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 change Limit the accumulation of error

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

Strategic
control

Structural
control

Operations Financial
control control

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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
Compare Determine need
Establish Measure
performance for corrective
standards performance
against standards action

Maintain the Correct the Change

status quo deviation standards

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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
Feedback

Inputs Transformation Outputs

Preliminary control Screening control Postaction control

Focus is on inputs Focus is on how Focus is on outputs
to the organizational inputs are being from the organiza-
system transformed into tional system
outputs

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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

Type of Budget What Budget Shows

Financial budget Sources and uses of cash

Cash-flow or cash budget
Capital-expenditures budget
Balance-sheet budget
All sources of cash income and cash
expenditures in monthly, weekly, or daily
periods
Costs of major assets such as a new plant,
machinery, or land
Forecast of the organization’s assets and
liabilities in the event that all other budgets
are met

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

Type of Budget What Budget Shows

Operating budget Planned operations in financial terms

Sales or revenue budget Income the organization expects to receive from
normal operations
Expense budget Anticipated expenses for the organization during
the coming time period
Profit budget Anticipated differences between sales or revenues
and expenses

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Financial Control
 Types of Budgets (cont’d)
(cont’d)
Type of Budget What Budget Shows

Nonmonetary budget Planned operations in nonfinancial terms

Labor budget Hours of direct labor available for use
Space budget Square feet or meters of space available for
various functions
Production budget Number of units to be produced during the coming
time period

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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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