Hello everyone, in the previous topic we were talking about Budgeting in Management. Today we are going to talk about Controlling in management, its importance, characteristics, and types.

WHAT IS CONTROLLING?

INTRODUCTION

Controlling is one of the important functions of a manager. In order to seek planned results from the subordinates, a manager needs to exercise effective control over the activities of the subordinates.

In other words, controlling means ensuring that activities in an organization are performed as per the plans. Controlling also ensures that an organization’s resources are being used effectively and efficiently for the achievement of predetermined goals. Controlling is, thus, a goal-oriented function.

The controlling function of a manager is a pervasive function. It is a primary function of every manager. Managers at all levels of management- top, middle, and lower-need to perform controlling functions to keep control over activities in their areas.

Moreover, controlling is as much required in an educational institution, military, hospital, and club as in any business organization.

Controlling should not be misunderstood as the last function of management. It is a function that brings the management cycle back to the planning function. The controlling function finds out how far actual performance deviates from standards, analyses the causes of such deviations, and attempts to take corrective actions based on the same.

This process helps in the formulation of future plans in the light of the problems that were identified and, thus, helps in better planning in the future periods. Thus, controlling only completes one cycle of the management process and improves planning in the next cycle.

Some of the leading definitions of the word “CONTROLLING” are quoted below-

According to EFL Brech, “Control is checking current performance against pre-determined standards contained in the plans, with a view to ensure adequate progress and satisfactory performance”.

According to Harold Koontz, “Controlling is the measurement and correction of performance in order to make sure that enterprise objectives and the plans devised to attain them are accomplished”.

According to Robert J. Mockler, “Management control can be defined as a systematic torture by business management to compare performance to predetermined standards, plans, or objectives in order to determine whether performance is in line with these standards and presumably in order to take any remedial action required to see that human and other corporate resources are being used in the most effective and efficient way possible in achieving corporate objectives”.

IMPORTANCE OF CONTROLLING

Control is an indispensable function of management. Without control, the best of plans can go away. A good control system helps an organization in the following ways:-

1. Accomplishing organizational goals

The controlling function measures progress towards the organizational goals and bring to light the deviations, if any, and indicates corrective action. It thus guides the organization and keeps it on the right track so that organizational goals might be achieved.

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 organization 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. Each activity is performed in accordance with predetermined standards and norms. 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 organization. It helps to minimize dishonest behavior on the part of the employees by keeping a close check on their activities. The box explains how an import-export company was able to track dishonest employees by using computer monitoring as a part of their control system.

6. Facilitating coordination in action

Controlling provides direction to all activities and efforts for achieving organizational goals. Each department and employee is governed by predetermined standards which are well coordinated with one another. This ensures that overall organizational objectives are accomplished.

CHARACTERISTIC OF CONTROLLING

The characteristic of controlling is as follow:-

1. Control is a Management Function

In management, there are various functions like planning, directing, staffing, organizing, and controlling. Controlling is one of the essential functions without which all other functions are rendered meaningless.

2. Control is a Continuous Activity

Controlling is not a single time activity but instead a continuous process that involves a timely review of performances and results in corrective action.

3. Control is related to Results

The assessment of progress is based on the results. Any deviation from the required results control has to be incorporated to take corrective actions.

4. Control is both backward and forward-looking

We compare the performance with the standards which are set during the planning and processing. The past data or activities are used for the analysis of deviations, hence control is backward-looking. Control is also related to the future as past activities cannot be controlled. The data analyzed is used to take corrective measures in the future. Hence, it is also a forward-looking process.

TYPES OF CONTROLLING

The various types of managerial control may be classified into two broad categories i.e. traditional techniques, and modern techniques.

A. Traditional Techniques

Traditional techniques are the techniques that have been used by companies for a long time. However, these techniques have not become obsolete and are still being used by companies.

These include-

1. Personal Observation

This is the most traditional method of controlling. Personal observation enables the manager to collect first-hand information. It also creates 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.

2. Statistical Reports

Statistical Reports are the analysis in the form of averages, percentages, ratios; correlation, etc. It presents useful information to the managers regarding the performance of the organization in various areas. Such information when presented in the form of charts, graphs, tables, etc., enables the managers to read them more easily and allow a comparison to be made with performance in previous periods and also with the benchmarks.

3. Breakeven Analysis

Breakeven 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 the breakeven point. It is a useful technique for managers as it helps in estimating profits at different levels of activities.

     Break-even-point can be calculated with the help of the following formula-

Break-even-point = Fixed Costs Selling price per unit – Variable cost per unit

4. Budgetary Control

Budgetary control is a technique of managerial control in which all operations are planned in advance in the form of budgets and actual results are compared with budgetary standards. This comparison reveals the necessary actions to be taken so that organizational objectives are accomplished.

A budget is a quantitative statement for a definite future period of time for the purpose of obtaining a given objective. It is also a statement that reflects the policy of that particular period. It will contain figures of forecasts both in terms of time and quantities. It shows the most common types of budgets used by an organization.

B. Modern Techniques

Modern techniques of control are those which are of recent origin and are comparatively new in management literature. These techniques provide refreshingly new thinking on the ways in which various aspects of an organization can be controlled. These include-

1. Return on Investment

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

ROI=Net Income/ Sales * Sales/ Total Investment

Net Income before or after-tax can be used for making comparisons. The total investment includes both working as well as fixed capital invested in the 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 the performance of different departments. It also permits departmental managers to find out the problem which affects ROI in an adverse manner.

2. Ratio Analysis

Ratio Analysis refers to the analysis of financial statements through the computation of ratios. The most commonly used ratios used by organizations can be classified into the following categories-

• Liquidity Ratios

Liquidity ratios are calculated to determine the short-term solvency of a business. Analysis of the current position of liquid funds determines the ability of the business to pay the amount due to its stakeholders.

• Solvency Ratios

Ratios that are calculated to determine the long-term solvency of a business are known as solvency ratios. Thus, these ratios determine the ability of a business to service its indebtedness.

• Profitability Ratios

These ratios are calculated to analyze the profitability position of a business. Such ratios involve analysis of profits in relation to sales or funds or capital employed.

• Turnover Ratios

Turnover ratios are calculated to determine the efficiency of operations based on the effective utilization of resources. Higher turnover means better utilization of resources.

3. Responsibility Accounting

Responsibility Accounting is a system of accounting in which different sections, divisions, and departments of an organization are set up as ‘Responsibility Centers’. The head of the center is responsible for achieving the target set for their center.

Responsibility center may be of the following types-

• Cost Center

A cost or expense center is a segment of an organization in which managers are held responsible for the cost incurred in the center but not for the revenues. For example, in a manufacturing organization, the production department is classified as a cost center.

• Revenue Center

A revenue center is a segment of an organization that is primarily responsible for generating revenue. For example, the marketing department of an organization may be classified as a revenue center.

• Profit Center

A profit center is a segment of an organization whose manager is responsible for both revenues and costs. For example, the repair and maintenance department of an organization may be treated as a profit center if it is allowed to bill other production departments for the services provided to them.

• Investment Centre

An investment center is responsible not only for profits but also for investments made in the center in the form of assets. The investment made in each center is separately ascertained and return on investment is used as a basis for judging the performance of the center.

4. 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.

5. PERT and CPPM

PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are important network techniques useful in planning and controlling. These techniques are especially useful for planning; scheduling and implementing time-bound projects involving the performance of a variety of complex, diverse, and interrelated activities. These techniques deal with time scheduling and resource allocation for these activities and aim at effective execution of projects within a given time schedule and structure of costs.

So, that is all for today guys see you in our next blog. If you like our article please doesn’t forget to share with others & follow our Instagram page for your daily dose of Motivation.

Thank You,

Regards

Grooming Urban

General FAQ