CHAPTER 9 CONTROLLING

• What is controlling?
• Importance of Controlling
• Steps in the Control Process
• Types of Control
• Components of Organizational Control Systems
• Strategic Control Systems
• Identifying Control Problems

WHAT IS CONTROLLING?
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." Con- trolling completes the cycle of management functions.
Objectives and goals that are set at the planning stage are verified as to achievement or
completion at any given point in the organizing and implementing stages. When expectations are
not met at scheduled dates, corrective measures are usually undertaken.

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. An effective inventory control system, for instance, minimizes, if not totally
eliminates losses in inventory.
The importance of controlling may be illustrated as it is applied in a typical factory. If the
required standard daily output for individual workers is 100 pieces, all workers who do not
produce the requirement are given sufficient time to improve; if no improvements are forth-
coming, they are asked to resign. This action will help the company keep its overhead and other
costs at expected levels. If no such control is made, the company will be faced with escalating
production costs, which will place the viability of the firm in jeopardy.

STEPS IN THE CONTROL PROCESS

The control process consists of four steps, namely:
 1. Establishing performance objectives and standards
2. Measuring actual performance
3. Comparing actual performance to objectives and standards, and
4. Taking necessary action based on the results of the comparisons.
Establishing Performance Objectives and Standards
In controlling, what has to be achieved must first be determined. Examples of such
objectives and standards are as follows:
1. Sales targets - which are expressed in quantity or monetary terms;
2. Production targets - which are expressed in quantity or quality;
3. Worker attendance - which are expressed in terms of rate of absences;
4. Safety record - which is expressed in number of accidents for given periods;
5. Supplies used - which are expressed in quantity or monetary terms for given periods.
Once objectives and standards are established, the measurement of performance will be
facilitated. Standards differ among various organizations. In construction firms, project
completion dates are useful standards. In chemical manufacturing firms, certain pollution
measures form the basis for standard requirements.
After the performance objectives and standards are established, the methods for measuring
performance must be designed. Every standard established must be provided with its own
method for measurement.

Measuring Actual Performance

There is a need to measure actual performance so that when shortcomings occur,
adjustments could be made. The adjustments will depend on the actual findings.
The measuring tools will differ from organization to organization, as each have their own
unique objectives. Some firms, for instance, will use annual growth rate as standard basis, while
other firms will use some other tools like the market share approach and position in the industry.
Comparing Actual Performance to Objectives and Standards
Once actual performance has been determined, this will be compared with what the
organization seeks to achieve. Actual production output, for instance, will be compared with the
target output. This may be illustrated as follows:
A construction firm entered into a contract with the government to construct a 100-
kilometer road within ten months. It would be, then, reasonable for management to expect at
least 10 kilometers to be constructed every month. As such, this must be verified every month, or
if possible, every week.
Taking Necessary Action
 The purpose of comparing actual performance with the desired result is to provide
management with the opportunity to take corrective action when necessary.
If in the illustration cited above, the management of the construction firm found out that
only 15 kilometers were finished after two months, then, any of the following actions may be
undertaken:
1. Hire additional personnel;
2. Use more equipment; or
3. Require overtime.

TYPES OF CONTROL
Control consists of three distinct types, namely:
1. Feedforward control
2. Concurrent control, and
3. Feedback control.

Feedforward Control
When management anticipates problems and pre- vents their occurrence, the type of
control measure undertaken is called feedforward control. This type of control provides the
assurance that the required human and nonhuman resources are in place before operations begin.
An example is provided as follows:
The manager of a chemical manufacturing firm makes sure that the best people are
selected and hired to fill jobs. Materials required in the production process are carefully checked
to detect defects. The foregoing control measures are designed to prevent wasting valuable
resources. If these measures are not undertaken, the likelihood that problems will occur is always
present.
Concurrent Control
When operations are already ongoing and activities to detect variances are made,
concurrent control is said to be undertaken. It is always possible that deviations from standards
will happen in the production process. When such deviations occur, adjustments are made to
ensure compliance with requirements. Information on the adjustments are also necessary inputs
in the pre-operation phase.
Examples of activities using concurrent control are as follows:
The manager of a construction firm constantly monitors the progress of the company's
projects. When construction is behind schedule, corrective measures like the hiring of additional
manpower are made.
 In a firm engaged in the production and distribution of water, the chemical composition
of the water procured from various sources is checked thoroughly before they are distributed to
the consumers.
The production manager of an electronics manufacturing firm inspects regularly the
outputs consisting of various electronics products coming out of the pro- duction line.
Feedback Control
When information is gathered about a completed activity, and in order that evaluation and
steps for improvement are derived, feedback control is undertaken. Corrective actions aimed at
improving future activities are features of feedback control.
Feedback control validates objectives and standards. If accomplishments consist only of a
percentage of standard requirements, the standard may be too high or inappropriate.
An example of feedback control is the supervisor who discovers that continuous overtime
work for factory workers lowers the quality of output. The feedback information obtained leads
to some adjustment in the over- time schedule.

COMPONENTS OF ORGANIZATIONAL CONTROL SYSTEMS

Organizational control systems consist of the following:
1. Strategic plan
2. The long-range financial plan
3. The operating budget
4. Performance appraisals
5. Statistical reports
6. Policies and procedures
Strategic Plans
A strategic plan (discussed in Chapter 3) provides the basic control mechanism for the
organization. When there are indications that activities do not facilitate the accomplishment of
strategic goals, these activities are either set aside, modified or expanded. These corrective
measures are made possible with the adoption of strategic plans.
The Long-Range Financial Plan
The planning horizon differs from company to company. Most firms will be satisfied with
one year. Engineering firms, however, will require longer term financial plans. This is because of
the long lead times needed for capital projects. An example is the engineering firm assigned to
construct the Light Rail Transit (LRT) within three years. As such, the three-year financial plan
will be very useful.
 As presented in Chapter 3, the financial plan recommends a direction for financial
activities. If the goal does not appear to be where the firm is headed, the control mechanism
should be made to work.
The Operating Budget
An operating budget indicates the expenditures, revenues, or profits planned for some
future period regarding operations. The figures appearing in the budget are used as standard
measurements for performance.
Performance Appraisals
Performance appraisal measures employee performance. As such, it provides employees
with a guide on how to do their jobs better in the future. Performance appraisals also function as
effective checks on new policies and programs. For example, if a new equipment has been
acquired for the use of an employee, it would be useful to find out if it had a positive effect on
his performance.
Statistical Reports
Statistical reports pertain to those that contain data on various developments within the
firm. Among the information which may be found in a statistical report pertains to the following:
1. Labor efficiency rates
2. Quality control rejects
3. Accounts receivable
4. Accounts payable
5. Sales reports
6. Accident reports
7. Power consumption
Policies and Procedures
Policies refer to "the framework within which the objectives must be pursued." A
procedure is "a plan that describes the exact series of actions to be taken in a given situation."?
An example of policy is as follows:
"Whenever two or more activities compete for the company's attention, the client
takes priority."
An example of a procedure is as follows:
"Procedure in the purchase of equipment:
1. The concerned manager forwards a request for purchase to the purchasing officer;
2. The purchasing officer forwards the request to top management for approval;
3. When approved, the purchasing officer makes a canvass of the requested item; if
disapproved, the purchasing officer returns the form to the requesting manager;
4. The purchasing officer negotiates with the lowest complying bidder."
 It is expected that policies and procedures laid down by management will be followed.
When they are breached once in a while, management is provided with a way to directly inquire
on the deviations. As such, policies and procedures provide a better means of controlling
activities.

STRATEGIC CONTROL SYSTEMS

To be able to assure the accomplishment of the strategic objectives of the company, strategic
control systems become necessary. These systems consist of the following:
Financial analysis
Financial ratio analysis

Financial Analysis
The success of most organizations depends heavily on its financial performance. It is just
fitting that certain measurements of financial performance be made so that whatever deviations
from standards are found out, corrective actions may be introduced.
A review of the financial statements will reveal important details about the company's
performance. The balance sheet contains information about the company's assets, liabilities, and
capital accounts. Comparing the current balance sheet with previous ones may reveal important
changes, which, in turn, provide clues to performance.
The income statement contains information about the company's gross income, expenses, and
profits. When also compared with previous years' income statements, changes in figures will
help management determine if it did well.
Financial Ratio Analysis
Financial ratio analysis is a more elaborate approach used in controlling activities. Under
this method, one account appearing in the financial statement is paired with another to constitute
a ratio. The result will be 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. When
deviations occur, explanations are sought in preparation for whatever action is necessary.
Financial ratios may be categorized into the following types:
1. Liquidity
2. Efficiency
3. Financial leverage
4. Profitability
Liquidity Ratios. These ratios assess the ability of a company to meet its current
obligations. The following ratios are important indicators of liquidity:
 1. Current ratio - This shows the extent to which current assets of the company can
cover its current liabilities. The formula for computing current ratio is as follows:
Current ratio = current assets/current liabilities

2. Acid-test ratio - This is a measure of the firm's ability to pay off short-term
obligations with the use of current assets and without relying on the sale of
inventories. The formula is as follows:
Acid-test ratio = current assets – inventories/liabilities
Efficiency Ratios. These ratios show how effectively certain assets or liabilities are being
used in the production of goods and services. Among the more common efficiency ratios are:
1. Inventory turnover ratio This ratio measures the number of times an inventory is
turned over (or sold) each year. This is computed as follows:
Inventory turnover ratio = cost of goods sold/inventory

2. Fixed asset turnover - This ratio is used to measure utilization of the company's
investment in its fixed assets, such as its plant and equipment. The formula used is as
follows:
Fixed asset turnover = net sales/net fixed assets
Financial Leverage Ratios. This is a group of ratios designed to assess the balance of
financing obtained through debt and equity sources. Some of the more important leverage ratios
are as follows:
1. Debt to total assets ratio - This ratio shows how much of the firm's assets are financed by
debt. It may be computed by using the following formula:
Debt to total assets ratio = total dept/total assets

2. Times interest earned ratio – This ratio measures the number of times that earnings before
interest and taxes cover or exceed the company’s interest expense. It may be computed by
using the following formula:
The interest earned ratio = (profit before tax + interest expense)/interest expense
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. Among the more
notable profitability ratios are as follows:
1. Profit margin ratio This ratio compares the net profit to the level of sales. The formula
used is as follows:
Profit margin ratio = net profit/net sales

2. Return on assets ratio This ratio shows how much income the company produces for
every peso invested in assets. The formula used is as follows:
Return on assets ratio = net income/assets
 3. Return on equity ratio This ratio measures the returns on the owner's investment. It may
be arrived at by using the following formula:
Return on equity ratio = net income/equity

IDENTIFYING CONTROL PROBLEMS

Recognizing the need for control is one thing, actually implementing it is another. When
operations become complex, the engineer manager must consider useful steps in controlling.
Kreitner mentions three approaches:
1. Executive reality check
2. Comprehensive internal audit
3. General checklist of symptoms of inadequate control
Executive Reality Check
Employees at the frontline often complain that management imposes certain requirements
that are not realistic. In a certain state college, for instance, requests for purchase of classroom
materials and supplies take last priority. This is irregular because requests of such kind must be
of the highest priority considering that the organization is an educational institution. Ironically,
because certain officers of the nonacademic staff have direct access to the president, their
purchase requests almost always get top priority. Later on, when the president made an
inspirational speech on quality teaching, many members of the faculty just shrugged their
shoulders and listened passively.
One school, the Central Luzon State University, provides a good example on how the
executive reality check may be exercised. It requires its executives to handle at least one subject
load each. What the executives will experience in the classroom will make him more responsive
in the preparation of plans and control tools.
The engineer manager of a construction firm could, once in a while, perform the work of
one of his laborers. In doing so, he will be able to see things that he never sees inside the
confines of his air-conditioned office. Because the said action exposes the engineer manager to
certain realities, the term "executive reality check" is very appropriate.
Comprehensive Internal Audit
An internal audit is one undertaken to determine the efficiency and effectivity of the
activities of an organization. Among the many aspects of operations within the organization, a
small activity that is not done right may continue to be unnoticed until it snowballs into a full-
blown problem.
An example is the resignation of an employee after serving the company for 15 years.
After one week, another employee with ten years of service also resigned. Both were from the
same department. If after another week, a third employee is resigning, a full investigation is in
order. Even if the source of the problem is identified, it may already have caused considerable
losses to the organization. A comprehensive internal audit aims to detect dysfunctions in the
organization before they bring bigger troubles to management.
Symptoms of Inadequate Control
If a comprehensive internal audit cannot be availed of for some reason, the use of a
checklist for symptoms of inadequate control may be used.
Kreitner has listed some of the common symptoms as follows:
1. An unexplained decline in revenues and profits
2. A degradation of service (customer complaints).
3. Employee dissatisfaction (complaints, grievances, turnover).
4. Cash shortages caused by bloated inventories or delinquent accounts receivable.
5. Idle facilities or personnel.
6. Disorganized operations (work flow bottlenecks, excessive paperwork).
7. Excessive costs.
8. Evidence of waste and inefficiency (scrap, rework)
It must be noted that behind every symptom is a problem waiting to be solved. Unless
this problem is clearly identified, no effective solution may be derived. Nevertheless, problems
are easily recognized if adequate control measures are in place.