Definition and Nature of Management Control
Controlling – a management function involves ensuring the work performance of the organization’s members are
aligned with the organization’s values and standards through monitoring, comparing, and correcting their actions
Standard – any established measure of extent quantity, quality, or value
Importance of Management Control
Management control -makes sure that the firm’s operating cash flow is sufficient, efficient, and, if possible, profitable
when invested.
Working capital, when properly controlled, must be adequate enough for daily operations such as financing,
inventories, credit payments to suppliers, reinvestment of cash surplus, and salaries of employees, or, in general,
maintaining an acceptable capital structure.
The Control Process
Control techniques- used for controlling financial resources, office management, quality assurance, and others are
essentially the same. The typical control process involves establishing standards, measuring and reporting actual
performance, and comparing it with standards, and taking action. Establishing standards means setting criteria for
performance. Managers must identify priority activities that have to be controlled, followed by determining how these
activities must be properly sequenced. In doing so, managers will be able to set key performance standards that need to
be achieved.
Measuring and reporting actual performance and comparing it with set standards is essentially the monitoring of
performance. To be able to do this, managers must develop appropriate information systems which will help them
identify, collect, organize, and disseminate information. Managers are able to control facts and figures called data, and
information, which have been given meaning and considered to have value. Analyses of data/information gathered
measure actual performance and comparing it with set standards serves as a means for detecting deviations. Deviations
must be revealed as early as possible in order to correct them. Taking action involves the correction of deviations from
set standards. This activity clearly shows the control function of management. Managers may rectify deviations by
modifying their plans or goals, by improving the training of employees, by firing inefficient subordinates, or by practicing
more effective leadership techniques.
LESSON 2 -The Link between Planning and Controlling
Control is integrated planning. Planning involves a thorough process which is essential to the creation and refinement of
a blue print or its integration with other plans that may combine forecasting of developments in preparation for future
scenarios.
As one plans, the elements of control immediately take place to consider how every turnout of the plan may be
evaluated and rectified. On a periodic basis, it is useful to create a pro forma financial statement which serves as a
forecast of the balance sheet, income statement, and cash flow statement in order to make projections. This may be
used as an aid to present plans to creditors and future investors, but, primarily, it is used for internal planning and control
purposes.
The Balance Sheet Balance sheet -is a financial statement which is defined by most accounting books as the “snapshot”
of any entity’s financial condition because it presents the financial balances of a particular period. It follows a pro forma
accounting entry: A = L + C, or that the total assets (A) must be equivalent to the aggregate summation of liabilities (L)
and capital (C) or owners’ equity.
Thus, others may also call this as either the statement of financial position or statement of condition. The asset side
keeps track of all the properties, tangible and intangible, owned by the organization, while the other side (liabilities)
records all the obligations to settle and actual capitalization of the firm. It must be noted that there must always be a
dual entry respective of the account titles. For newly established smaller business organizations with budget constraints,
planning and control starts with available dedicated capital which needs monitoring and would serve as the budget with
posting entry in the balance sheet as cash and owner’s equity. For example, one who has a 500,000 capitalization may
have a pro forma entry of:
Assets Liabilities and Equities
Cash on hand xxxxx Accounts Payable xxxxx
Marketable Securities xxxxx Accruals xxxxx
Prepaid Expenses xxxxx Total Current Liabilities xxxxx
Accounts Receivable xxxxx
Total Currrent Assets xxxxx Long Term Debts xxxxx
Mortgages xxxxx
Property and Equipment xxxxx Total Long-term Liabilities xxxxx
Land xxxxx Total Liabilities xxxxx
Total Fixed Assets xxxxx
Debit Cash ₱500,000
Credit Owner’s Capital ₱500,000
For this setup, with the assumption that the capital is all in cash, the latter amount may diminish
depending on what was spent for. Assuming you would purchase equipment to be used in the business amounting to
100,000, you would now have:
Assets Liabilities and Capital
Cash......................................... 400,000 Owner’s Capital................................ 500,000
Equipment ............................ 100,000
Total Assets ........................... 500,000 Total Liabilities and Capital .......... 500,000
One has to note that it did not change the total amount of capital which is 500,000 since it was just deducted
from cash. The pro forma accounting entry which is Assets = Liabilities plus Capital is still intact and balanced on both
sides. Further, if you placed orders or suppliers on credit terms or for future payments amounting to 30,000:
Assets Liabilities and Capital
Cash................................... 400,000 Owner’s Capital................................ 500,000
Equipment ...................... 100,000 Accounts Payable ............................... 30,000
Supplies............................. 30,000
Total Assets ..................... 530,000 Total Liabilities and Capital .......... 530,000
The presentation on the balance sheet would clearly state what had been the allocation of the capital in its
business operation. Thus, its appearance may depend on how the entity plans to progress, but through strict monitoring
and recording, a simple control function is applied and implemented. However, the account titles must be in accordance
to its liquidity.
Income Statement
The income statement - is also known as the profit and loss statement, revenue and expenses statement,
statement of financial performance, or earnings statement. It displays the cost and expenses charged to recognize
revenues in a specific period. Basically, it shows whether the company made money or lost money.
Any business entity in progress may incur expenses and later on garner income or profit. Its pro forma statement
may start on how many units of quantity it plans to sell in a given period. For example, if the final product would cost 50
each for sale in the market and the projected number of units to be sold would be 1,000, it would follow that the gross
sale would be 50,000 for a particular period derived as 50 × 1,000 units. If in its operation, there would be anticipation
of expenses such as operating expenses (OPEX) of 25,000 or administrative costs of 20,000, the gross income would then
be 5,000. The income statement may appear to have an initial pro forma of:
Gross Sales 50,000
Less: Operating Expenses 25,000
Administrative Costs 20,000 45,000
Gross Income 5,000
The complexity of the financial statements would depend also on how complicated the business transactions
are. As transactions progress, additional expenses, accounts, and taxes imposed may be included. The process of
creating pro forma financial statements varies from firm to firm, but you may observe some common elements among
them.
Cash Flow Statement
Without adequate cash for the timely payment of obligations, funding operations and growth, and for
compensating owners, the firm will fail.
The statement of cash flow summarizes the inflow and outflow of cash during a given period. Inflow activities
are those that result in providing the firm with sources of funds, while outflows result in cash leaving the firm due to
disbursements or expenses that utilize cash. It is important to note that this statement includes and recognizes only the
movement of cash in its entire operations.
What information should financial forecasts and financial projections contain? According to the book CFO
Fundamentals by Shim, Siegel, and Shim (2012), financial statements must contain the following minimum items:
• Sales or gross revenues
• Net income
• Gross profit
• Income from continuing/discontinuous operations
• Usual income statement items
• Tax provision
• Material changes in financial positions
Summaries of Significant Accounting Policies and Assumptions
Organizational productivity -is the amount of goods or services produced (output) divided by the inputs needed to
produce the said output. In general, all organizations and their work units aim to be productive. In other words, they
want to produce the biggest amount of outputs, using the least input.
Output may be measured by the sales income which an organization gains when goods are sold. Inputs, on the other
hand, may be measured by the amount spent on acquiring and transforming resources into outputs. Decreasing inputs
by being more efficient in work performance will decrease the organization’s expenses, thus, increasing the ratio of
output to input and achieving what management wants.
Organizational effectiveness is a measure of the organizational goals’ suitability to organizational needs and how well
these said goals are being attained.
Rankings in industry is a way commonly used by managers to measure organizational performance.
Other Performance Controls in Organizations
Computer-based control systems - are common in many companies today. Managers have easy access to their firms’
databases which could provide meaningful information for performance evaluation. Performance may be controlled by
quantifiable measures such as the number of customer transactions handled, the frequency of errors committed by
their human resources, or the length of time taken to deliver goods to customers.
Bureaucratic control - makes use of strict rules, regulations, policies, procedures, and orders from formal authority.
Negative performance evaluation is given to human resources who do not comply with the said control measures.
Clan control - is based on compliance with norms, values, expected behavior related to the firm’s organizational culture,
and other cultural variables of the country where the company is located. Positive performance evaluation ratings are
given to employees or teams who quickly adapt to possible changes of norms and values in the firm’s internal and
external environment.
