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.
Control refers to the actions made to ensure
that activities performed match the desired
activities and goals that have been set.

Importance of Controlling

When controlling is properly

implemented, it will help organization achieve
its goal in the most efficient and effective
manner possible.

Steps in the Control Process

The control process consists of four steps, namely:

1. Establishing performance objectives and
standards.
2. Measuring actual performance.
3. Comparing actual performance to objectives and
standards, and
4. Taking necessary action based on the results of
the comparisons.

Establishing Performance Objectives and Standards

1. Sales targets which are expressed in quantity

or monetary terms;
2. Production targets which are expressed in
quantity or quality
3. Worker attendance which are expressed in
terms of rate of absences;
4. Safety record which is expressed in number of
accidents for given periods.
5. Supplies used- which are expressed in quantity
or monetary terms for 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.
Example: A construction firm entered into a contract
with the government to construct a 100 km road
within ten months. It would, then, reasonable for
management to expect at least 10kms 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.
Citing the previous example if the management of
the construction firm found out that only 15kms
were finished after 2 months, then any of the
following actions may be undertaken:
1. Hire additional personnel;
2. Use more equipment; or
3. Require overtime.

Types of Control
Control consists of three distinct types, namely:
Feedforward Control
When management anticipates potential problems
and prevents their occurrence.
Concurrent Control
Undertaken when operations are already on going and
activities to detect variances are made.
Feedback Control
Undertaken when information is gathered about a
completed activity in order that evaluation and steps
for improvement are derived. Corrective actions aimed
at improving future activities are features of feedback
control.

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 long term financial plans. This is because
of the long lead times needed for capital
projects.
Example: An Engineering firm assigned to construct
the Light Railway Transit (LRT) within three
years. As such the 3-year financial plan will be
very useful.

Components of Organizational
control systems
1.
2.
3.
4.
5.
6.

Strategic plan
The long-range financial plan
The operating budget
Performance appraisals
Statistical reports
Policies and procedures.

Strategic Plan

The output of strategic planning which spells out

the decision about long-range goals and the
course of action to achieve these goals. It
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 Operating Budget

Indicates the expenditures, revenues, or

profit planned for some future period regarding
operations.
The figures appearing in the budget are used as
standard measurements for performance.

Performance Appraisals

Measures employee performance. As such, it

provides employees with a guide on how to do
their jobs better in the future.It also functions as
effective checks on new policies and programs.
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

1.
2.
3.
4.
5.
6.
7.

Statistical Reports pertain to those that

contain data on various developments within the
firm.
Labor efficiency rates
Quality control rejects
Accounts receivable
Accounts payable
Sales reports
Accident reports
Power consumption report

Policies and Procedures

Policies refer to the framework within

which the objectives must be pursued.
Procedure is a plan that describes the
exact series of actions to be taken in a given
situation.
It is expected that policies and procedures laid
down by management will be followed. When
they are breached once in a while, management
is provided with a way to directly inquire on the
deviations.

STRATEGIC CONTROL
SYSTEMS
To be able to assure the accomplishment of
the strategic objectives of the company,
strategic control systems, become necessary.
1. Financial analysis
2. Financial ration analysis

Financial Analysis

The success of most organization depends

heavily 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 action 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

Categories of Financial Ratio

1. Liquidity Ratios- assess the ability of a company to meet
its current obligations
2. Efficiency Ratios- show how effectively certain assets or
liabilities are being used in the production of goods and
services.
3. Financial Leverage Ratios- designed to assess the balance
of financing obtained through debt and equity sources.
4. Profitability Ratios- measure how much operating income
or net income a company is able to generate in relation to
its assets, owners equity, and sales

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.

Executive Realty Check

Employees at the frontline often complain

that management imposes certain requirements
that are not realistic.

Comprehensive Internal Audit

An internal audit is one undertaken to

determine the efficiency and effectively of the
activities of an organization.

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.

Symptoms of Inadequate Control

(Kreitner)

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 (workflow bottlenecks,
excessive paperwork).
7. Excessive costs.
8. Evidence of waste and inefficiency (scrap,
rework)