GB Final Exam

Controls can cost the organization in several areas:

(1) financial, (2) damage to culture and reputation, (3) decreased responsiveness, and (4) botched implementation.

benefits of organizational controls

(1) improved cost and productivity control, (2) improved quality control, (3) opportunity recognition, (4) better ability to manage uncertainty and complexity, and (5) better ability to decentralize decision making.

There are three basic financial reports that all managers need to understand and interpret to manage their businesses successfully:

(1) the balance sheet, (2) the income/profit and loss (P&L) statement, and (3) the cash flow statement.

Lean Control

a process for measuring and reducing inventory and streamlining production

outcome controls

are generally preferable when just one or two performance measures (say, return on investment or return on assets) are good gauges of a business's health. Outcome controls are effective when there's little external interference between managerial decision making on the one hand and business performance on the other. It also helps if little or no coordination with other business units exists.

Seven Deadly Wastes (MUDA)

defects, overproduction, transportation, waiting, inventory, motion, over processing

are those assets that are not easily converted to cash in the short term; that is, they are assets that only change over the long term. Land, buildings, equipment, vehicles, furniture, and fixtures are some examples of fixed assets. In the balance sheet for Success-R-Us, the fixed assets shown are furniture and fixtures and equipment. These fixed assets are shown as less accumulated depreciation.

fixed assets

financial control

involves the management of a firm's costs and expenses to control them in relation to budgeted amounts. Thus, management determines which aspects of its financial condition, such as assets, sales, or profitability, are most important, tries to forecast them through budgets, and then compares actual performance to budgeted performance. At a strategic level, total sales and indicators of profitability would be relevant strategic controls.

strategic controls

is concerned with tracking the strategy as it is being implemented, detecting any problem areas or potential problem areas suggesting that the strategy is incorrect, and making any necessary adjustments . Strategic controls allow you to step back and look at the big picture and make sure all the pieces of the picture are correctly aligned.

profit and loss statement

shows the relation of income and expenses for a specific time interval. The income/P&L statement is expressed in a 1-month format, January 1 through January 31, or a quarterly year-to- date format, January 1 through March 31. This financial statement is cumulative for a 12-month fiscal period, at which time it is closed out. A new cumulative record is started at the beginning of the new 12-month fiscal period. The P&L statement is divided into five major categories: (1) sales or revenue, (2) cost of goods sold/cost of sales, (3) gross profit, (4) operating expenses, and (5) net income. Let's look at each category in turn.

gross profit

tells the difference between what you sold the product or service for and what the product or service cost you. The goal of any business is to sell enough units of product or service to be able to subtract the cost and have a high enough gross profit to cover operating expenses, plus yield a net income that is a reasonable return on investment. The key to operating a profitable business is to maximize gross profit.

Organizing and leading are the choices made about the way people work together and are motivated to achieve individual and group goals and objectives.

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This chapter introduced the basics of controls, the process by which an organization influences its subunits and members to behave in ways that lead to attaining organizational goals and objectives. When properly designed, controls lead to better performance by enabling the organization to execute its strategy better. Managers must weigh the costs and benefits of control, but some minimum level of control is essential for organizational survival and success.

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While poorly conceived and implemented nonfinancial controls are certainly a cost for organizations, such ineptness is no defense for not including them in every modern organization's system of controls

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sales or revenue

where the retail price of the product is expressed in terms of dollars times the number of units sold. This can be product units or service units. Sales can be expressed in one category as total sales or can be broken out into more than one type of sales category: car sales, part sales, and service sales, for instance.

4 steps in organizational control

1. establish standards 2. measure performance 3. compare performance to standards 4. take corrective action as needed

Increasingly, however, organizations manage the various levels, types, and forms of control through systems called

Balanced Scorecards

Kaizen

Japanese term for continuous improvement

Newell and Rubbermaid

Single companies who together became really big

balance sheet

The balance sheet is a snapshot of the business's financial position at a certain point in time. This can be any day of the year, but balance sheets are usually done at the end of each month. With a budget in hand, you project forward and develop pro formal statements to monitor actual progress against expectations.

concurrent controls

The process of monitoring and adjusting ongoing activities and processes is known as concurrent control. Such controls are not necessarily proactive, but they can prevent problems from becoming worse. For this reason, we often describe concurrent control as real-time control because it deals with the present. An example of concurrent control might be adjusting the water temperature of the water while taking a shower.

operating expenses

a measurement of all the operating expenses of the business. There are two types of expenses, fixed and variable. Fixed expenses are those expenses that do not vary with the level of sales; thus, you will have to cover these expenses even if your sales are less than the expenses. The entrepreneur has little control over these expenses once they are set. Some examples of fixed expenses are rent (contractual agreement), interest expense (note agreement), an accounting or law firm retainer for legal services of X amount per month for 12 months, and monthly charges for electricity, phone, and Internet connections. Variable expenses are those expenses that vary with the level of sales. Examples of variable expenses include bonuses, employee wages (hours per week worked), travel and entertainment expenses, and purchases of supplies. (Note: categorization of these may differ from business to business.) Expense control is an area where the entrepreneur can maximize net income by holding expenses to a minimum.

lean

a system of nonfinancial controls used to improve product and service quality and decrease waste.

proactivity

can be defined as the monitoring of problems in a way that provides their timely prevention, rather than after the fact reaction

balanced scorecard

control system that translates an organization's vision, mission, and strategy into specific, quantifiable goals and to monitor the organization's performance in terms of achieving these goals.

are those assets that are cash or can be readily converted to cash in the short term, such as accounts receivable or inventory. In the balance sheet shown for Success-R-Us, the current assets are cash, petty cash, accounts receivable, inventory, and supplies.

current assets

budgeting

generally refers to a simple listing of all planned expenses and revenues.

operational control

in contrast to strategic control, is concerned with executing the strategy. Where operational controls are imposed, they function within the framework established by the strategy. Normally these goals, objectives, and standards are established for major subsystems within the organization, such as business units, projects, products, functions, and responsibility centers (Mattews, 1999). Typical operational control measures include return on investment, net profit, cost, and product quality. These control measures are essentially summations of finer-grained control measures. Corrective action based on operating controls may have implications for strategic controls when they involve changes in the strategy.

feedback controls

involve gathering information about a completed activity, evaluating that information, and taking steps to improve the similar activities in the future. This is the least proactive of controls and is generally a basis for reactions. Feedback controls permit managers to use information on past performance to bring future performance in line with planned objectives.

behavioral controls

involve the direct evaluation of managerial and employee decision making, not of the results of managerial decisions. Behavioral controls tie rewards to a broader range of criteria, such as those identified 15.4 Types and Levels of Control 626 in the Balanced Scorecard. Behavioral controls and commensurate rewards are typically more appropriate when there are many external and internal factors that can affect the relationship between a manager's decisions and organizational performance. They're also appropriate when managers must coordinate resources and capabilities across different business units.

cash flow statement

is the detail of cash received and cash expended for each month of the year. A projected cash flow statement helps managers determine whether the company has positive cash flow. Cash flow is probably the most immediate indicator of an impending problem, since negative cash flow will bankrupt the company if it continues for a long enough period. If company's projections show a negative cash flow, managers might need to revisit the business plan and solve this problem.

feedforward control

it addresses what can we do ahead of time to help our plan succeed. The essence of feedforward control is to see the problems coming in time to do something about them.

balanced scorecard 4 analyses:

learning and growth, internal, customer, financial

intangible assets

may also be shown on a balance sheet. These may be goodwill, trademarks, patents, licenses, copyrights, formulas, and franchises. In this instance, net means the value of intangible assets minus amortization.

long term debt (liability)

may be bank notes or loans made to purchase the business's fixed asset structure. Long-term debt/liabilities come due in a period of more than 1 year. The portion of a bank note that is not payable in the coming year is long-term debt/liability.

the ultimate objective of lean is the avoidance of ________, or wasteful activity, in all business operations. doesn't add value

muda

This mistake appears to be a common one but its root cause—failure to adapt the control system to the specific strategy of the organization—is not obvious.

non financial control mistake

failing to validate the links (1) good employee recruiting leads to (2) satisfied employees, which leads to (3) an employee base that creates value, which leads to (4) satisfied customers,which leads to (5) profitable customer buying patterns, which lead to (6) good profitability.

non financial control mistake

not setting performance targets

non financial control mistake

Owner's Equity

refers to the amount of money the owner has invested in the firm. This amount is determined by subtracting current liabilities and long-term debt from total assets. The remaining capital/owner's equity is what the owner would have left in the event of liquidation, or the dollar amount of the total assets that the owner can claim after all creditors are paid."

organizational control

refers to the process by which an organization influences its subunits and members to behave in ways that lead to the attainment of organizational goals and objectives.

organizational controls should serve two basic functions.

should help managers determine whether and why their strategy is achieving the desired results. Second, they should be an early warning system in cases where the organization is getting a little (or a lot) off track.

cost of goods sold/cost of sales

shows the cost of products purchased for resale, or the direct labor cost (service person wages) for service businesses. Cost of goods sold/sales also may include additional categories, such as freight charges cost or subcontract labor costs. These costs also may be expressed in one category as total cost of goods sold/sales or can be broken out to match the sales categories: car purchases, parts, purchases, and service salaries, for example.

measurement failure- non financial control mistake

that is, in many cases, an inappropriate measure is used to assess whether a targeted nonfinancial control is being achieved. using the wrong tools to assess the satisfaction

Net Income

the difference between total revenue and total expenses when total revenue is greater is the bottom line. This is the measure of a firm's ability to operate at a profit. Many factors affect the outcome of the bottom line. Level of sales, pricing strategy, inventory control, accounts receivable control, ordering procedures, marketing of the business and product, expense control, 635 Principles of Management customer service, and productivity of employees are just a few of these factors. The net income should be enough to allow growth in the business through reinvestment of profits and to give the owner a reasonable return on investment.

Current Liabilities

those coming due in the short term, usually the coming year. These are accounts payable; employment, income and sales taxes; salaries payable; federal and state unemployment insurance; and the current year's portion of multiyear debt. A comparison of the company's current assets and its current liabilities reveals its working capital. Many managers use an accounts receivable aging report and a current inventory listing as tools to help them in management of the current asset structure.

non financial controls

track aspects of the organization that aren't immediately financial in nature but are expected to lead to positive performance outcomes. The theory behind such nonfinancial controls is that they should provide managers with a glimpse of the organization's progress well before financial outcomes can be measured. Increasing numbers of organizations have been measuring customer loyalty, referrals, employee satisfaction, and other such performance areas that are not financial.

The financial controls provide a blueprint to compare against the actual results once the business is in operation. A comparison and analysis of the business plan against the actual results can tell you whether the business is on target. Corrections, or revisions, to policies and strategies may be necessary to achieve the business's goals. The three most important financial controls are: (1) the balance sheet, (2) the income statement (sometimes called a profit and loss statement), and (3) the cash flow statement. Each gives the manager a different perspective on and insight into how well the business is operating toward its goals. Analyzing monthly financial statements is a must since most organizations need to be able to pay their bills to stay in business.

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