CONTROLLING

MEANING

Controlling is the basic managerial function. It is the process of ensuring the actual activities confined to planned activity. It is an essential function for all levels of management. It ensures the right things are done in the right manner at right time. Each and every organization set the goals. All activities are directed towards the goals. Controlling is defined as a measurement of Actual performance and expected performance and taking corrective action. Its purpose is to make sure that actual performance is consistent with plans. In fact control helps managers to monitor the effectiveness of their planning, their organizing and their directing activities.

MEANING AND DEFINITION OF CONTROLLING 

Controlling is the process of ensuring that actual activities conform to planned activities. It is one of the important functions of management .it is the evaluation and correction of the performance of subordinates. 

‘Controlling is the measuring and correcting of activities of subordinates to assume that events conform to plans’ -Koontz and O ‘Donnel 

“control is the process of taking steps to bring actual results and desired results closing together’ – Philip Kotler 

“Management control seeks to compel events to confirm to plans’ - Billy E . Goetz 

“Management control is the process by which managers assume that resources are obtained and used effectively in accomplishment of organisation’s objectives” - Robert Antony

CONTROLLING AT A GLANCE

• Controlling is a regulatory function 

• It is the end function of management 

• It is a dynamic and continuous function 

• It is done by all managers at all levels( pervasive) 

• It is the evaluation and correction of activities 

• Controlling is forward linking/looking 

IMPORTANCE OF CONTROLLING

Control is an indispensable function of management. Without control the best of plans can go awry. A good control system helps an organisation in the following ways:

1 Accomplishing organisational goals: The controlling function measures progress towards the organisational goals and brings to light the deviations, if any, and indicates corrective action.

2 Judging accuracy of standards : A good control system enables management to verify whether the standards set are accurate and objective. An efficient control system keeps a careful check on the changes taking place in the organisation and in the environment and helps to review and revise the standards in light of such changes.

3 Making efficient use of resources: By exercising control, a manager seeks to reduce wastage and spoilage of resources. This ensures that resources are used in the most effective and efficient manner.

4 Improving employee motivation : A good control system ensures that employees know well in advance what they are expected to do and what are the standards of performance on the basis of which they will be appraised. It, thus, motivates them and helps them to give better performance.

5 Ensuring order and discipline: Controlling creates an atmosphere of order and discipline in the organisation. It helps to minimise dishonest behaviour on the part of the employees by keeping a close check on their activities. 

6 Facilitating coordination in action: Each department and employee is governed by predetermined standards which are well coordinated with one another. This ensures that overall organisational objectives are accomplished.

LIMITATION OF CONTROLLING

1 Difficulty in setting quantitative standards :Employee morale, job satisfaction and human behaviour are such areas where this problem might arise.

2 Little control on external factors : Generally an enterprise cannot control external factors such as government policies, technological changes, competition etc.

3 Resistance from employees: Control is resisted by the employees as they feel that their freedom is restricted. E.g employees may resist and go against the use of cameras to observe them minutely.

4 Costly affair: Control is a costly affair as it involves a lot of expenditure, time and effort.

RELATIONSHIP BETWEEN PLANNING AND CONTROLLING

Planning and controlling are interrelated and in fact reinforce each other in the sense that-

1. Planning is pre-requisite for controlling. Plans provide the standard for controlling. Thus, without planning, controlling is blind. If the standards are not set in advance managers have nothing to control.

2. Planning is meaningless without controlling. It is fruitful when control is exercised. It discovers deviations and initiates corrective measures.

3. Effectiveness of planning can be measured with the help of controlling.

4. Planning is looking ahead and controlling is looking back: Planning is a future oriented function as it involves looking in advance and making policies for the maximum utilization of resources in future that is why it is considered as forward looking function. 

In controlling we look back to the performance which is already achieved by the employees and compare it with plans. If there are deviations in actual and standard performance or output then controlling functions makes sure that in future actual performance matches with the planned performances. Therefore, controlling is also a forward looking function. Thus, planning & controlling cannot be separated. The two are supplementary function which support each other for successful execution of both the function. Planning makes controlling effective whereas controlling improves future planning.

CONTROLLING PROCESS

1. Establishing or setting standards

the first step of controlling is to set standard against which results can be measured. For setting standard, targeted results must be identified and it should be quantitative as far as possible. Quantitative term can make controlling effective. however Standards can be set in both quantitative as well as qualitative terms. Standards are expressed in general term as

 Cost should be reduced

 Orders should be executed

 Overhead must be reduced

 All orders must be executed in 2 days or so on.

 Improving goodwill and motivation level of employees

It is important that standards should be flexible enough to be modified whenever required. Due to changes taking place in the internal and external business environment, standards may need some modification to be realistic in the changed business environment.

2. Measuring actual performance 

In this step, actual performance of employees, group or units is measured. A manager should examine actual performance on the basis of given standard which is definite set of work assigned to definite employees and different techniques can be used to measure the actual performance. In convenience of manager, he develops better information system to measure the actual performance. Actual performance measurement system should be a regular and constant basis so that it can provide reliable and regular feedback to the management.

There are several techniques for measurement of performance. These include personal observation, sample checking, performance reports, etc.

Measurement of performance of an employee may require preparation of performance report by his superior. Measurement of a company’s performance may involve calculation of certain ratios like gross profit ratio, net profit ratio, return on investment, etc., at periodic intervals. Progress of work in certain operating areas like marketing may be measured by considering the number of units sold, increase in market share etc., whereas, efficiency of production may be measured by counting the number of pieces produced and number of defective pieces in a batch.

3. Comparing actual performance with standard

After measuring actual performance, those results should be compared with standard set in the first step to know if the expected results are achieved or not . For that, good systems of comparison between performance and standard should be maintained.

4. Analyze Deviations: 

These comparisons should reveal it the actual performance is equal, lower or higher than that of predetermined standards. If lower standards are achieved the manager should find out the deviation and take corrective action.

Critical point control and management by exception should be used by a manager in this regard.

1. Critical Point Control: Control should, therefore, focus on key result areas (KRAs) which are critical to the success of an organisation. These KRAs are set as the critical points. If anything goes wrong at the critical points, the entire organisation suffers. For instance, in a manufacturing organisation, an increase of 5 per cent in the labour cost may be more troublesome than a 15 per cent increase in postal charges.

2. Management by Exception: only significant deviations which go beyond the permissible limit should be brought to the notice of management. Thus, if the plans lay down 2 per cent increase in labour cost as an acceptable range of deviation in a manufacturing organisation, only increase in labour cost beyond 2 per cent should be brought to the notice of the management.

5. Taking corrective actions: 

After comparing actual performance with the standard, if any deviation is detected, and then corrective actions should be taken and initiated. If performance does not meet the standard, it is duty of a manager to take corrective action and further help the organization to overcome any difficulty. The corrective action may be related to

 Revision of standard if they seem to be unattainable

 Revision of strategies, policies and procedures

 Additional employees training

 Greater motivation

 Change in the existing technique

TECHNIQUES OF MANAGERIAL CONTROL

The various techniques of managerial control may be classified into two broad categories:

1. Traditional techniques, and

2. Modern techniques.

Traditional Techniques: Traditional techniques are those which have been used by the companies for a long time now. However, these techniques have not become obsolete and are still being used by companies. These include:

(a) Personal observation

(b) Statistical reports

(c) Break- even analysis

(d) Budgetary control

Personal Observation: This is the most traditional method of control. Personal observation enables the manager to collect first hand information. It also creates a psychological pressure on the employees to perform well as they are aware that they are being observed personally on their job. However, it is a very time-consuming exercise and cannot effectively be used in all kinds of jobs.

Statistical Reports: Statistical analysis in the form of averages, percentages, ratios, correlation, etc., present useful information to the managers regarding performance of the organisation in various areas. It is presented in the form of charts, graphs and table etc which enables the managers to read them more easily and allow a comparison.

Break-even analysis is a technique used by managers to study the relationship between costs, volume and profits. It determines the probable profit and losses at different levels of activity. The sales volume at which there is no profit, no loss is known as break-even point. It is a useful technique for the managers as it helps in estimating profits at different levels of activities.

BUDGETARY CONTROL: 

A budget is a numerical or quantitative statement for a definite period of time for the purpose of obtaining a given objectives. Budgeting means the process of preparing budgets. Budgetary control is a technique of controlling the activities of an organization with the help of budgets. It involves the comparison of actual performance with the budgetary standards. Comparison reveals the reasons for variance to take corrective action to achieve the organizational objective. 

Following are the important types of budgets. 

Sales Budget: a statement of what an organization expects to sell in terms of quality as well as value. Production Budget: a statement of what an organization plans to produce in the budgeted period. Material budget: A statement of estimated quality and cost of materials required for production. Cash Budget: Anticipated Cash inflows and outflows for the budgeted period. 

Capital Budget: Estimated spending on major long term assets like new factory or major equipment. Research and Development Budget: Estimated spending for the development or refinement of products and processes. 

Advantages of Budgetary Control: 

1. Budgetary Control guides the management in planning and policy formation 

2. It facilitates ‘management by exception’ by identifying areas which require special attention 

3. It results the coordinated efforts of all individuals and departments of the organization. 

4. It aims maximization of profit through cost control and proper utilization of resources. 

5. It is a good guide to the management for making future plan. 

6. It minimizes wastages and losses and hence increases productivity. 

Modern Techniques :

Modern techniques of controlling are those which are of recent origin and are comparatively new in management literature. These include:

(a) Return on investment

(b) Ratio analysis

(c) Responsibility accounting

(d) Management audit

(e) PERT and CPM

(f ) Management information system

Return on Investment

Return on Investment (ROI) is a useful technique which provides the basic yardstick for measuring whether or not invested capital has been used effectively for generating reasonable amount of return. ROI can be used to measure overall performance of an organisation or of its individual departments or divisions. It can be calculated as under.

ROI - NET INCOME/SALES x SALES/TOTAL INVESTMENT = NET INCOME/TOTAL INVESTMENT

Net Income before or after tax may be used for making comparisons. Total investment includes both

working as well as fixed capital invested in business. According to this technique, ROI can be increased either by increasing sales volume proportionately more than total investment or by reducing total investment without having any reductions in sales volume.

ROI provides top management an effective means of control for measuring and comparing performance of different departments. It also permits departmental managers to find out the problem which affects ROI in an adverse manner.

Ratio Analysis

A ratio is an arithmetic expression of relationship between two figures. Ratio analysis refers to analysis of financial statements through computation of ratios. 

Commonly used accounting ratios are 

1. Liquidity Ratios: Liquidity ratios are calculated to determine short term solvency of business. Ie. Ability to meet short term obligation. Eg:- current ratio, quick ratio. 

2. Solvency ratios: Ratios which are calculated to determines the long term solvency of business are known as solvency ratios. Thus these ratios determine the ability of a business to service its indebtedness. Eg. Debt- equity ratio, proprietary ratio, Interest coverage ratio. 

3. Profitability Ratios: These ratios are calculated to analyses the profitability in relation to sales or capital investment in business. Eg: Gross profit ratio, Net profit ratio, Return on capital employed. 

4. Turn over Ratios/ Activity Ratios: It is calculated to determine the efficiency of operation based on effective utilization of resources. Higher turnover means better utilization of resources. Eg: Inventory Turnover Ratios, Stock Turnover ratio, Debtors Turnover Ratios

RESPONSIBILITY ACCOUNTING:

 It is a system of accounting in which different sections/ departments/divisions in an organization are taken as ‘Responsibility Centre’s’. The person in charge of a Centre is responsible for achieving the target fixed. Responsibility Centres are of the following types: 

1. Cost Centre/Expense Centre: Cost Centre is a segment of an organization in which mangers are held responsible for the cost incurred. In the Centre but not for the revenues. Eg. In a manufacturing organization, production department is classified as cost Centre. 

2. Revenue Centre: A revenue Centre is a segment of organization which is primary responsible for generating revenue. Eg:- Marketing department of an organization may be classified as a revenue Centre.

3. Profit Centre: A profit Centre is a segment of an organization whose manger is responsible for both revenues and costs. Eg. Repairs and maintenance department may be treated as a profit Centre provided it bills other departments in the organization for the services rendered to them. 

4. Investment Centre: This Centre is not only responsible for profit but for investment made in it in the terms of assets. The investment is separately calculated and return on investment is taken as the basis for judging the performance of the Centre  

MANAGEMENT AUDIT:

 Management Audit refers to systematic appraisal of the overall performance of the management of an organization. The purpose is to review the efficiency and effectiveness of management and to improve its performance in future periods. It is helps in identifying the deficiencies in the performance of the management function. Thus management audit may be defined as evaluation of the functioning , performance and effectiveness of management of an organization. 

Advantages of Management Audit: 

1. It helps to locate present and potential deficiencies in the performance of management function 

2. It suggests the ways and means of increasing managerial efficiency. 

3. It improves the coordination in the functioning of various department so that they work together effectively towards the achievement of organizational objectives. 

4. It ensures updating of existing managerial policies and strategies in the light of environmental changes.. Conducting this kind of audit may create problem as there is no standards for it. Also management audit is not compulsory under the law.  

NETWORK TECHNIQUES ( PERT & CPM) PERT (Programme Evaluation and Review Technique) and CPM (Critical Path method) 

these are important network techniques useful in planning and controlling. These techniques are especially useful for planning; scheduling and implementing time bound projects involving performance of a variety of complex, diverse and interrelated activities. Both are decision making tools assisting in project completion. These techniques concentrate on time scheduling and resource allocation and aim at effective project execution within the time frame and costs. 

Steps involved in using PERT/CPM 

1. Arrange all activities in a logical sequence 

2. A network diagram is prepared to show the sequences of activities, the starting point and termination point of the projects. 

3. Time estimates are prepared for each activity-PERT requires the preparation of three time estimates – Optimistic ( Shortest Time), Pessimistic ( Longest Time), and Most Likely Time. In CPM only one time estimates is required. But CPM insists on having cost estimates for completion of project. 

4. The Longest path in the network is identified the critical path. All activities lying in the critical path are called Critical activities. Critical path represents the sequences of those activities which are important for timely completion of the project. Any delay in completion of them will delay the project completion. 

5. Plan may be modified for prompt execution and timely completion of the project. PERT and CPM are used extensively in areas like ship building, construction projects, aircraft manufacture. Etc.

MANGEMENT INFORMATION SYSTEM (MIS)

Management Information System is a computer based information system that provides information and support for effective managerial decision making. MIS is an important communication tool for mangers. MIS is also serving as an important control technique. MIS provides the required information to the mangers at the right time so that appropriate corrective action may take in case of deviation from standards. 

Advantages of MIS 

1. It helps in planning , decision making and controlling in all levels 

2. It improves the quality of information with which a manger works 

3. It ensures cost effectiveness in managing information. 

4. Mangers are free from information overload. 

5. It facilitates collection and distribution of information among different levels of management.