Controlling is a major function of management that involves setting standards, measuring actual performance, and comparing the standards with actual performance to determine deviations. Organizations cannot do without control because it assists in regulating resources and reducing wastages in the firm. Management should establish effective control systems in the organization that should be timely, cost effective, accurate, acceptable by employees, and efficient in providing information. Controls can give information before, during or after the occurrence of an activity. This information enables management to take corrective action at the right time and avoid losses. Management can use budgets cost accounting and ratio analysis among other techniques to determine effectiveness of operations and identify areas that need corrective measures. Controlling is a wide function of management without which organizational success is not achievable. Therefore, this paper analyses the controlling function of management in its various dimensions.
Key Words: control, budget cost accounting, ratio analysis, and function of management
Among the basic functions of management outlined by Henri Fayol, is the controlling function of management. Control is about making things happen as earlier planned. The controlling function of management can be a key determinant to the success of an organization because it assists in making corrective action in case of deviations. Control has continued to gain significance in most modern organizations as complexity of work increases and many great companies fail because of lack of control. Controlling function majorly deals with feedback and adjustment processes. It involves setting standards, measuring actual performance, and comparing the standards to actual performance to identify deviations in order to take corrective measures (Griffun, 2007). Planning precedes the controlling function and these two functions work in parallel. Planning is about setting goals while controlling ensures establishment of goals by keeping track of any deviations. Controlling is a wide topic and this paper discusses the various dimensions of the control function of management including its characteristics, steps in the control system, types of control and control techniques among others.
Characteristics of control
An effective control system should be cost effective. The costs of installing and operating control systems in the organization should not outweigh the benefits from the system. If an organization uses too much control, it could be depressing to the organization because of the costs involved. For instance, controls for checking the behavior of employees in the organization should be effective in achieving the desired behavior. Controls also need to be timely so that they achieve their purpose (Murugan, 2004). When management notices deviations in the performance of organizations, they should take immediate measures to ensure that the progress is back on track. Management need to have information for comparisons on hand in order to take immediate corrective action as need arises.
Controls need to be accurate and concise in order to achieve their objective of minimizing deviations. Controls in the organization must provide quality information to management to ensure meaningful comparisons and establish deviations in the standards. Too much information with controls can be disastrous to management and therefore they have to be concise. In addition, people should be aware of the controls in place as they use them to avoid misunderstandings. Management needs to communicate the controls used in the organization to the affected employees so that they accept them and implement them as required. Besides, controls should focus on the key activities of the organization that affect overall organizational success. For example, controls should focus on how the organization uses its finances or how effective employees are in carrying out their duties.
Other features of the controlling function are that it is an end function. “It happens at the end after performance of a certain activity to determine if actual results met the set standards” (Anbuvalen, 2007, p.73). It is also forward looking because it aims at comparing the past results with the future results and determining deviations of future expectations. Additionally, controlling function is pervasive because managers use it at all levels in the organization hierarchy to determine any deviations and their causes in the organization. The function is also dynamic because it involves various aspects of management. It involves reviewing the processes in the organization and making constant changes to ensure that processes are on track. Finally, this function succeeds planning. Management start with establishing standards, which are like plans and then measuring actual performance in view of established standards.
Management utilizes four steps in the process of controlling to ensure organizational success. The first step involves establishing standards of performance. Performance standards serve as reference points that employees can use to evaluate outcomes and know what management expects from them (Certo, 2009). They assist employees in assessing their performance and they are useful in achieving organizational goals because employees know beforehand how they should behave. Standards can be tangible or intangible. Tangible standards should be measurable, specific, and clear; and they include monetary standards where management determines the amount of profit or costs that it expects. Time standards determine the speed with employees complete their jobs. For instance, the time set to complete a certain project. There are also numerical standards, which specify for instance, the number of items produced or sold. Intangible standards, on the other hand, involve human characteristics such as high morale or ethics.
After setting the standards, the next step involves measuring actual performance. Management should monitor and measure current performance against the set standards to ensure that there is compliance. Management should measure performance often against the expectations to ensure that deviations are detected early and corrective measures taken to accomplish the expected goals. Management can measure performance through personal observations inspections or having written and oral reports from employees to determine if they are meeting standards (Schermerhorn, 2011). Additionally, management can use automatic methods to determine if employees are meeting the expected standards of performance. A manager could for instance visit the premise without notice to find out how effectively employees are performing.
The next step involves comparing actual performance with the set standards to determine any deviations from expectations. Incase expected performance is below average, management should take a preventive corrective action to make sure performance meets expectations before a problem arises. Management should investigate all deviations to establish their causes so that they can take the necessary measures (Griffin, 2007). For example, in a manufacturing industry, sometimes the actual units produced may differ from the set standards. This deviation could be because of faulty machines and not inefficiency on the part of employees. Therefore, it would be wrong to blame employees for reduced production yet the cause is faulty machines. Performance could also be above standards and thus management should determine the cause for this situation. Management should check operating procedures to find out if employees are using them correctly or if they need improvements.
Finally, after analyzing the deviations, the controlling function enables management to take corrective action in order to get back on track. “This step could involve adjustments or fine-tuning to reset the performance according to standards” (Murugan, 2004, p.122). A dramatic action may be necessary and it could involve removing important tasks or maintaining standards. Although this step can be difficult for management, it is would get worse if ignored and thus management should handle any negative deviations fast and efficiently. For example, management may decide to use training programs for new employees that have not been performing as expected. Additionally, management can decide to shift employees to assist meet deadlines in other departments and ensure the organization meets its standards. Management can also take drastic measures such as rebuking employees for failure to follow safety rules or shut down defective machinery that have been performing below standards.
Types of controls
There are several types of controls used before, during and after a process. Controls established before the commencement of a process are referred to as feed forward controls. These preventive controls assist management to foresee problems and take corrective action before the problems occur. These controls focus on regulating organizational resources such as financial, human and material to make sure they meet the necessary standards. The problem with these controls is that they require accurate and timely information, which is often difficult to determine. An example of this control is when the team leader examines the quality and reliability of machines before going to the site.
“Concurrent controls take place while an activity is in progress” (Anbuvalen, 2007, p.212). They are sometimes referred to as screening controls because they involve checkpoints where management determines if to continue with the progress, stop working on the project or take corrective action. Concurrent controls involve monitoring an ongoing process to ensure that activities comply with organizational standards. They ensure that the work activities of employees produce the desired results. Since these controls involve monitoring ongoing tasks, they require an absolute understanding of the specific activities involved and their connection to the desired product. For instance, when the team leader monitors the performance of other members using the tools on the site, then he or she is applying the concurrent controls.
The last controls are feedback controls, which focus on the output after completion of an activity. Sometimes referred to as output controls, they are effective when feed forward or concurrent controls are expensive to use or are not feasible. Feedback controls assist managers to know how effective their planning was and motivates employees. For instance, if feedback indicates small variances then it means planning was on target. Consequently, if there were great variances between standards and actual performance, management can know how to plan effectively in the future. The major problem with this type of control is that it detects problems after damage has occurred. It corrects problems after their occurrence, which could cost the organization a great deal of its resources.
Management uses several control techniques to determine the compliance of actual performance to the set standards. Managers use budgets as a control technique to determine if they underestimated, correctly estimated or overestimated on their financial resources (Schermerhorn, 2011). Management also uses cost accounting methods, direct costing, standard costing and ratio analysis as control techniques. In my opinion, ratio analysis is the most effective control technique that management can use to determine conformity to expected standards.
Ratio analysis is a form of analyzing financial statements to get a quick indication of the financial performance of an organization in several critical areas. This technique is effective because information is readily available from the books of accounts that managers can use to determine performance over time. Ratios assist managers to compare their firm’s performance with that of the best in the industry and hence take corrective measures where necessary (Certo, 2009). They also assist managers to determine areas where performance has improved or worsened over time by making a trend analysis.
The various types of ratios that managers use for control include the profitability ratios. These ratios indicate the operational performance of the firm and its efficiency in using resources to make returns. They include ratios such as the net profit margin, gross profit margin and operating profit margin among others.
Liquidity ratios, on the other hand, indicate the ability of the firm to meet its short-term obligations as and when they fall due. They show the capability of the firm to remain solvent incase of distress. The most common liquidity ratios are the current ratio and quick ratio. Efficiency ratios indicate the efficiency of the firm in using its assets to generate sales for the organization. They enable management in determining the measures taken to utilize total assets, creditors and debtors to generate maximum sales.
The gearing ratios are another form of control that management uses in the organization. They indicate how effectively a firm is employing debt to meet long-term obligations. This ratio shows the leverage of the company and the potential risks that a firm is exposed to because of using long-term debt. The greater the amount of debt a firm holds, the greater is the financial risk of the firm (Griffin, 2007). These ratios assist investors in determining the level of a company’s risk. The other ratio is the investor ratio, which enable investors to assess the viability of firm as an investment option. They include the earnings per share ratio and the price earnings ratio.
Although ratio analysis is a useful tool for management to control the resources of the organization, it has its limitations. Ratio analysis uses past information to determine the performance of an organization yet users are interested in current and future information. Additionally, different firms operate in different industries affected by different environmental conditions and thus, ratio analysis may not be an effective tool in such a case. Therefore, to ensure effective controls, management should use ratio analysis only as a quick indicator of the performance of the organization.
Limitations of controlling
Despite being a crucial management function, controlling also has its problems. It is usually difficult to quantify human behavior because management may be subjective and imprecise when measuring physical characteristics. For example, employees in the organization could be performing according to standards but the controls in place may indicate otherwise. In such a situation, controls become ineffective. In addition, controls may transfer subjective inputs into numerical data leading the analyst to make incorrect appraisals (Murugan, 2004). For instance, a control may rank one employee at a point of 5.50 and consider this employee more effective than another one at 5.25 yet the two may have made decisions under different conditions. When objectives cannot be measured on quantitative terms, controls become ineffective because of difficulties in evaluating output.
Without controls in the organization, it is difficult to achieve efficiency and effectiveness. Controlling is a function of management that deals with setting standards, measuring actual performance and determining deviations from the expectations. Controlling involves establishing effective control systems. These systems should be accurate, timely, cost effective, focus on appropriate activities and be acceptable to the people they affect. The three types of controls include feed forward, concurrent and feedback controls. In my opinion, the feedback controls are the most effective because they provide management with information on where to make improvements or where to retain the performance. Among the many techniques of control, I would prefer ratio analysis because it gives management sufficient information on the areas to make improvements. However, managers should use controls wisely because they can be inefficient if misused.
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