Chapter 7: Controlling

Controlling, sometimes referred to as the Terminal Management Functions, takes place after other
functions have been completed. Controlling is most closely associated with planning, because planning
establishes goals and the methods for achieving them. Controlling investigates whether planning was
successful.

The Time Elements in Control

1. Preventive Controls – takes place prior to the performance of the activity. It prevents problems
that result from deviation to performance standards. Preventive controls are generally the most
cost-effective.
2. Concurrent Controls – monitor activities while they are carried out. A typical concurrent control
takes place when a supervisor observes performance, spots a deviation from standard, and
immediately makes a constructive suggestion.
3. Feedback Controls – evaluate an activity after it is performed. Feedback controls measure history
pointing out what went wrong in the past. The process if applying this control may provide
guidelines for future corrective action.

Four (4) Steps in Control Process

1. Setting the Performance Standards

A control system begins with the set of performance standards that are realistic and acceptable to the
people involved. A standard is a unit of measurement used to evaluate results. Standards can be
quantitative such as cost of sales, profits or time to complete an activity. It can also be qualitative such as
viewer’s perception of the visual appeal of an advertisement.

2. Measuring the Performance

To implement the control system, performance must be measured. Performance evaluations are one of the
major ways of measuring performance. Supervisors often make direct observations of performance to
implement a control system.

3. Comparing Actual Performance to Standards

After establishing standards and taking performance measurements, the next step is to actually compare
performance to standards. Key aspects of comparing performance to standard include measuring the
deviation and communicating information about it.

Deviation in a control system indicates the size of the discrepancy between performance standards and
actual results. It is important to agree beforehand how much deviation from the standard is the basis for
corrective action.

4. Taking Corrective Action

An evaluation of the discrepancy between actual performance and a standard presents a manager with the
three courses of actions: do nothing, solve the problem, or revise the standard.

NONBUDGETARY CONTROL TECHNIQUES

One way pf classifying technique is to divide them into two categories: those based on budgets and those
not based on budgets. Nonbudgetary techniques are classified into two types: Qualitative control
techniques and Quantitative control techniques.

 Qualitative Control Techniques – are methods based on human judgements about performance
that result in a verbal rather than a numerical evaluation. For example, customer service might be
rated as “outstanding.”
 Quantitative Control Techniques – are methods based on numerical measures of performance,
such as number of orders processed per hour.

BUDGETARY CONTROL TECHNIQUES

A budget is a plan, expressed in numerical terms, for allocating resources. The numerical terms typically
refer to money, but they could also refer to such things as the amount of energy or the number of laser
cartridges used. A budget typically involves cash outflow and inflow.

Types of Budgets

a. Fixed budget – allocates expenditures based on a one-time allocation of resources. The

organizational unit receives a fixed sum of money that must last for the budget period.
b. Flexible budget – allows for variation in the use of resources on the basis of activity. Under a
flexible budget, for example, an e-commerce department would receive an increased information
technology budget if the department increased the scope of its program.

FINANCIAL RATIOS AND THE CONTROL PROCESS

A more advanced method of using budgets for control is to use financial ratios guidelines for
performance. Four such ratios are presented here.

1. Gross Profit Margin – is expressed as the difference between sales and the cost of goods sold,
divided by sales.

Formula:
Gross Profit Margin = (Sales-Cost of Goods Sold)/Sales x 100

Example:
Zagu earned a total sales of PHP 12,000,000 for the year 2015. The total cost of goods sold for
the year reached up to PHP 9,000,000. Find the Gross Profit Margin.

Computation:
Gross Profit Margin = (Sales-Cost of Goods Sold)/Sales x 100
 Gross Profit Margin = (12,000,000 – 9,000,000)/12,000,000 x 100
Gross Profit Margin = (3,000,000)/12,000,000 x 100
Gross Profit Margin = 0.25 or 25%

2. Profit Margin – also known as Return on Sales, it measures profit earned per dollar of sales as
well as the efficiency of the operation. In the business press, the profit margin is usually referred
to as simply the margin; it is calculated as the profit divided by sales.

Formula:
Profit Margin = Net Income/Sales x 100

Example:
Zagu with its PHP 12,000,000 total sales for year 2015 had a Net Income of PHP 600,000
reflecting on its Income Statement. Compute the Profit Margin.

Computation:
Profit Margin = (Net Income/Sales) x 100
Profit Margin = 600,000/12,000,000 x 100
Profit Margin = 0.05 or 5%

3. Return on Equity – is an indicator of how much a firm is earning on its investment. It is the ratio
of net income to the owner’s equity.

Formula:
Return on Equity = (Net Income/Owner’s Equity) x 100

Example:
Assume that the owner of Zagu invested PHP 15,000,000 for the business and that the net Income
for the year 2015 is PHP 600,000.

Computation:
Return on Equity = Net Income/Owner’s Equity x 100
Return on Equity = 600,000/15,000,000 x 100
Return on Equity = 0.04 or 4%

4. Revenue per Employee – a simple financial ratio that is widely used by business managers is
revenue per employee expressed as:
Formula:
Revenue per Employee = Total Revenues/Number of Employees

Example:
Zagu has a total number of 150 employees including the outlet vendors, sales and marketing staff
and purchasing and logistics officers. With its PHP 12,000,000 total revenue for 2015, find the
Revenue per Employee.
 Computation:
Revenue per Employee = 12,000,000/150
Revenue per Employee = 80,000

The ratios presented above offer a traditional view of the financial health of an organization because they
emphasize earning a profit. Many starts-up in the telecommunication, information technology, and
biotechnology fields with revenues far below their expenses pay salaries and other expenses out of
investor capital. Dozens of other companies do not pay their bills at all because they lack necessary cash.
Without cash to pay bills and profits to pay investor, most companies eventually fail. Ratios such as profit
margin and return on equity are still relevant in today’s economy.

Characteristics of Effective Control

1. The controls must be accepted

2. The control measures must be appropriate and meaningful
3. The control measure provides diagnostic information
4. The controls allow for self-feedback and self-control
5. The control systems provide timely information
6. The control measures are more effective when employees have control over the results measured
7. The control measures do not contradict with each other
8. The controls allow for random variations from standard
9. The controls are cost-effective
10. The controls do not limit innovation