CO N TRO L L ING

FUNCTION OF MANAGEMENT

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A news report indicated that the fire
which destroyed the Php 800 million
Superferry 7 luxury ship in March 26,
1997 was caused by illegal connections
made on its electrical system. If this is
true, the losses could be attributed to
inadequate management control.

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The tragedy happened at the Ozone
Disco in March 28, 1996 clearly
manifested management’s lack of
control over the day-to-day operations
of the firm. Even the failure to detect
earlier the violations in the Building
Code spells lack of effective
government control.

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 What is 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.”
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 Importance of
CONTROLLING?

1. If properly implemented, organization will

achieve its goal in the most efficient and
effective manner.

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 Importance of
CONTROLLING?

2. Proper control measures minimize the ill

effects of deviations, shortcomings, and
mistakes.

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 Steps in the
CONTROL PROCESS
Taking
necessary
Comparing actions
actual versus based on
Measuring objectives & results
actual standards
Performance performance
objectives &
standards

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 Establishing
Pe r f o r m a n c e & S t a n d a r d s
Sales Target (monetary/quantity)

Production Target (quantity/quality)

Worker Attendance (rate of absences)

Safety Record (number of accidents for a given period)

Supplies used (quantity/monetary for a given period)

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 Establishing
Pe r f o r m a n c e & S t a n d a r d s

Constructio • e.g. Project completion dates,

n firms milestones
Chemical • e.g. Pollution measures
firms

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 Measuring
Ac t u a l Pe r f o rm a n c e

• Certain adjustments shall be made

when shortcomings occur - depends on
actual findings
• Measuring tools will vary from
organization to organization (e.g. annual
growth rate, market share approach and
position) – depend on goals
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 ComparingActual to
Objectives and Standards
• Actual production versus Target Output
• To illustrate:
A construction firm entered into a contract
with the government to construct a 100-km
road within ten months. It would be then
reasonable for the management to expect at
least 10 km road every month.

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Ta ke n e c e s s a r y A c t i o n

• If found out that only 15 km where

finished in 2 months you may:
1. Hire additional personnel,
2. Use more equipment, or
3. Require overtime.

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 TYPES OF CONTROL
1 FEEDFORWARD CONTROL
• Management anticipates problems and prevents their occurence
• The required human and nonhuman resources is already in-place before
operations
2 CONCURRENT CONTROL
• Operations are already on-going to detect variances
• Deviations happen during production process
• Adjustments made shall be an input during pre-operation phase
3 FEEDBACK CONTROL
• About completion, evaluation and steps for improvement,
feedback control is undertaken

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 Components of Organizational
Control System

1. STRATEGIC PLAN
2. LONG-RANGE FINANCIAL PLAN
3. OPERATING BUDGET
4. PERFORMANCE APPRAISALS
5. STATISTICAL REPORTS
6. POLICIES & PROCEDURES

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Components of Organizational
Control System

1.STRATEGIC PLAN
 Basic control mechanism
 Set aside, modified or expanded

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Components of Organizational
Control System

2. LONG-RANGE FINANCIAL PLAN

 Most firms are satisfied with one year
 Engineering firms will require longer
(long-lead capital projects)
Light Rail Transit (LRT) construction within 3
years

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Components of Organizational
Control System

3. OPERATING BUDGET
 Indicates expenditures, revenues, or profits
planned for some future period
 Figures used are standard measurements for
performance

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Components of Organizational
Control System

4. PERFORMANCE APPRAISALS
 Measures employee performance
 Guides the employees how to do better in
the future
 Effective checks on new policies and
programs

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Components of Organizational
Control System

5. STATISTICAL REPORTS
 contains data on various developments within the firm
Labor efficiency rates
Quality control rejects
Accounts receivable
Accounts payable
Sales reports
Accident reports
Power consumption reports

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 Sample Statistical Report

MORNING STAR CHEMICAL CORPORATION

Power Consumption Report
For the FIRST QUARTER 1997
By Department (in KWH)

Departme
January February March Total
nt
A 1000 1100 1200 3300
B 900 1400 1010 3310
C 1180 1650 1200 4030
D 500 1100 600 2200
E 600 455 632 1687
Total 4180 5705 4642 14527 21
Components of Organizational
Control System

6. POLICIES & PROCEDURES

 POLICIES – framework within which the
objectives must be pursued
 PROCEDURES – containes exact series of
actions

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Strategic Control System

FINANCIAL
ANALYSIS
FINANCIAL
RATIO
ANALYSIS 23
 Fi n a n c i a l A n a l y s i s
• Success of organization depends on
the financial performanc
• Review of financial statements
• BALANCE SHEET
• INCOME STATEMENT

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Fi n a n c i a l A n a l y s i s

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Fi n a n c i a l R a t i o A n a l y s i s
• More elaborate approach in controlling
• Category:
1. Liquidity
2. Efficiency
3. Financial leverage
4. Profitability

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Fi n a n c i a l R a t i o A n a l y s i s
LIQUIDITY RATIOS
 Assesses the ability of the company to meet its current
obligation

Current Ratio – shows the extent of the current

assets to cover the current liabilities

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Fi n a n c i a l R a t i o A n a l y s i s
LIQUIDITY RATIOS
 Assesses the ability of the company to meet its current
obligation

Acid Test Ratio – measure firm’s ability to pay off

short-term obligations with use of the current assets
and without relying on the sales of inventories

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Fi n a n c i a l R a t i o A n a l y s i s
EFFICIENCY RATIOS
 Shows how effectively certain assets or liabilities are
being used in the production of goods and services

 Inventory Turnover Ratio – measures the number of

times the inventory is turned over (or sold) each
year

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Fi n a n c i a l R a t i o A n a l y s i s
EFFICIENCY RATIOS
 Shows how effectively certain assets or liabilities are
being used in the production of goods and services

 Fixed Asset Turnover– used to measure utilization

of the company’s investment in its fixed assets

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Fi n a n c i a l R a t i o A n a l y s i s
FINANCIAL LEVERAGE RATIOS
 Designed to assess financing obtained thought debt
and equity sources

 Debts to total assets ratio – shows how much of

the firm’s assets are financed by debts

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Fi n a n c i a l R a t i o A n a l y s i s
FINANCIAL LEVERAGE RATIOS
 Designed to assess financing obtained thought debt
and equity sources

 Times interest earned ratio – measures the number

of times the earnings before interest and taxes
cover or exceed the company’s

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Fi n a n c i a l R a t i o A n a l y s i s
PROFITABILITY RATIOS
 Measure how much operating income or net income a
company is able to generate in relation to assets,
owner’s equity, and sales

 Profit Margin Ratio – compares the net profit to the

level of sales

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Fi n a n c i a l R a t i o A n a l y s i s
PROFITABILITY RATIOS
 Measure how much operating income or net income a
company is able to generate in relation to assets,
owner’s equity, and sales

 Return on Assets Ratio – shows how much income

the company produces for every peso invested in
assets

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Fi n a n c i a l R a t i o A n a l y s i s
PROFITABILITY RATIOS
 Measure how much operating income or net income a
company is able to generate in relation to assets,
owner’s equity, and sales

 Return on Equity Ratio – measures the returns on

the owner’s investment

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Identifying Control Problems
• Kreitner mentions three (3) approaches:
1. Executive Reality Check
2. Comprehensive Internal Audit
3. Symptoms of Inadequate Control

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