cannot be
very effective.
Types of control
Depending on the time at which control is applied, controls are of three
types-

a) Feedback (Historical or post-control) Control-

● This feedback control employs historical outcomes as bases
for correcting future actions. Here control takes place after
activity is done.
 ● Unfortunately by the time a manager has the requisite
information the problems already enter the system.
● Benefit is that it shows how well planning worked and how ell
employees performed.
b) Concurrent control
● It is also called ‘real-time’ control. It takes place while the
activity is in progress.
● It is also in effect when supervisors observe employees to
ensure they work efficiently and avoid mistakes.
● Managers can walk around and directly interact with
employees in the work area to find out what is going on.
c) Predictive or feed-forward control-
● Here the control system anticipates problems that the
management encounters in the future. Ex-cash budget where
the finance manager anticipates future requirements of cash
● It attempts to anticipate problems or deviations from the
standard in advance of their occurrence.
● It is a more progressive, proactive approach to control,
allowing corrective action to be taken ahead of the occurrence
of the problem.
Steps in the control process

1) Setting the standards-standards represents the criteria against

which actual performance is measured. Standards serve as the
benchmark because they reflect the desired results or acceptable
level of performance. Control standards can be quantitative or
qualitative. Quantitative standards are set in physical or monetary
terms. Such standards are set in production, sales, finance, and
other areas where results can be measured in precise quantitative
terms. Qualitative standards are certain areas such as goodwill,
employee morale, etc are taken care of when targets are set in
intangible form.
Standards need to be as clear as possible as vaguely defined
standards will make it difficult to measure performance against
standards.
2) Measuring performance-after setting standards, the next step is
to get information about the performance. Four approaches are
 used by managers to measure and report actual performance –
personal observations, statistical reports, oral reports, and written
reports. Most managers use a combination of these approaches.
3) Comparing performance with standards-the comparing steps
determines the variation between actual performance and a
standard. Although some variation in performance can be expected
in all activities, it is critical to determine an acceptable range of
variation. Deviation outside this range needs attention.
4) Taking corrective action-after the comparison of performance
with standards. A manager can do three things do nothing, correct
the actual performance and third is revise the standard. Doing
nothing is self-explanatory
a) Correct actual performance-if the actual performance falls
short of standards due to the non-availability of materials,
managers try to procure these materials and thus set things in
order. It is due to poor results shown by employees, it could be
rectified through the introduction of attractive incentive plans.
Thus corrective action may involve change in methods, rules,
procedures, etc.
b) Revise the standard -sometimes variations may occur due to
an unrealistic standard. That is the goal may be too high or too
low. In such cases, managers try to set things in order by revising
the standards altogether.
c) Immediate or basic-Immediate corrective action corrects
something right now but gets things back on track. This is
temporary in nature. Basic on the other hand is concerned with a
permanent solution to the problem with nay serious deviations.
Principles of an effective control system
The main principles on which an effective controlling system is based are
the following-
● Simple-an effective control system should be simple and easy to
understand. Complicated and complex systems are difficult for the
managers both to understand and execute
● Economical-a control system has its own cost therefore its cost of
working should be less than the savings made by implementation
● Prompt-an effective control system should be able to detect
deviations and errors promptly so that corrections may be made
and done immediately
● Suggestive-a good control system should not only find out
deviations but also give solutions
● Objective-the standards of performance should be as objective and
specific as possible. They should not be vague and ambiguous.
 ● Flexible-the control system must keep pace with the changing
environment. It should adapt to new developments and new
situations
● Forward looking- the control system should be futuristic in
nature .it must try to visualize the future and accordingly make
changes in plans.
● Exception-it means the manager should focus on only critical
deviations that have a serious impact on business. The more the
manager concentrates his control efforts on exceptions, the more
efficient will be the result of his control.
Accountability for performance
● Accountability is the manager’s expectation that the employee will
accept credit or blame for his work. No manager can check
everything that an employee does and that is why guidelines are
established and performance standards are set.
● Accountability is an obligation to complete an assignment in
accordance with performance standards established by the superior.
● Accountability is absolute and final and cannot be assigned to
others.
● The ultimate responsibility -accountability to higher ups-lies with the
manager doing the delegating. The manager remains responsible
and accountable not only for their own actions but also for the
actions of their subordinates
● Accountability is the point at which authority and responsibility meet
and is essential for high performance. If any of them is missing
performance of employee cannot be judged fairly.
Prerequisites for making employees accountable
a) Clarity of goals-managers must know clearly what they expected
to deliver before they can be held responsible for delivery.
b) Ability to deliver-accountability for goal achievement can only be
assumed by a manager if they have the ability to deliver.
c) Training and coaching-the employee should be given the training
in skills required to perform.
d) Measurement -once the goals have been defined translating them
into something measurable is easy. However, in reality, goals
usually need to be deconstructed into short-term goals to be
associated measures and targets to check progress. If one cannot
evaluate performance no employee can be held accountable for
non-performance.
e) Acceptance of responsibility-finally managers must accept their
accountabilities, recognising their responsibility as the person who
can must and will deliver.
Control Techniques /Measures of Controlling
 To be done as per guidelines are
traditional control measures Modern techniques
Financial ratios Economic Value Added and
Market Value added
Budgetary control Balanced Score Card
PERT/CPM

Traditional Techniques
a) Financial Ratios-a general technique for analyzing a business
performance or its potential performance is known as ratio analysis.
● It involves dividing numbers from a business ‘balance sheet
and income statement to create percentages and decimals.
● It shows how one number is related to another. It is expressed
in the form of co-efficient, percentage, proportion, or rate.
● Ratio analysis will assist investors in determining three things
about an existing business: how the business is performing
relative to other business units of the industry
Some commonly used ratios
1) Liquidity ratios-measures a company’s capability to
provide sufficient cash to cover its short-term obligations.
The most common liquidity ratios include: the current
ratio and quick ratio
2) Activity ratios-indicates how much a company has
invested in a particular type of asset (or a group of assets)
relative to the revenue the asset is producing. the most
common activity ratios include: the average collection
period ratio and inventory turnover ratio
3) Leverage ratios-measures a company’s use of debt to
finance its operations. The most common leverage ratios
include: debt ratio and debt-to-equity ratio
4) Profitability ratios-they measure how effectively a
firm’s management is generating profits on sales, total
assets, and stockholders' investment. hence, they are
useful to investors. Common ratios are gross profit
margin, net profit margin, return on total assets and
return on equity
Advantages disadvantages
1. simplifies financial statements- 1. ratios alone are not adequate-
ratios only tell the whole story ratios are only indicative and cannot
2. facilitates inter-firm be taken as final
comparison-ratios tell which firm is 2. limitations of financial
successful and which is a strong and statements-ratios are based only on
weak firm recorded and inputted information
3. helps in planning-ratios can help and do not include other relevant
forecasting, planning, control, etc factors
4. help in making investment 3. lack of adequate standards-no
decision-for investors and lending fixed standards can be laid down for
decisions for bankers. ideal ratios
4. Different- people may interpret
ratios differently
5.incomparable-not only do
industries differ in their nature, but
firms similar business differ in size
and accounting etc hence
comparison becomes difficult
b) Budgetary Control-
● A budget is a financial or quantitative statement prepared prior
to a definite period of time, of the policy to be pursued during
that period for the purpose of attaining a given objective
● A budgetary control system secures control over costs and
performance in various parts of an enterprise by a) establishing
budgets b) comparing actual results with budgeted ones c)
taking corrective action or revising the budget if required
Objectives of Budgetary Control
a) To provide a detailed plan of action for a business over a
period of time
b) To coordinate the different units and activities of the
organisation with a view to utilize resources judiciously
c) To motivate organizational members to perform well
d) To exercise control over cost through comparison of actual
results with budgeted ones and initiating rectification steps
promptly
advantages of budgetary control
a) Budgets are the outcome of the planning function and as
such they direct every action of the organization towards
goal achievements.
b) It involves measuring performance and comparing it against
budgeted figures. Through this variation are struck out and
responsibilities fixed.
c) It is a somewhat democratic way of managing and control.
Employees at all levels are involved in making budgets. More
authority for preparing budgets is delegated to subordinates.
d) It makes people in the organization more conscious about
cost and performance. This leads to the effective utilization of
resources.
 Limitations of budgetary control
a) Accuracy is doubtful-budgetary control begins with the
formulation of budgets that are based on estimates. The
adequacy of budgetary control depends upon the accuracy
with which estimates are made. Budgeting based on
inaccurate data is of no use to evaluate.
b) Constant review needed-the effectiveness of the budget
depends upon the budget revisions are made in the light of
changed circumstances. If the budget is not reviewed it
becomes a self-defeating exercise.
c) Cost may be prohibitive- small concerns may find it luxury,
but if it has to be revised small entities find changes taxing
and problematic.
d) Impersonal Approach-budgetary control does not
guarantee sure success. It should have top management
support, sufficient training must be imparted to employees.
Modern techniques of Controlling
a) PERT and CPM (Network Techniques)
PERT Program(project) Evaluation and Review Technique
● In this planning scheduling, organising, coordinating, and
controlling uncertain activities take place
● The technique studies and represents and studies the tasks
undertaken to complete a project, to identify the least time for
completing a task and the minimum time required to complete
the whole project
● It aims to reduce cost and time per project
● It uses time as a variable which represents the planned resource
application along with performance specification
● Steps are-1.divide the project into events 2.proper sequence of
work is constructed 3.time needed by each activity is determined
and critical path (longest path connecting all events ) is
determined.
Critical Path Method (CPM)
● It is an algorithm used for planning scheduling and control of
activities in a project. It is assumed that the activity duration is fixed
and certain
● It is used to compute the earliest and latest start time for each
activity
● The process differentiates between critical and non-critical activities
to reduce time and avoid queue generation in the process.
 ● The reason behind the identification of critical activities is that, if
any activity is delayed it will cause the whole process to suffer that
is why named CPM.
● STEPS -1.List is prepared of all activities needed to complete a
project 2. 2.computation time to complete each activity
3.dependency between the activities is determined 4. The path is
defined as a sequence of activities in a network and critical path is
the path with highest length.
PERT CPM
1.It is an mgt technique whereby 1.It is a statistical technique of
planning, scheduling, organising, project management in which
coordinating, and controlling of all planning ,scheduling, organising ,
uncertain activities is done coordination, and control of well-
defined activities takes place.
2.it is a method to control costs
2.it is a technique of planning to
and time
control of time.
3.as a construction project
3.it has evolved as a research and
development project
4. it is aligned according to events 4.it is aligned towards activities
5. it deals with unpredictive 5.predicatable activities
activities
6.involves job of repetitive nature
6. is used where the nature of the
job is non-repetitive
7. used projects like construction
7.used for research and
development projects

But now mostly both techniques are being merged with passage
of time.
b) BALANCED SCORE CARD
It combines both qualitative and quantitative measures,
acknowledges the expectations of different stakeholders, and
relates an assessment of performance to the choice of strategy.
It involves identifying the vision, the mission of the firm and
designing and implementing strategies to achieve the mission, and
analysing performance from the following perspectives-
a) Financial perspective-it includes results like profits, increase in
the market share, return on investments, and other economic
measures undertaken
 b) Customer’s perspective-the helps to get on customer
satisfaction, the customer’s perspective about organisation,
customer loyalty, and acquiring new customers. the data can be
collected from the frequency and number of customer complaints
the time taken to deliver the products and services etc
c) Internal business and production process perpective-these are
the measures related to organisation's internal processes that
help to achieve customer satisfaction. It includes the
infrastructure, the long-term and short-term goals and
perspectives, organizational processes and procedures, systems,
and human resources.
d) Learning and innovation perspective-it covers the organisation's
ability to learn, innovate, and improve. they can be judged from
the employee skill matrix, key competencies, value-added, and
revenue per employee.
Benefits of balanced score card
● It focuses attention on company mission and strategy
● It integrates financial and non-financial measures of performance
into a single system
● Shows interrelationship between company’s objective and activities
meant for achievement.
● states explicitly that the competitive advantage of the firm is the
core element for the success of strategy.
● It evaluates the strengths and weaknesses of the firm by providing
equal and balanced weight to different factors
Limitations of BSC
● It focuses only on four perspectives and ignores human resource
development etc.
● It is not full proof to control an oragnisation’s performance as
targets and sub-targets under the four may not be clearly
defined
● It is used for measuring company performance only and does not
suggest better performance areas.

Economic Value Added (EVA) –

● EVA is simply the operating profit after tax less a charge for the
capital, equity as well as debt, used in a business.
● The idea behind it is that shareholders must earn a return that
compensates for the risk taken
● If it is zero it is sufficient achievement on the ground that
shareholders earned a return that compensated a risk
Measurement of EVA-
● EVA is a measure of the economic efficiency of a company.
 ● It is surplus generated from operating activities over and above the
cost of capital.it is excess profit of the firm after charging the cost of
capital.
● Profit is contributed by land, labor, capital, and management.
● Compensation to labour, management and cost of debt fund are all
charged to the P&L account and dividend is treated as appropriation
profit as per the traditional concept
● In economic terms profit is a clear surplus to the company after
even meeting the cost of equity share capital
● It is a measure of corporate surplus.it is NOPAT ( Net operating
profits after tax).it is suggested to deduct depreciation while
computing NOPAT since depreciation is an economic expense.
EVA is calculated as
NOPAT + Finance charge on debt
ROOC= __________________________________ * 100
Operating capital
Strategies to increase EVA
● Increase return on existing projects (improve operating
performance)
● Invest in new projects that have a return greater than the cost of
capital
● Use less capital to achieve the same return
● Reduced cost of capital
● Liquidate capital or curtail further investment in sub-standard
operations where inadequate returns are being earned
Advantages of EVA
● It is a better indicator of efficiency than profit after tax (PAT) .So the
management of a company can plan for increasing EVA in order to
improve shareholders value or capital efficiency
● Based on this investor can invest
● It can be used to compare performance with other companies in
same industry.
● It can be used as a tool of tax optimisation.
Limitations of EVA
● It is based on an accounting method which can be manipulated by
management
● It focuses on immediate results and this may adversely affect
investment in innovation by the business
● It is based on a flat rate table cost of capital which is not
appropriate as it does not consider the rate advantage enjoyed by
the company by raising funds from cheaper sources in the market
● It does not consider the appreciation in the price of fixed assets.
 ● It does not give correct computation of net real growth in the
owner’s wealth This is because the total cost of capital at a blanket
rate also includes the cost of the owner’s fund.
Market value-added method
● It shows the difference between the market value of a company and
the capital contributed by investors (both bondholders and
shareholders).
● In other words, it is the sum of all capital claims held against a
company plus the market value of debt and equity.
MVA= Company’s Market Value-Invested Capital
● The higher the MVA the better it means the company has created a
substantial wealth for the shareholders. A negative MVA means that
the value of capital contributed to the company by the capital
market (or wealth and value have been destroyed)
Difference between EVA &MVA
EVA MVA
1.it attempts to measure the true 1.it is simply difference between
economic profit produced by a the current market value of a
company. company and the capital
contributed by investors (including
both shareholders and
bondholders)
2.it is not a performance metric
like EVA, but a wealth matrix
2.it helps to measure the economic
measuring value a company has
failure and success over a period of
created over a period of time
time.
3.as the company performs well
over time it will retain earnings.
3. it is useful for investors to This will improve book value of the
determine how well a company has company’s shares, and investors
produced value for customers will likely bid up the prices of those
shares in expectation of future
earnings, causing company’s
market value to rise.
4.it is calculated as difference
between company’s market value
and capital contributed by
4.it is calculated by taking the investors (its MVA) represents the
company’s net after-tax operating excess tag the market assigns to
profit and subtracting from it the the company as a result of its past
product of the company's invested operating successes.
capital multiplied by its percentage
cost of capital