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CONTROLLING

Definition: 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.

Importance of Controlling

When controlling is properly implemented, it will help the organization achieve its goal
in the most efficient and effective manner possible. Deviations, mistakes, and shortcomings
happen inevitably. When they occur in the daily operations, they contribute to unnecessary
expenditures which increase the cost of producing goods and services. Proper control measures
minimize the ill effects of such negative occurrences. And effective inventory control system, for
instance, minimizes, if not totally eliminates losses inventory. Steps in the Control Process.

Steps in the Control Process

1. Establishing Performance Objectives and Standards

-What has to be achieved, must first be determined.

2. Measuring Actual Performance

-Measuring actual performance is important so that adjustments can be made when

shortcomings occur.

3. Comparing Actual Performance to Objectives and Standards; and

-When actual performance has been determined, it will be compared with what the
organization seeks to achieve.

4. Taking Necessary Action

 -This is important to be able to make necessary actions when there is a problem between
the actual performance and what the management seeks to achieve.

Types of Controls

1. Feedforward Control
-used when management anticipates problems and prevents their occurrence. This
type of control provides the assurance that the required human and nonhuman
resources are in place before operations begin.
2. Concurrent Control

-this is undertaken when operations are already ongoing and measures to detect
variances are already made.

3. Feedback Control
-feedback control is undertaken when information is gathered about a completed
activity for purposes of evaluating and deriving required steps for improving the
activity. It is concerned with corrective actions aimed at improving future
activities.

Components of Organizational Control Systems

1. Strategic Plan
2. Long-Range Financial Plan
3. The Operating Budget
4. Performance Appraisal
5. Statistical Reports
6. Policies and Procedures

Strategic Control Systems

1. Financial Analysis
 -It is necessary that certain measurements of financial performance be made so
that whenever deviations from standards are found out, corrective actions may be
introduced.

2. Financial Ratio Analysis

- Under this method, one account appearing in the financial statement is paired
with another to constitute a ratio. The result is compared with a required
norm, which is usually related to what other companies in the industry have
achieved or what the company has achieved in the past.
Categories of Financial Ratio:
a. Liquidity Ratios- used to assess the ability of a company to meet its current
obligations.
i. Current Ratio = current assets / current liabilities
ii. Acid-Test Ratio= currents assets – inventories / current liabilities
b. Efficiency Ratios
i. Inventory Turnover Ratio = cost of goods sold / inventory
ii. Fixed Assets Turnover = net sales / net fixed assets
c. Financial Leverage Turnover- grouping of ratios designed to assess the balance of
financing obtained through debt and equity souces.
i. Debt to Total Assets Ratio = total debt / total assets
profit before tax + interest expense
ii. Times Interest Earned Ratio =
Interest expenses
d. Profitability Ratios- these ratios measure how much operating income or net
income a company is able to generate in relation to its assets, owner’s equity and
sales.
i. Profit Margin Ratio = net profit / net sales
ii. Return on Asset Ratio = net income / assets
iii. Return on Equity Ratio = net income / equity

Identifying Control Problems

1. Executive Reality Check. Manager or the top management could perform the work of one
of his laborers to really know what is happening.
2. Comprehensive Internal Audit. This is undertaken to determine the efficiency and
effectiveness of the activities of an organization.
3. Symptoms of Inadequate Control. This is used when a comprehensive internal audit
cannot be availed of for some reason.

Symptoms of Inadequate control:

a. An unexplained decline in revenues and profits
b. A degradation of service (costumer complaints).
c. Employee dissatisfaction (complaints, grievances, turnover).
d. Cash shortages caused by bloated inventories or delinquent accounts receivable.
e. Idle facilities or personnel.
f. Disorganized operations (work flow bottlenecks, excessive paperwork).
g. Excessive costs.
h. Evidence of waste and inefficiency (scrap, rework)