INFORMATION SHEET # 7.

1-1
TOPIC: CONTROL TECHNIQUES

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Summary of learning content.

At the end of this module you will be able to:

1. Discuss the nature of controlling

2. Describe the link between planning and controlling
3. Distinguish control methods and system
4. Apply management control in accounting and marketing concepts and techniques
5. Prepare a budget

Motivation:
1. What are the different traditional control techniques in a business?
2. What is the difference between planning and controlling?
INTRODUCTION

Control is the process of comparing actual performance with established standards for the
purpose of taking action to correct deviations. A system of controls presupposes the existence of
certain standards. The plans provide the standards of performance which serve as the basis of
controls. Controlling helps an organization to put its resources to best use, bring order and
discipline throughout the organization, facilitate coordination of activities and cope with
uncertainty and change, quite effectively.
The process of controls involves four steps: establishment of standards, measurement of
actual performance, comparison of actual performance with the standards and taking corrective
action when required.
Effective controls systems tend to have certain qualities in common. The controls system should
be simple, suitable, economical, reasonably flexible, forward-looking, achievable, objective and
acceptable.

Depending on the time at which controlled is exercised, controls may be classified into
three categories: feedback control, concurrent control, and feedforward control. In a large
organization, it is not possible to control everything. So, usually, a multiproduct firm puts attention
on key result areas through a critical or strategic point control system. Management by exception is
another technique when attention is drawn towards unusual or exceptional items only.

While controlling the human element, management should be careful enough not to rub
people on the wrong side. The feelings, aspirations and attitudes of employees must be given
weight while devising quantitative standards. Top management must find ways and means to strike
a proper balance between persons, standards, and organizational objectives.
 Figure 1. Effective Control System

Control Defined
Control is an important function of management. It is an essential feature of scientific
management. In fact, much of the precision of managerial education is focused on the
improvement of control techniques.

The term ‘control’ may have controlled sensitive connotation due to its non-standardized
use in diverse fields. It is generally used for putting restraints on the elements being controlled. It
is also used for providing information and data for appropriate actions such as controls room of a
railway station or shipyard. In managerial terminology, controls is ensuring work accomplishment
according to plans. Thus, basically, control is a process that guides activity towards some
predetermined goal.

The following are some important definitions of controls:

“In undertaking controls consists in verifying whether everything occurs in conformity with the
plans adopted, the instructions issued and the principle established. Its object is to point out the
weakness and error in order to rectify them and prevent the occurrence. It operates on
everything, i.e., things, people, and action.”
—H. Fall

“Control is checking current performance against predetermined standards constrained in the

plans, with a view to ensuring adequate progress and satisfactory performance.”
—F.F.L. Breach

“Controls, in its managerial sense, can be defined as, the presence in a business of that force
which guides it to a predetermined objective by means of predetermined policies and decision.”
—Dalton E. McFarland

Thus, we see that control is a fundamental management function that ensures work
accomplishment according to plans. It is concerned with measuring and evaluating performance
so as to secure the best results of managerial efforts.

NATURE OF CONTROL
Managerial controls has the following characteristics:

1. Control is a function of management: It is, in fact, a follow-up action to the other functions
of management. This function is performed by all the managers in the organization to control the
activities assigned to them.

2. Control is a dynamic process: It involves the continuous review of standards of performance

and results in corrective action which may lead to changes in other functions of management.

3. Control is a continuous activity: It does not stop anywhere. According to Koontz and
O’Donnell “Just as the navigator continually takes readings to ascertain the right course so
should be the business manager continually take readings to assure himself that his enterprise or
department is of the course.”

4. Controls is forward-looking: It is related to future, as the past cannot be controlled. It is

usually preventive as the presence of controls systems leads to minimize wastages, losses, and
deviations from standards. It should be noted that controls do not curtail the rights of the
individuals. It simply keeps a check on the performance of individuals.

5. Planning and controlling are closely related with each other: According to Billy E. Goetz,
‘Managerial Planning seeks consistent, integrated and articulated program while managerial
control seeks to compel events to conform to plans.
As a matter of fact, planning is based on control and control is based on planning. The process of
controls uses certain standards for measuring performance which is laid down by planning. The
controls process, in turn, may reveal the deficiency of planning and may lead to the revision of
planning. It may also lead to the setting of new goals, change the organizational structure,
improve staffing and make major changes in the techniques of directing.

6. The essence of control is action: The performance of controls is achieved only when
corrective action is taken on the basis of feedback information. It is only action which adjusts
performance to predetermined standards whenever deviations occur. A good system of controls
facilitates timely action so that there is the minimum waste of time and energy.
10 Types of Traditional Control Techniques

The ten types of traditional techniques of controlling are discussed below:

1. Direct Supervision and Observation
'Direct Supervision and Observation' is the oldest technique of controlling. The supervisor himself
observes the employees and their work. This brings him in direct contact with the workers. So,
many problems are solved during supervision. The supervisor gets first hand information, and he
has better understanding with the workers. This technique is most suitable for a small-
sized business.

2. Financial Statements
All business organizations prepare Profit and Loss Account. It gives a summary of the income and
expenses for a specified period. They also prepare Balance Sheet, which shows the financial
position of the organization at the end of the specified period. Financial statements are used to
control the organization. The figures of the current year can be compared with the previous year's
figures. They can also be compared with the figures of other similar organizations.
Ratio analysis can be used to find out and analyze the financial statements. Ratio analysis helps to
understand the profitability, liquidity and solvency position of the business.

3. Budgetary Control
A budget is a planning and controlling device. Budgetary control is a technique of managerial
control through budgets. It is the essence of financial control. Budgetary control is done for all
aspects of a business such as income, expenditure, production, capital and revenue. Budgetary
control is done by the budget committee.

4. Break Even Analysis

Break Even Analysis or Break Even Point is the point of no profit, no loss. For e.g. When an
organization sells 50K cars it will break even. It means that, any sale below this point will cause
losses and any sale above this point will earn profits. The Break-even analysis acts as a control
device. It helps to find out the company's performance. So the company can take collective action
to improve its performance in the future. Break-even analysis is a simple control tool.
5. Return on Investment (ROI)
Investment consists of fixed assets and working capital used in business. Profit on the investment
is a reward for risk taking. If the ROI is high then the financial performance of a business is good
and vice-versa.
ROI is a tool to improve financial performance. It helps the business to compare its present
performance with that of previous years' performance. It helps to conduct inter-firm comparisons.
It also shows the areas where corrective actions are needed.

6. Management by Objectives (MBO)

MBO facilitates planning and control. It must fulfill following requirements:
Objectives for individuals are jointly fixed by the superior and the subordinate.
Periodic evaluation and regular feedback to evaluate individual performance.
Achievement of objectives brings rewards to individuals.

7. Management Audit
Management Audit is an evaluation of the management as a whole. It critically examines the full
management process, i.e. planning, organizing, directing, and controlling. It finds out the
efficiency of the management. To check the efficiency of the management, the company's plans,
objectives, policies, procedures, personnel relations and systems of control are examined very
carefully. Management auditing is conducted by a team of experts. They collect data from past
records, members of management, clients and employees. The data is analyzed and conclusions
are drawn about managerial performance and efficiency.

8. Management Information System (MIS)

In order to control the organization properly the management needs accurate information. They
need information about the internal working of the organization and also about the external
environment. Information is collected continuously to identify problems and find out
solutions. MIS collects data, processes it and provides it to the managers. MIS may be manual or
computerized. With MIS, managers can delegate authority to subordinates without losing control.

9. PERT and CPM Techniques

Program Evaluation and Review Technique (PERT) and Critical Path Method (CPM) techniques
were developed in USA in the late 50's. Any program consists of various activities and sub-
activities. Successful completion of any activity depends upon doing the work in a given sequence
and in a given time.
CPM / PERT can be used to minimize the total time or the total cost required to perform the total
operations.
Importance is given to identifying the critical activities. Critical activities are those which have to
be completed on time otherwise the full project will be delayed.
So, in these techniques, the job is divided into various activities / sub-activities. From these
activities, the critical activities are identified. More importance is given to completion of these
critical activities. So, by controlling the time of the critical activities, the total time and cost of the
job are minimized.

10. Self-Control
Self-Control means self-directed control. A person is given freedom to set his own targets, evaluate
his own performance and take corrective measures as and when required. Self-control is especially
required for top level managers because they do not like external control.
The subordinates must be encouraged to use self-control because it is not good for the superior to
control each and everything. However, self-control does not mean no control by the superiors. The
superiors must control the important activities of the subordinates