Controlling

Introduction

After managers have planned, organised, staffed, and directed, the final function of management is Controlling. Planning involves setting the course of action, and controlling ensures that the actual performance is in line with the planned performance. It is the process that measures actual performance, compares it with planned performance, and takes corrective action if deviations are found.

Controlling is a crucial function as it helps in keeping a check on all activities and progress towards goals. It ensures that resources are being used effectively and efficiently.

Planning without controlling is meaningless, and controlling without planning is blind.

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Meaning Of Controlling

Controlling is defined as the process of measuring actual performance, comparing it with planned standards, identifying deviations, and taking corrective action to ensure that the actual results match the planned results.

It is the process by which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organisation's objectives.

Key aspects of controlling:

1. Measurement of performance: Assessing how well the tasks are being performed.

2. Comparison with standards: Comparing the measured performance against the pre-set targets or benchmarks.

3. Identification of deviations: Finding out the difference between actual and standard performance.

4. Taking corrective action: Implementing measures to bring performance back on track if deviations occur.

Controlling is a dynamic and forward-looking process because taking corrective action is aimed at improving future performance.

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Importance Of Controlling

Controlling is one of the most important functions of management. Its importance is highlighted by the following benefits:

1. Accomplishing Organisational Goals: Controlling helps in checking the performance and finding out deviations, enabling timely corrective action to achieve the objectives.

2. Judging Accuracy of Standards: An efficient control system helps in judging the accuracy of standards. It reveals whether the standards set are accurate and achievable. Deviations may suggest the need to revise standards.

3. Making Efficient Use of Resources: By checking the work and performance, controlling ensures that resources are used efficiently and effectively, minimising wastage and optimum utilisation of resources.

4. Improving Employee Motivation: A good control system provides clear standards and informs employees about what is expected of them. This clarity and regular feedback on performance motivate employees to perform better.

5. Ensuring Order and Discipline: Controlling helps to monitor employee activities, thereby reducing dishonest behaviour and ensuring order and discipline in the organisation.

6. Facilitating Coordination in Action: Controlling provides direction to the activities of various departments and individuals. Each department is guided by pre-determined standards, which helps in achieving coordination.

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Limitations Of Controlling

Despite its importance, controlling has certain limitations:

1. Difficulty in Setting Quantitative Standards: Control is most effective when standards can be expressed in quantitative terms. However, for certain activities, especially in service sectors or managerial jobs (e.g., employee morale, job satisfaction), it is difficult to set quantitative standards.

2. Little Control on External Factors: Controlling is limited as it cannot control external factors such as government policies, technological changes, competition, changes in consumer tastes, etc., which significantly impact organisational performance.

3. Resistance from Employees: Employees often resist controlling as they feel it restricts their freedom. Close supervision and strict control can lead to resentment and demotivation.

4. Costly Exercise: Controlling can be a costly affair, involving significant expenditure on setting up a control system, measurement of performance, and implementing corrective actions. Small enterprises may find it difficult to afford an elaborate control system.

5. Difficulty in Accurate Assessment: Measuring actual performance, especially in qualitative areas or complex tasks, can be difficult and may not always be accurate.

6. Less Effective in Small Organisations: While controlling is pervasive, the need for a formal, elaborate control system is less in small organisations where direct supervision is often sufficient.

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Relationship Between Planning And Controlling

Planning and Controlling are closely related and interdependent functions of management. They are often considered the two sides of the same coin.

Planning is the basis of Controlling: Planning sets the standards for control. Without planning, there are no goals or standards to measure performance against, making controlling impossible. Controlling is meaningful only in the context of plans.

Controlling checks Planning and guides future Planning: Controlling involves comparing actual performance with standards set in the planning stage. It identifies deviations and provides valuable feedback to the management. This feedback helps in revising future plans based on past experience and changing conditions. Thus, controlling provides information for future planning.

They are interrelated in a cyclical manner:

$$ \text{Planning} \quad \xrightarrow{\text{Sets Standards}} \quad \text{Controlling} \quad \xrightarrow{\text{Provides Feedback}} \quad \text{Future Planning} $$

Differences: Although interdependent, they are distinct functions.

Planning is primarily forward-looking, deciding in advance what to do. Controlling is both backward-looking (measuring past performance) and forward-looking (correcting future performance).

Planning is prescriptive, outlining the desired course of action. Controlling is evaluative and corrective, checking if the action was taken as planned and correcting future course if needed.

While planning initiates the process of management, controlling brings the process to a close and points the way to new planning.

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Controlling Process

The controlling process involves a systematic sequence of steps to ensure that actual activities conform to planned activities. The steps are as follows:

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Step 1: Setting Performance Standards

Standards are benchmarks against which actual performance is measured. Standards serve as the basis of control. They should be specific, measurable, achievable, relevant, and time-bound (SMART) wherever possible. Standards can be set in quantitative or qualitative terms.

Quantitative Standards: Expressed in numbers (e.g., production volume per week, sales revenue per month, cost per unit, time taken per task, percentage of defects).

Qualitative Standards: Expressed in non-numerical terms (e.g., improving customer satisfaction, improving employee morale, timely completion of reports). While harder to measure, they are important and can sometimes be quantified using rating scales or surveys.

Standards should be flexible enough to be modified when conditions change, yet stable enough to serve as a meaningful benchmark.

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Step 2: Measurement Of Actual Performance

Once standards are set, the actual performance of employees or units is measured. Measurement should be done in a timely manner, preferably during the course of the work, so that deviations can be identified and corrected early.

Various methods can be used for measurement:

1. Personal Observation: Directly observing the work being done.

2. Sample Checking: Inspecting a representative sample of work.

3. Performance Reports: Using data from statistical reports, written reports, or financial statements.

4. Automatic Systems: Using automated systems to track output, time, or costs.

The method of measurement should be appropriate for the activity being monitored and the standard being used.

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Step 3: Comparing Actual Performance With Standards

This step involves comparing the measured actual performance with the established standards. This comparison helps in determining whether the performance is on track, exceeding the standard, or falling short of the standard.

Comparison is typically done by calculating the difference between actual performance and standard performance (Actual Performance - Standard Performance = Deviation).

Example: If the standard is 100 units per day, and actual output is 95 units, the deviation is -5 units.

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Step 4: Analysing Deviations

Not all deviations need immediate attention. Managers should focus on significant deviations that require corrective action. Two important principles guide the analysis of deviations:

a) Critical Point Control: Focusing control efforts on key areas that are critical to the success of the organisation. Performance in these key areas (e.g., costs, productivity, sales volume) is monitored closely.

b) Management by Exception: A principle that suggests that only significant deviations that are beyond a permissible limit should be brought to the attention of management. Routine or minor deviations can be handled by lower-level management. This saves valuable time and effort of top management.

Identifying the **cause** of the deviation is also a crucial part of this step (e.g., Is the shortfall in production due to power failure, employee absenteeism, faulty machinery, or unrealistic standards?).

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Step 5: Taking Corrective Action

Once the cause of significant deviations is identified, corrective action is taken to bring the performance back in line with the plan or to prevent future deviations. The type of corrective action will depend on the cause of the deviation.

Corrective actions might include:

1. Training employees: If deviation is due to lack of skill or knowledge.

2. Improving supervision: If deviation is due to lack of effort or discipline.

3. Repairing or replacing machinery: If deviation is due to faulty equipment.

4. Revising standards: If the standards were unrealistic (though this should be done carefully).

5. Changing the plan: If the original plan is no longer feasible due to unforeseen circumstances.

Taking timely and appropriate corrective action is essential to make the control process effective.

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Techniques Of Managerial Control

Managers use various techniques to monitor and control performance. These techniques can be broadly classified into traditional and modern techniques.

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Traditional Techniques

Traditional techniques are those that have been used by managers for a long time. They are still relevant and widely used, though some modern techniques offer more sophisticated analysis.

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Personal Observation

This involves the manager personally observing the work being done by employees. It allows for direct feedback, identifies problems on the spot, and can be motivating for employees if done supportively.

Advantages: Provides first-hand information, allows for corrective action on the spot, improves discipline.

Disadvantages: Time-consuming, may not be suitable for all jobs, can be subjective, employees might behave differently when observed.

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Statistical Reports

These involve collecting and analysing data in the form of charts, graphs, averages, percentages, etc. Reports on sales figures, production volumes, inventory levels, and quality control are examples.

Advantages: Provides objective data, presents information in a summarised way, facilitates comparison over time or between different units.

Disadvantages: May not provide insights into the 'why' behind the numbers, data needs to be interpreted correctly.

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Breakeven Analysis

Breakeven analysis is a technique used to determine the point at which total revenues equal total costs, meaning there is neither profit nor loss. This point is known as the Breakeven Point (BEP).

It helps in understanding the relationship between costs, volume, and profits. Managers can use it to determine the minimum level of sales needed to cover costs and to analyse the impact of changes in price, cost, or volume on profitability.

Formula for Breakeven Point (BEP) in Units:

$$ \text{BEP (Units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per Unit} - \text{Variable Cost per Unit}} $$

Formula for Breakeven Point (BEP) in Value (Sales Revenue):

$$ \text{BEP (Value)} = \text{BEP (Units)} \times \text{Selling Price per Unit} $$

Or

$$ \text{BEP (Value)} = \frac{\text{Fixed Costs}}{\text{Profit Volume Ratio (P/V Ratio)}} $$

Where $$ \text{P/V Ratio} = \frac{\text{Contribution per Unit}}{\text{Selling Price per Unit}} = \frac{\text{Selling Price per Unit} - \text{Variable Cost per Unit}}{\text{Selling Price per Unit}} $$

Advantages: Helps in determining sales targets, understanding profitability at different volumes, useful for pricing decisions and cost control.

Disadvantages: Based on assumptions (e.g., costs are linear), simplifies complex reality, less useful for multi-product companies unless modified.

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Budgetary Control

Budgetary control is a technique of managerial control in which budgeting is used as a tool for planning and control. A budget is a statement of expected results expressed in numerical terms (e.g., sales budget, production budget, cash budget). Budgetary control involves preparing budgets, comparing actual performance with budget, and taking corrective action.

Advantages: Provides a framework for planning, helps in coordination, motivates employees (if they participate in setting budgets), facilitates performance evaluation and control.

Disadvantages: Based on estimates (can be inaccurate), can be rigid, involves costs, might lead to conflicts between departments.

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Modern Techniques

Modern control techniques are newer and often involve more sophisticated analysis and quantitative methods compared to traditional techniques. They are usually more complex but can provide deeper insights into performance.

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Return On Investment

Return on Investment (ROI) is a financial ratio used to measure the profitability and efficiency of an investment. It is calculated as:

$$ \text{ROI} = \frac{\text{Net Profit}}{\text{Total Investment}} \times 100 $$

It helps in evaluating the overall performance of an organisation or a specific project/division by comparing the return generated with the investment made. A higher ROI indicates better performance.

Advantages: Measures overall efficiency, comparable across different divisions or projects, useful for capital budgeting decisions.

Disadvantages: Can be difficult to determine 'Total Investment' accurately (especially for assets acquired at different times), focuses primarily on financial returns, may lead to short-term focus by managers.

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Ratio Analysis

Ratio Analysis involves calculating and interpreting various financial ratios from financial statements (like Balance Sheet and Profit & Loss Account). These ratios help in assessing the liquidity, solvency, profitability, and turnover of the business.

Examples of ratios: Current Ratio ($$ \frac{\text{Current Assets}}{\text{Current Liabilities}} $$), Debt-Equity Ratio ($$ \frac{\text{Debt}}{\text{Equity}} $$), Gross Profit Ratio ($$ \frac{\text{Gross Profit}}{\text{Net Sales}} $$), Inventory Turnover Ratio ($$ \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} $$).

Advantages: Provides insights into financial health and performance, facilitates comparison (with industry averages or past performance), useful for decision making (e.g., creditworthiness assessment).

Disadvantages: Ratios are based on historical data, do not reflect qualitative factors, industry averages may not be truly comparable, can be manipulated.

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Responsibility Accounting

Responsibility Accounting is a system of control in which different individuals are assigned responsibility for the performance of a specific unit or department, and their performance is evaluated based on the results of that unit. The organisation is divided into responsibility centres.

Types of responsibility centres:

1. Cost Centre: Manager is responsible for costs only (e.g., Production Department).

2. Revenue Centre: Manager is responsible for revenues only (e.g., Sales Department).

3. Profit Centre: Manager is responsible for both revenues and costs (e.g., a specific product division).

4. Investment Centre: Manager is responsible for revenues, costs, and the investment made in the unit (e.g., a subsidiary company).

Advantages: Helps in fixing responsibility, facilitates performance evaluation, promotes cost consciousness, aids in decision making.

Disadvantages: Difficulty in accurately assigning costs/revenues to centres, potential for conflict between centres, may lead to a narrow focus on unit goals rather than overall organisation goals.

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Management Audit

Management Audit is a systematic appraisal of the overall performance of the management of an organisation. It is an evaluation of the efficiency and effectiveness of management in various functions (planning, organising, staffing, directing, controlling).

It aims to identify deficiencies in the management process and recommend improvements. It is usually conducted by external experts.

Advantages: Helps in improving managerial efficiency, identifies areas for improvement, provides an objective assessment of management performance.

Disadvantages: Can be expensive, requires expertise, findings may not be readily accepted by existing management.

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Pert And Cpm

PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are network techniques used for planning, scheduling, and controlling large-scale, complex projects, such as construction, R&D, or product launches. They involve breaking down a project into individual activities, arranging them in a logical sequence, and estimating the time required for each activity.

The network diagram shows the sequence of activities and their interdependencies. The Critical Path is the longest path through the network, representing the minimum time required to complete the project. Any delay in activities on the critical path will delay the entire project.

Advantages: Useful for complex projects, helps in timely completion, identifies critical activities, facilitates optimum resource allocation.

Disadvantages: Requires accurate time estimates (difficult for R&D projects in PERT), not suitable for routine activities, complex to understand and implement for small projects.

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Management Information System

A Management Information System (MIS) is a computer-based system that provides managers with relevant information in a timely and accessible manner to support planning and control decisions. It collects data from various sources, processes it, and generates reports for management at different levels.

An effective MIS integrates information from various departments (sales, production, finance, HR) to provide a holistic view of the organisation's performance.

Advantages: Facilitates timely decision making, improves efficiency, provides objective data, helps in identifying trends and problems quickly.

Disadvantages: Requires significant investment (hardware, software, training), needs to be updated regularly, can suffer from 'information overload' if not designed properly.

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