MGMT Chapter 14

Financial control:

(under operations control) concerned with the organization's financial resources. Ex. Monitoring receivables to make sure customers are paying their bills on time.

The purpose of control:

-adaption to environmental change -Limiting the accumulation of error -coping with organizational complexity -Minimizing costs

Types of control:

-areas of control -levels of control -responsibilities for control

Overcoming resistance to control:

-encouraging employee participation -develop verification procedures:

Levels of control:

-operations control -financial control -structural control -strategic control

Resistance to control:

-overcontrol -inappropriate focus -rewards for inefficiency -too much accountability

Financial audits:

independent appraisals of an organization's accounting, financial and operational systems. -external audit -internal audit

Financial budget

indicates where the organization expects to get its cash for the coming time period and how it plans to use it. Because financial resources are critically important, te organization needs to know where those resources will be coming from and how they will be used. Usual sources of cash include sales revenue, short and long erm loans, the sale of assets and the issuance of new stock Ex. cash flow, cash budget, capital expenditures budget, balance sheet budget.

Characteristics of effective control:

integration and planning flexibility Accuracy Timeliness objectivity

Balance sheet:

list of assets and liabilities of an organization at a specific point in time. (usually the last day of the fiscal year) divided into current assets, fixed assets, and current liabilities and long term liabilities and stockholder's equity

controller:

most large organizations have one or more specialized managerial positions. -responsible for helping line managers with their control activities, for coordinating the organization's overall control system, and gathering and assimilating relevant information. -businesses that use H form or M form design have many controllers: one for the corporation and one for each division. -organizations are beginning to use operating employees to help maintain effective control

Develop verification procedures:

multiple standards and information systems provide checks and balances in control and allow the organization to verify the accuracy of performance indicators.

Flexibility:

must be flexible to accommodate change.

nonmonetary budget:

simply a budget expressed in nonfinancial terms such as units of output, hours of direct labor, machine hours, or square foot allocations. Most commonly used by managers at the lower levels of an organization. Ex. labor budget, space budget

Limiting the accumulation of error:

small mistakes do not often seriously damage the financial health of an organization. Over time, small errors may accumulate and become serious. Ex. defect rate in units.

income statement:

summarizes financial performance over a period of time, usually one year. Ex. summarizes the firms revenues less its expenses to report net income.

control:

the regulation of organizational activities so that some targeted element of performance remains within acceptable limits. Without regulation, organizations have no indication of how well they are performing in relation to their goals. -keeps the organization moving in the proper direction. -compares where the organization is in performance to where is it supposed to be. -provides the organization with a mechanism for adjusting its course when performance falls outside acceptable boundaries.

responsibilities for control:

traditionally, managers are responsible for overseeing the control systems.

Overcontrol:

trying to control too many things. Limiting employee behavior Ex. how to dress, wear your hair and arrange your desk.

steps in the control process:

1. establish standards 2. measure performance 3. compare performance against standards 4. determine need for corrective action -maintain the status quo -correct the deviation -change standards

Rewards for inefficiency:

Ex. budget cuts for coming in under budget vs. being rewarded more money for next year when you went over budget.

Adapting to environmental change:

If managers could establish goals and achieve them instantaneously, control would not be needed. -In The time between when a goal is established and when a goal is completed, many things can happen in the organization and its environment. -A properly designed control system can help managers anticipate, monitor and respond to changing circumstances.

developing budget:

Many contemporary organizations allow all managers to participate in the budget process. Budget is approved and created by committee, controller and CEO Division budget requests Operating unit budget requests.

Comparing performance against standards:

Performance may be higher than, lower than, or identical to the standard. In some cases, comparison is easy. The goal of each product manager at GE is to make the product either number one or number two in its market. If performance is low, the question is how much deviation from standards to allow before taking remedial action. -The time table for comparing performance to standards depends on a variety of factors including the importance and complexity of what is being controlled. For longer run and higher level standards, annual comparisons may be appropriate.

financial statement:

a profile of some aspect of an organization's financial circumstances. Financial statements must be prepared and presented in commonly accepted and required ways. Ex. balance sheet and income statement

Establishing standards:

The first step in the control process. -should be expressed in measurable terms. -should be consistent with organizational goals. -adopts specific standards, in measurable terms. -identify performance indicators. Performance indicators are measures of performance that provide information that is directly relevant to what is being controlled.

Accuracy:

The results from inaccurate information can be dramatic.

Coping with organizational complexity:

When a firm purchases one raw material, produces one product, has a simple organizational design, and enjoys constant demand for its product, its managers can maintain control with a basic, simple system. -An organization that is more complicated needs a more sophisticated control system. -When large firms merge, the short term results are often disappointing. The firm becomes so large and complex that the former control system is nto adequate.

Encourage employee participation:

When employees are involved in planning and implementing change, they are less likely to resist it.

Minimizing Costs:

When it is practiced effectively, control can help reduce costs and boost output. Ex. GP learning about thinner blades for its machines. -many businesses are cutting back on health insurance coverage, over night shipping, and lunches for clients.

Measuring performance:

a constant, ongoing activity for most organizations. For control to be effective, performance measures must be valid. Daily, weekly, and monthly sales measure sales performance. Production and performance may be expressed in terms of unit cost, product quality, or volume produced.

budget:

a plan expressed in numerical terms. Organizations establish budgets for work groups, departments, divisions, and the whole organization. The usual time period for a budget is one year, although breakdowns of budgets by the quarter or month are also common. Generally expressed in financial terms. -provide yardsticks for measuring performance and facilitate comparisons across departments, between levels, and from one time period to another. Help serve four primary resources and projects. They help define the established standards for control. Enable organizations to evaluate the performance of managers and organizational units.

Control standard:

a target against which subsequent performance will be compared.

Strengths and weaknesses of budgeting:

advantages: facilitate effective control. Placing dollar values on operations enables managers to monitor operations better and pinpoint problem areas. Facilitate coordination and communication between departments. help maintain records of performance and are a local complement to planning. Disadvantages: can be too rigid. process of developing budgets can be time consuming. limits innovation and change.

Bureaucratic control

an approach to organization design characterized by formal and mechanistic structural arrangements. The goal is employee compliance. Organizations under this control rely on strict rules and rigid hierarchies. insisting employees meet minimum levels of performance and often have a tall structure. They focus their rewards on individual performance and allow only limited and formal employee participation. Value: -employee compliance -strict rules, formal controls and rigid hierarchy -Directed toward minimum levels of acceptable performance -Tall structure with top down influence -directed at individual performance -limited and formal

decentralized control:

an approach to organizational control characterized by informal and organic structural arrangements. It's goal is employee commitment. Relies heavily on group norms and a strong corporate culture and gives employees the responsibility for controlling themselves. Employees are encouraged to perform beyond minimally acceptable levels. Relatively flat. They direct rewards at group performance and favor widespread employee participation Value: -employee commitment -group norms, culture, self control -directed toward enhanced performance above and beyond the minimum -flat structure, shared influence -directed at group performance -extended and informal.

Ratio analysis:

compare different elements of a balance sheet or income statement to one another. Ratio analysis is te calculation of one or more financial ratios to assess some aspect of the financial health of an organization. Ex. liquidity ratios: indicate how easily things are converted to cash. Debt ratios: reflect ability to meet long term financial obligations. coverage ratios: help estimate the organization's ability to cover interest expenses on borrowed capital. Operating ratios: indicate the effectiveness of specific functional areas rather than that of the total organization.

Preliminary control:

concentrates on the resources- financial, material, human and information- the organization brings in from the environment. Preliminary control attempts to monitor the quality or quantity of these resources before they enter the organization. Firms such as Pepsi and general mills hire only college grads for their management training programs. Specify standards when you're hiring, when you're acquiring supplies, etc. monitors inputs

Structural control:

concerned with how the elements of the organization's structure are serving their intended purpose . Ex. monitoring the administrative ratio to make sure staff expenses do not become excessive.

Operating budget:

concerned with planned operations within the organization. It outlines what quantities of products or services the organization intends to create and what resources will be used to create them. Ex. sales or revenue budget, expense budget, profit budget

Areas of control:

control can focus on any area of an organization. Most organizations define areas of control in terms of the four basic types of resources they use: physical, human, information and financial. control of physical resources: inventory management, quality control, and equipment control. control of human resources: selection and placement, training and development, performance appraisal, and compensation. Organizations also try to control the behavior of employees. control of information resources: sales and marketing forecasting, environmental analysis, public relations, production scheduling, and economic forecasting. control of financial resources: managing the organization's financial obligations, ensuring that the firm always has enough cash on hand, and ensuring that receivables are collected and bills are paid on a timely basis

integration and planning:

control should be linked with planning. The more precise the linkage, the more effective the control system is. The best way to integrate planning and control is to account for control as plans develop. In other words, as goals are set during the planning process, attention should be paid to developing standards that will reflect how well the plan is realized.

Inappropriate focus:

control system may be too narrow, or it may focus too much on quantifiable variables and leave no room for analysts.

Objectivity:

control system should provide information that is as objective as possible.

Considering corrective action:

decisions regarding corrective action draw heavily on a manager's analytic and diagnostic skills. Ex. as health-care costs have risen, many firms have sought to ways to keep their own expenses in check. Some have reduced benefits; others have opted to pass on higher costs to their employees. After comparing performance against control standards, one of three actions is appropriate: maintain the status quo, correct the deviation, or change the standards. Maintaining the status quo: is preferable when performance essentially matches the standards, but is more likely that some action will be needed to correct a deviation from standards. correct the deviation: Sometimes performance that is higher than expected may also cause problems for organizations. Ex. a highly anticipate new video games are firms introduced, the demand may be so strong that customers are placed on waiting lists. changing an established standards: is necessary if it was set too low or too high at the outset. This is apparent if large numbers of employees routinely beat the standard by a wide margin, or if no employees ever meet the standard.

Timeliness:

does not necessarily mean quickness. It describe a control system that provides information often as is necessary.

Too much accountability:

effective controls allow managers to determine whether employees successfully discharge their responsibilities. If standards are properly set and performance accurately measured, managers know when problems arise and which departments and individuals are responsible. People who do not want to be answerable for their mistakes or who do not want to work as hard as their boss might resist control.

External audits:

financial appraisals conducted by experts who are not employees of the organization. Typically concerned with determining whether the organization's accounting procedures and financial statements are compiled in an objective and verifiable fashion. Usually contracts with certifiable public accountant (CPA). The CPA's main objective is to verify for stockholders, the IRS and other interested parties that the methods by which the organization's financial managers and accountants prepare documents and reports are legal and proper. Corporations are required by law to have external audits regularly, as assurance to investors that the financial reports are reliable.

Types of budgets:

financial, operating and nonmonetary.

Strategic control:

focuses on how effectively the organization's corporate, business and functional strategies are succeeding in helping the organization meet its goals. Ex. if a corporation's been unsuccessful in implementing its strategy of related diversification, its managers need to identify the reasons for that lack of success and either change the strategy or renew their efforts to implement it.

Screening control:

focuses on meeting standards for product or service quality or quantity during the actual transformation process itself. Relies heavily on feedback processes. Ex. in a Dell assembly factory, computer system components are checked periodically as each unit is being assembled. Periodic quality checks provide feedback to workers so that they know what, if any, corrective actions to take. -screening controls tend to be used more often than other forms of control. They are an affective way to promote employee participation and catch problems early in the overall transformation process. Ex. inspection at each stage of the production process. monitors transformation

Postaction control:

focuses on the outputs of the organization after e transformation process is complete. Corning's old system was postaction control-final inspection after the product was manufactured. -may be affective if the product is manufactured in one or two steps.

Operations control:

focuses on the processes that the organization uses to transform resources into products or services. Ex. quality control -

Internal audit:

handled by employees inside the organization. To verify the accuracy of financial and accounting procedures used by the organization. Also examine the efficiency and appropriateness of financial and accounting procedures. -more expensive than external audits.