Chapter 9 Controlling

CONTROLLING
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.
IMPORTANC
E OF
When controlling is properly implemented, it will help the organization achieve
its goal in the most efficient and effective manner possible. CONTROLLI
Deviations, mistakes, and shortcomings happen inevitably. When they occur in
the daily operations, they contribute to unnecessary expenditures which increase the
NG
cost of producing goods and services. Proper control measures minimize the ill effects
of such negative occurrences. An effective inventory control system, for instance,
minimizes, if not totally eliminate& losses in inventory.
1 STEPS IN
Establishing THE
performance
objectives and CONTRO
2
standards
Measuring actual
L
performance PROCESS
3
Comparing actual
performance to
objectives and
standards 4
Taking necessary action
based on the results of
the comparisons.
Establishing Performance Objectives and
Standards
1. Sales targets
- which are expressed in quantity

4. Safety record - which
or monetary terms;
is expressed in number of
2. Production targets
accidents for given
- which are expressed in quantity periods;
or quality;
5. Supplies used - which
3. Worker attendance are expressed in quantity
- which are expressed in terms of or monetary terms for
rate of absences; given periods.
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 determined, this will be compared with what
the organization seeks to achieve. Actual production output, for instance, will be
compared with the target output.
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. If in the illustration cited above, the
management of the construction firm found out that only 15 kilometer
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.
1 TYPES
Feedforward
Control OF
2 CONTR
OL
Concurrent
Control
3
Feedback Control
COMPONENTS OF
ORGANIZATIONAL
CONTROL SYSTEMS
1. Strategic plan 4. Performance appraisals

2. The long-range financial plan 5. Statistical reports
3. The operating budget 6. Policies and procedures
Strategic Plans
A strategic plan (discussed in Chapter 3) provides the basic control mechanism for the organization. When
there are indications that activities do not facilitate the accomplishment of strategic goals, these activities 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.
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 bow
to do their jobs better in the future. Performance appraisals also function as effective checks on new policies and
programs.
Statistical Reports
Statistical report 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 report
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 follows:

"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:
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.
STRATEGIC
CONTROL
To be able to assure the accomplishment of the strategic
objectives of the company, strategic control systems become SYSTEM
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 be made so that whatever deviations from standards
are found out, corrective actions may be introduced.
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 ratio.
The result will be compared with a required norm which is usually related to what other companies in
the industry have achieved, or what the company has achieved in the past. 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
ratio are important indicators of liquidity:
1.Current Ratio
2.Acid-Test Ratio
Efficiency Ratios. These ratios show how effectively
certain assets or liabilities are being used in the
production of goods and services. Among the more common
efficiency ratios are:
3.Inventory Turnover Ratio
4.Fixed Asset Ratio
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:
5.Debt to Total Assets Ratio
2. Times Interest Earned Ratio
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 ae follows:
1. Profit Margin Ratio
2. Return on asset Ratio
3. Return on Equity Ratio
IDENTIFYING
CONTROL
PROBLEMS
Recognizing the need for control is one thing, actually implementing
it is another. When operations become complex, the engineer 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 instance, 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 the 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.
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 it snowballs into a full blown problem.
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 may be 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).
3. Employee dissatisfaction (complaints, grievances,
Turnover).
4. Cash shortages caused by bloated inventories
or delinquent accounts receivable.
5. Idle facilities or personnel.
6. Disorganized operations (work flow bottlenecks' excessive paperwork).
7. Excessive costs.
8. Evidence of waste and inefficiency (scrap,
rework).

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CONTROLLING

- which are expressed in quantity

1. hire additional personnel;

2. use more equipment; or

1. Strategic plan 4. Performance appraisals

The Long-Range Financial Plan

The Operating Budget

An example of policy is as follows:

An example of a procedure is as follows:

1. executive reality check

2. comprehensive internal audit

3. general checklist of symptoms of inadequate control

Comprehensive Internal Audit

1. An unexplained decline in revenues and profits.

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