Unit – V

CONTROLLING
According to Brech, “Controlling is a systematic exercise which is called as a process of
checking actual performance against the standards or plans with a view to ensure adequate
progress and also recording such experience as is gained as a contribution to possible future
needs.”
FEATURES OF CONTROLLING FUNCTION

Following are the characteristics of controlling function of management-

1. Controlling is an end function- A function which comes once the performances are
made in conformities with plans.
2. Controlling is a pervasive function- which means it is performed by managers at all
levels and in all type of concerns.
3. Controlling is forward looking- because effective control is not possible without past
being controlled. Controlling always look to future so that follow-up can be made
whenever required.
4. Controlling is a dynamic process- since controlling requires taking reviewable methods,
changes have to be made wherever possible.
5. Controlling is related with planning- Planning and Controlling are two inseparable
functions of management. Without planning, controlling is a meaningless exercise and
without controlling, planning is useless.

The essential elements of any control system are:

1. Establishment of standards;

2. Measurement of performance;

3. Comparison of performance with standards ; and

4. Taking corrective action.

PURPOSES OF CONTROL:

The management function of control aims at:

1. Verifying the actual performance and standard performance,

2. Regulating the actual performance in accordance with the standard,

3. Finding out the variations from the standard performance,

4. Rectifying the variations,

5. Preventing such variations in future,

6. Minimizing waste at all levels, and

7. Increasing efficiency, production and productivity.

LIMITATIONS OF CONTROLLING:

1. Difficulty in setting quantitative standards:

Control system loses its effectiveness when standard of performance cannot be defined in
quantitative terms and it is very difficult to set quantitative standard for human behaviour,
efficiency level, job satisfaction, employee’s morale, etc. In such cases judgment depends
upon the discretion of manager.

2. No control on external factors:

An enterprise cannot control the external factors such as government policy, technological
changes, change in fashion, change in competitor’s policy, etc.

3. Resistance from employees:

Employees often resist control and as a result effectiveness of control reduces. Employees
feel control reduces or curtails their freedom. Employees may resist and go against the use of
cameras, to observe them minutely.

4. Costly affair:

Control is an expensive process it involves lot of time and effort as sufficient attention has to
be paid to observe the performance of the employees. To install an expensive control system
organisations have to spend large amount. Management must compare the benefits of
controlling system with the cost involved in installing them. The benefits must be more than
the cost involved then only controlling will be effective otherwise it will lead to inefficiency.

A BRIEF DISCUSSION OF THESE PRINCIPLES IS AS FOLLOWS:

(1) The Principle of Uniformity:

The object of control is to derive the best work performance. In business, it is necessary that
principle of uniformity must be observed. It requires the presentation of data, information,
 figures and reports for control purposes in terms of organisation structure. The principle of
parity between authority and responsibility must be followed.

(2) The Principle of Comparison:

A good control system must provide quick comparisons, so that the manager of control can
attend to possible trouble, while the operation is ‘in control’. The purpose of comparison is
not only to determine the deviation and mistake but to enable the manager to predict future
results. Such control is supposed to pose a challenge to each individual.

(3) The Principle of Utility:

Under this Principle the value of reports for control changes directly with the suitability of
the period covered by report keeping in view of the purpose of control. With ‘utility’ the
concept of ‘unity’ should also be there. A manager can be successful in controlling by uniting
the ideas of the men around him. This inter-action is the psychological aspect of control. The
control system should be acceptable to the persons being controlled.

(4) The Principle of Exception:

Management control also emphasises on exception principle. The exception principle holds
that the manager should devote greater attention to the strategic points of unusual time.
Optimum control can be achieved only if critical points can be identified and a close
attention is paid to them. Good control does not necessarily mean maximum control. Control
has been considered as expensive. Therefore, principle of exception has been considered as
important.

OR

SOME OTHER PRINCIPLES OF CONTROL IN MANAGEMENT

Principle of Reflection of Plans

Planning and control are two sides of the same coin, they go hand in hand. So if the firm has a clear
and complete plan then it is much easier to make a control system for the firm.

Principle of Prevention

The concept of ‘prevention is better than cure’ will apply to the control function as well. So the
system of control must not only focus on improving deficiencies and solving the deviations from
standards.

Principle of Future-Directed Control

The function of control is not simply a feedback system. Further, the managers here will be able to
perceive any deviations from standards and shortfalls from the goals of the company. And then they
can take action to prevent such an event from occurring.

Principle of Efficiency of Control

A very extensive control system can be expensive and the cost benefits can disappear. So it is
important that there is efficiency in the approach and techniques of the control system.

Principle of Organizational Suitability

To have an efficient and effective control system, the organizational structure of the business must
be clear and well integrated. This allows us to see where the responsibilities will lie for which
actions.

Principle of Action

The function of control is justified only if positive remedial action is taken. Only pointing out
deviations or shortfalls from standards is not enough.

Principles of Standard

For effective control in the organisation, the company sets a common standard that needs to be
achieved by the workers. If deviations noted, they will work on the drawbacks.

Principles of Assurance of objective

This ensures that by detecting the deviations in the work. The objectives of the company are
achieved on a quick and more efficient basis

PROCESS OF CONTROLLING

1. Establishment of standards- Standards are the plans or the targets which have to be
achieved in the course of business function for judging the performance. Standards
generally are classified into two-
 a. Measurable or tangible - Those standards which can be measured and expressed
are called as measurable standards. They can be in form of cost, output,
expenditure, time, profit, etc.
b. Non-measurable or intangible- There are standards which cannot be measured
monetarily. For example- performance of a manager, deviation of workers, their
attitudes towards a concern.

2. Measurement of performance- The second major step in controlling is to measure the

performance. Finding out deviations becomes easy through measuring the actual
performance. Measurement of tangible standards is easy as it can be expressed in units,
cost, money terms, etc. Quantitative measurement becomes difficult when performance
of manager has to be measured.

Performance of a manager cannot be measured in quantities. It can be measured only by-

a. Attitude of the workers,

b. Their morale to work,
c. The development in the attitudes regarding the physical environment, and
d. Their communication with the superiors.

3. Comparison of actual and standard performance- Deviation can be defined as the

gap between actual performance and the planned targets. The manager has to find out two
things here- extent of deviation and cause of deviation. The managers have to exercise
control by exception. Major deviations like replacement of machinery, appointment of
workers, quality of raw material, rate of profits, etc. should be looked upon consciously.
example, if stationery charges increase by a minor 5 to 10%, it can be called as a minor
deviation. On the other hand, if monthly production decreases continuously, it is called as
major deviation.
4. Taking remedial actions- Once the causes and extent of deviations are known, the
manager has to detect those errors and take remedial measures for it. There are two
alternatives here-
a. Taking corrective measures for deviations which have occurred; and
b. After taking the corrective measures, if the actual performance is not in
conformity with plans, the manager can revise the targets. It is here the
controlling process comes to an end. Follow up is an important step because it is
only through taking corrective measures, a manager can exercise controlling.

RELATIONSHIP BETWEEN PLANNING AND CONTROLLING

Planning is concerned with deciding in advance what, when, where, why and how is to be done
and who shall do it. Thus, planning is the process of setting goals and choosing the means to
achieve those goals.

Planning and controlling are two separate functions of management, yet they are closely related.
The scope of activities if both are overlapping to each other. Without the basis of planning,
controlling activities becomes baseless and without controlling, planning becomes a meaningless
exercise. In absence of controlling, no purpose can be served by. Therefore, planning and
controlling reinforce each other. According to Billy Goetz, " Relationship between the two can
be summarized in the following points

1. Planning proceeds controlling and controlling succeeds planning.

2. Planning and controlling are inseparable functions of management.
3. Activities are put on rails by planning and they are kept at right place through controlling.
4. The process of planning and controlling works on Systems Approach which is as
follows :

Planning → Results → Corrective Action

5. Planning and controlling are integral parts of an organization as both are important for
smooth running of an enterprise.
6. Planning and controlling reinforce each other. Each drives the other function of
management.
In the present dynamic environment which affects the organization, the strong relationship
between the two is very critical and important. Once controlling is done effectively, it give us
stimulus to make better plans. Therefore, planning and controlling are unseparated functions of a
business enterprise.

TECHNIQUES OF CONTROL
 1. Personal Observation:
The simplest way to control organisational activities is that managers take round at the work
place and observe the progress of the work. Any defect in performance can be spotted and
corrected immediately.
2. Budgeting:
A budget is a statement which reflects future incomes, expenditures and profits that can be
earned by a firm. It is a future projection of the firm’s financial position.
3. Break-Even Analysis:
Break-even analysis or cost-volume-profit analysis defines the relationship between sales
volume, costs and profits to arrive at a figure of sales at which sales revenue is equal to cost. The
point at which sales revenue is equal to cost (fixed cost plus variable cost) is the break-even
point.
4. Financial Statements:
The statements are prepared along with last year’s statements so that firm can compare present
performance with last year’s performance and take action to improve its future performance.

Two most commonly used financial statements are:

(i) Balance Sheets, and
(ii) Income Statements.
5. Statistical Data and Reports:
Data helps in applying statistical techniques of averages, regression, correlation etc. to predict
financial performance. Data can be used for diagrammatic representations like trend charts,
histograms, pie charts, and bar graphs etc. which assess the company’s performance. Deviations
can be pointed out and corrected.

MODERN TECHNIQUES OF CONTROL

1. Management Information System (MIS):
To carry out managerial functions of planning through controlling for various functional areas
(production, marketing etc.) and integrate them with the external environment (Government,
customers etc.), managers need different types of information (quantitative and qualitative).
2. Management Audit:
Audit means periodic inspection of financial statements and verifying that the statements are
honestly and fairly prepared according to accounting principles. An audit, thus, provides a basis
for control.
Two types of audit can be conducted by a firm:
(a) External audit
(b) Internal audit
3. Responsibility Accounting:
It divides the organization into smaller units where each unit is headed by a manager who is
responsible for achieving the targets of his unit. These units are called responsibility centers and
the head of each responsibility center is responsible for controlling the activities of his center.
Performance of each responsibility center is judged by the extent to which targets of that center
are achieved.
4. Network Techniques (PERT and CPM):
When a complex project is undertaken which involves a series of inter-related or inter-dependent
activities, the network models or techniques help in planning, coordinating and controlling the
network of activities. Various sequences of activities are scheduled with reference to time and
cost and managers execute the project within the constraints of time and cost.

5. Balanced Score Card:

Balanced score card is “a performance measurement tool that looks at four areas — financial,
customer, internal processes and people/innovation/growth assets — that contribute to a
company’s performance.” It evaluates organisational performance in terms of financial and non-
financial parameters. It is a performance appraisal and reporting system that maintains balance
between financial and non-financial measures. It links performance to rewards and recognises
the diversity of organisational goals.

6. Ratio Analysis:
Financial statements show financial performance in absolute figures.
for example, may represent profit of Rs.50 lakh or Rs.40 lakh for a year. The figure of profit has
no meaning unless it is related to capital employed by the firm. Profit of Rs.50 lakh may have
been earned over a capital base of Rs.1 crore giving a return of 50% while Rs.40 lakh may have
been earned on a capital base of Rs.60 lakh giving a return of 66.796.

7. Economic Value Added (EVA):

Value added is an important tool to measure financial performance of a company. It indicates net
wealth or value created by the company. Its major goal is to maximise shareholders’ wealth.
Companies must generate wealth to survive and grow. A company may survive without profits in
the short-run but it cannot survive without adding value to its wealth. It covers financial
management functions that result in wealth creation.