Principles of Management

Basic Elements of Control

MGT-211 (Sec-06)
The Nature of Control in
Organizations
⚫ Control
⚫ The regulation of organizational activities so that some
targeted element of performance remains within
acceptable limits.
⚫ Provides organizations with indications of how well they
are performing in relation to their goals.
⚫ Control provides a mechanism for adjusting
performance to keep organizations moving in the right
direction.

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The Nature of Control in
Organizations (cont’d)
⚫ The Purpose of Control
⚫ Control is one of the four basic management functions.
The control function, in turn, has four basic purposes.

Adapt to environmental Limit the accumulation of error

change

Control helps the organization

Cope with organizational complexity Minimize costs

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The Nature of Control in
Organizations (cont’d)
⚫ Types of Controls
⚫ Areas of Control
⚫ Physical resources—inventory management, quality
control, and equipment control.
⚫ Human resources—selection and placement, training and
development, performance appraisal, and compensation.
⚫ Information resources—sales and marketing forecasts,
environmental analysis, public relations, production
scheduling, and economic forecasting.
⚫ Financial resources—managing capital funds and cash
flow, collection and payment of debts.

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The Nature of Control in
Organizations (cont’d)
⚫ Types of Controls (cont’d)
⚫ Levels of Control

Strategi
ccontro
l

Structura
l contro
l

Operation Financial
s contro contro
l l

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The Nature of Control in
Organizations (cont’d)
⚫ Types of Controls (cont’d)
⚫ Responsibilities for Control
⚫ Controller—a position in organizations
that helps line managers with
their control activities.

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The Nature of Control in
Organizations (cont’d)
⚫ Steps in the Control Process

1 2 3 4
Compar Determine
Establis Measur
e erformance
p need
for
h
standard e
performanc
against corrective
s e
standards action

Maintain Correct Chang

the
status the
deviatio e
standard
quo n s

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The Nature of Control in
Organizations (cont’d)
⚫ Steps in the Control Process (cont’d)
⚫ Establish Standards
⚫ Control standard—a target against which subsequent
performance will be compared.
⚫ Measure Performance
⚫ Performance measurement is a constant, ongoing process.

⚫ Performance measures must be valid indicators (e.g., sales,

costs, units produced) of performance.

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The Nature of Control in
Organizations (cont’d)
⚫ Steps in the Control Process (cont’d)
⚫ Compare Performance Against Standards
⚫ Define what is a permissible deviation from the performance
standard.
⚫ Utilize the appropriate timetable for measurement.
⚫ Determine the Need for Corrective Action
⚫ Maintain the status quo (do nothing).

⚫ Correct the deviation to bring operations into compliance

with the standard.
⚫ Change the standard if it was set too high or too low.

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The Nature of Control in
Organizations (cont’d)
⚫ Operations Control
Feedbac
k

Inputs Transformation Outputs

Preliminary Screening Postaction

control
Focus is on inputs control
Focus is on how control
Focus is on outputs
to the organizational inputs are being from the organiza-
syste transformed into tional system
m output
s

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Financial Control
⚫ Financial Control
⚫ Control of financial resources (i.e., revenues,
shareholder investment) as they flow into the
organization, are held by the organization (i.e., working
capital, retained earnings), and flow out of the
organization (i.e., payment of expenses).

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Financial Control (cont’d)
⚫ Financial Control
⚫ Budgetary Control
⚫ Budgets may be established at any organizational level.
⚫ Budgets are typically for one year or less.
⚫ Budgets may be expressed in financial terms, units of output,
or other quantifiable factors.
⚫ Budgets serve four purposes:
⚫ Help managers coordinate resources and projects.
⚫ Help define the established standards for control.
⚫ Provide guidelines about the organization’s resources and
expectations.
⚫ Enable the organization to evaluate the performance of managers and
organizational units.

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Financial Control (cont’d)
⚫ Types of Budgets

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Financial Control
⚫ Types of Budgets (cont’d) (cont’d)

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Financial Control
⚫ Types of Budgets (cont’d)
(cont’d)

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Other Tools of Financial Control
⚫ Financial Statements
⚫ Financial statement is a profile of some aspect of an
organization’s financial circumstances.
⚫ Balance sheet
⚫ A listing of assets (current and fixed), liabilities (short- and
long-term), and stockholders’ equity at a specific point in time
(typically, year-ending) that summarizes the financial
condition of the organization.
⚫ Income statement
⚫ Summary of financial performance—revenues less expenses as
net income (i.e., profit or loss)—over a period of time, usually
one year.

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Other Tools of Financial Control
(cont’d)
⚫ Ratio Analysis
⚫ The calculation of one or more financial ratios to assess
some aspect of the organization’s financial health.
⚫ Financial Audits
⚫ Audit—an independent appraisal of an organization’s
accounting, financial, and operational systems.
⚫ External audits—financial appraisals conducted by experts
who are not employees of the organization to verify to
external parties that the organization’s financial and
accounting procedures are legal and proper.
⚫ Internal audits—appraisals conducted by employees of the
organization to determine the accuracy, efficiency, and
appropriateness of financial and accounting procedures.

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Structural Control
⚫ Bureaucratic Control
⚫ A form of organizational control characterized by formal
and mechanistic structural arrangements.
⚫ Decentralized Control
⚫ An approach to organizational
control characterized by
informal and organic
structural arrangements.

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