Summary and Notes of Ch 8 Controlling| Class 12th Business Studies
Meaning of Controlling
Controlling ensures that an organisation’s resources are being used effectively and efficiently for the achievement of predetermined goals.
Definition (according to Philip Kotler)
Control is the process of taking steps to bring actual results and desired results closed together.
Importance of controlling
• Accomplish organisational goals: The controlling process is implemented to take care of the plans. With the help of controlling, deviations are immediately detected and corrective action is taken for achievement of organisational goals.
• Judging accuracy of standards: An efficient control system keeps a careful check on the changes taking place in the organisation and in the environment and helps to review and revise the standards in light of such changes.
• Making efficient use of resources: Controlling makes it possible to use human and physical resources efficiently.
• Improving employee motivation: The implementation of controlling makes all the employees to work with complete dedication because they know that their work performance will be evaluated and if the progress report is satisfactory, they will have their identify established in the organisation.
• Ensuring order and discipline: controlling creates an atmosphere of order and discipline in the organisation.
• Facilitating coordination in action: Controlling provides direction to all activities and efforts for achieving organisational goals.
Limitations of Controlling
• Difficulty in setting quantitative standards: The setting of standards is possible if the nature of the work is quantitative but in respect of work which is qualitative in nature, the setting of standard is difficult.
• Little control on external factors: An enterprise cannot control on external factors such as government policies, technological changes, competition etc.
• Resistance from employees: Sometimes, employees think that they have bounded by controlling process.
• Costly affair: Control is a costly affair as it involves a lot of expenditure, time, and effort.
Relationship between Planning and Controlling
• Planning and controlling are inseparable twins of management. Once a plan becomes operational, controlling is necessary to monitor the progress and deviations. Thus planning without controlling is meaningless. Other hand controlling is blind without planning, if the predetermined standards are not set in advance, there is nothing to control.
• Planning is looking Ahead whereas Controlling is Looking Back
• Plans are prepared for future and are based on forecasts about future conditions on the contrary controlling is like a post mortem of past activities to find out deviations from the standards.
Controlling Process
• Setting Performance standards: This is a first step of controlling. Standards are those criteria on the basis of which the actual performance is measured. Standards can be set in both quantitative as well as qualitative terms.
• Quantitative standard: They are the standards which shown with the help figures and standards set in terms of cost to be incurred, revenue to be earned, product units to be produced and sold etc. all represents in terms of quantitative standards.
• Qualitative standards: Some examples of qualitative standards are increasing the morale of the employees, improving goodwill.
• Measurement of Actual performance: Once the performance standards are set, the second step is measurement of actual performance. The measurement of performance is done on the basis of predetermined standards. Some of the techniques for measurement of performance are personal observation, sample checking, Performance checking etc. Measurement of a company’s performance may involve calculation of certain ratios like gross profit ratio, net profit ratio, return on investment, etc., at periodic intervals.
• Comparing Actual Performance with standards: This step involves comparison of actual performance with the standard such comparison will reveal the deviation between actual and desired results.
• Analysing Deviations: Analysing deviations are very important for all the activities done in the organisation but deviations in key areas of business need to be attended more urgently as compared to deviations in certain insignificant areas. Critical point control and management by exception should be used by a manager in this regard.
• Critical Point Control: There is not possible to check each and every activity in an organisation. Managers should focus on key result areas of business which related to goals so, KRAs are set on critical points.
• Management by Exception: It is important principle of management control. Only significant deviations which go beyond the permissible limit should be bought to the notice of management.
• Taking Corrective Action: There is no need of any corrective action required when the deviations are within acceptable limits but when the deviations go beyond the acceptable range especially in the important areas need a special attention so that deviations do not occur again.
Techniques of Managerial Control
Managerial control classified into two categories:
• Traditional Techniques
• Modern Techniques
Traditional technique: This is old technique used by the companies for long time.
• Personal observation: This is traditional method of control. It is time consuming control and cannot effectively used in all kinds of jobs. Employees are observed by the manager personally during job hour.
• Statistical Reports: Statistical Reports provides important information to the managers regarding performance of the organisation in various areas in the form of average, percentage, ratios, correlation, etc.
• Breakeven Analysis: It is useful technique for the managers as it helps in estimating profits at different levels of activities to study the relationship between costs, volume, and profits.
• Budgetary Control: Under this technique all operations are planned in advance in the form of budgets and actual results are compared with budgetary standards.
Advantages of Budgeting
• Budgeting focuses on special and time bound target.
• Budgeting is a source of motivation to the employees.
• Budgeting helps in optimum utilisation of resources by allocating them according to the requirements of different department.
• Budgeting helps in coordination among different departments.
Modern Techniques: New techniques in the field of management which is developed by thinking and new observation of manager.
• Return on investment
• Ratio analysis
• Responsibility accounting
• Management audit
• PERT and CPM
• Management information system
• Return on investment: ROI is usually expressed as a percentage and is typically used for personal financial decisions, to compare a company’s profitability or to compare the efficiency of different investment.
ROI = Net income/Sales × sales/Total investment
Total investment (working capital + fixed capital)
• Ratio Analysis: Ration analysis refers to analysis of financial statements through computation of ratios. The most commonly used ratios are:
• Liquidity Ratios: It is calculated to determine short-term solvency of business and also determines the current position of liquid funds Example-current Ratio, quick Ratio
• Solvency ratios: It is calculated to determine the long-term solvency of business and determine the ability of a business to service its indebtedness, Examples are Debt-Equity Ratio, Proprietary Ratio, Interest Coverage Ratio.
• Profitability Ratios: It is calculated to analyse the profitability position of a business. Examples are Gross Profit Ratio, Net Profit Ratio, Return on Capital Employed.
• Turnover ratios: It is calculated to determine the efficiency of operations based on effective utilisation of resources.
• Responsibility accounting: Under this system different section, divisions, and departments of an organisation are set up as ‘Responsibility Centres.’ The head of the centre is responsible for achieving the target set for this centres.
Types of responsibility centres
• Cost Centre: Cost centre is a segment of an organisation in which managers are responsible for only cost incurred in the centre but not for the revenues.
• Revenue Centre: Revenue Centre is a segment of an organisation in which managers are responsible for only revenue generating.
• Profit Centre: Profit Centre is a segment of an organisation in which managers are responsible for both revenues and costs.
• Investment Centre: An investment centre is responsible not only for profits but also for investments.
• Management Audit: Management Audit means evaluation of the functioning, performance and effectiveness of management of an organisation. This helps to check whether management functions run smoothly or not.
The advantages of management audit are as follows:
• It helps to locate present and potential deficiencies in the performance of management functions.
• It helps to improve the control system of an organisation by continuously monitoring the performance of management.
• It improves coordination in the functioning of various departments.
• It ensures updating of existing managerial policies and strategies in the light of environmental changes.
PERT and CPM
PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are useful in planning and controlling task. These techniques are generally used for planning, scheduling and implementing.
Management Information System
It is a computer based information and support for effective managerial decision making. It is also helpful for control technique because it provides accurate information at right time.