Techniques of Managerial Control
Management is dynamic and so has to be its functions. The controlling function of management in this context has been evolved in due times.
A large number of techniques are available to enable managers to effectively control organizational activities. A manager should know these techniques and in which situation it should be applied and how it is to be applied to gain the maximum of the efforts.
The techniques of managerial control have been broadly classified into two categories:
(I) Traditional techniques
(II) Modern techniques
Traditional Techniques – Techniques of Managerial Control
Traditional techniques are those techniques that have been in use by the business organization from the primitive era and are continued to be used still. These are effective techniques and had not become obsolete with due change in time.
Personal Observation
The most traditional technique is a personal observation of the employees or subordinates by the manager or superior. It provides first-hand, raw, and real information. The managers need to hold discussions with the persons whose work is being controlled and they should watch the actual operations. It also creates positive pressure on the employees to perform well in the tasks assigned to them as they know that their activities are being noted. Through this, managers are able to establish discipline in the organization. The manager is given ample power to take necessary actions as and when required in order to ensure coordination.
However, this technique is time-consuming and may reflect the effects of personal biases towards employees. It may sound negative to an employee who does not get a regular appraisal. Thus, it depends on the manager in how efficient is he/she is collecting the information through this technique.
Statistical Reports
The reason behind the origin of statistics was that it made understanding concepts and conclusions easier. Statistical analysis is done in the form of ratios, percentages, preparing graphs in different ways, etc. present useful and easy to analyze information to the managers regarding the work of the employees. It enables them to suggest solutions in lesser time as compared. The preparation of statistical data enables comparison among employees’ performance over time and also with the benchmarks set by the top-level management.
Breakeven Analysis
It is also called –’ cost volume profit analysis.’ It analyses the relationship between the cost of production, the volume of production, volume of sales, and profits. Here, total costs are divided into two i.e., fixed cost and variable cost. Fixed cost is that cost that does not change with a change in volume of production. Variable cost varies according to the volume of production. This analysis helps in determining the volume of production or sales and the total cost which is equal to the revenue.
Profit is termed as the excess of total revenue over the total cost. The point at which revenue is equal to the total cost is known as ‘Break-Even Point (BEP). In other words, the break-even point is the point at which there is no profit or loss to the organization.
The break-even point analysis helps in managerial control in several ways.
Budgetary Control
A budget is a quantitative statement for a definite period of time so that financial and other resources can be utilized properly to achieve the objectives of the organization. It is a statement that reflects the policy of that particular period. It is that technique of managerial control in which all the operations are planned in advance in the form of budgets and actual results are compared with budgetary standards. Different types of budgets include the following :
Sales budget: A statement of what an organization expects to sell in terms of quantity as well as value.
Production budget: A statement of what an organization plans to produce in the prescribed year or the budgeted period.
Material budget: A statement of estimated quantity and cost of raw materials, tools required for production
Cash budget: Anticipated level of cash inflows and outflows for the budgeted period.
Capital budget: The estimated spending on major long-term Assets such as on factories, on major equipment.
Research and development budget: The estimated level of spending for the development and refinement of products and processes.
Budgeting ensures optimum utilization of scarce resources by allocating them in a proper manner to different departments of an organization. Budgeting helps in a way to focus on specific and time-bound targets and helps in the attainment of organizational objectives.
Budgeting also helps to ensure coordination among different departments as the budget for sales has been set according to production programs and schedules. It also facilitates Management by exception by stressing those operations which deviate from budgeted standards in a significant way.
However, the effectiveness of budgeting depends on how accurately estimates have been made about the future and the budget should be flexible enough so that there is a possibility to accommodate the environmental changes.
Modern techniques – Techniques of Managerial Control
Modern techniques are those techniques that are very new in the management world. These techniques provide various new and better aspects for controlling the activities of an organization. With time, new techniques need to be adopted as the situation demands so.
Return on Investment
Return on investment is also known as return on the capital employed. The rate of profitability is ascertained by the management with the help of this technique. The amount of profits earned by the company is different from the rate of profitability of the company. It provides the basic yardstick for measuring whether invested capital has been used effectively for generating a reasonable amount of return. It can be used to measure the overall performance of an organization or of its individuals, departments, etc. RoI proves to be an effective means of Control for analyzing performance.
Ratio Analysis
Ratio analysis furnishes the comparison between the elements of financial statements. This enables the management to compare the performance of the employees in an organization over time and with other organizations as well. Ratio analysis includes the following types of ratios:
Liquidity ratios: These ratios are calculated to determine and estimate the short-term solvency of a business. In other words, it determines the number of assets available to pay off the current debts.
Solvency Ratios: These ratios help to determine the long-term solvency of the business and prove of immense help to the management to frame further policies and plans, especially capital formation policies.
Profitability Ratios: These ratios help to analyze the profitability of the business operations and involve ways and techniques to improve it further.
Turnover Ratios: These help to determine the efficiency of operations and effective utilization of resources. There is a positive relationship between turnover and better utilization of resources.
Responsibility Accounting
Responsibility accounting can be defined as a system of accounting in which the overall involvement of different sections, divisions & departments of an organization is set up as ‘Responsibility centers’. The head of the center is responsible for achieving the target set for his center. Responsibility centers may be of the following types:
Cost Centre: Cost center, also known as expenses record center, refers to a department of an organization whose manager is held responsible for the cost incurred in the center but not the revenue earned. For example, the Production department of an organization can be termed as the cost center as it is the one that purchases raw materials and is involved in the process.
Revenue Centre: A revenue center refers to a department that is responsible for generating revenues from the operation of an organization. For example, the marketing department.
Profit Centre: A profit center refers to a department whose manager is responsible for both cost and revenues and has to look after those activities which directly affect the profitability of an organization. For example, the Repair and Maintenance department.
Investment Centre: An investment center is responsible for profits as well as investments made in the form of various assets. ROI, return on investment is calculated to ascertain the effectiveness of various investments made by the organization. This ratio is compared with the organization’s previous ratios and with the current and previous ratios of other organizations working in a similar line.
Management Audit
It refers to the systematic appraisal of the overall performance of the management of an organization. The purpose is to review the efficiency and effectiveness of management and to improve its performance in successive periods. It is helpful in identifying the deficiencies in the performance of Management functions. It may be defined as an evaluation of the function performance and effectiveness of management of an organization.
It helps to locate the present potential deficiencies in the performance of managerial functions. It helps to improve the control system of an organization by continuously monitoring the activities. It helps to improve the coordination among the various departments and ensure the updating of existing managerial policies in light of environmental changes.
However, conducting a management audits may sometimes be a problem as there are no standard techniques for it but enlightened managers understand its usefulness in improving the efficiency of the organization’s operations.
PERT and CPM
PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are two important techniques that form an important aspect of planning and controlling functions. These techniques are used to compute the expected time required to complete specific tasks & identify the major activities which directly impact the working of the organization These techniques are mainly used in areas like construction projects, aircraft manufacture, shipbuilding, automobile industries, etc.
The various steps involved in using these techniques are as under:
- The project is first divided into various sets of activities and then these activities are arranged in a logical sequence chronologically.
- A network diagram that is easy to explain is prepared to show the sequence of activities.
- Time estimates are set for each activity that has to be done.
PERT provides three-time estimates-
(A) Optimistic (shortest time)
(B) Most likely time
(C) Pessimistic (longest time).
In CPM, only a one-time estimate is prepared. CPM also concentrates on the cost of completing a particular project in a particular manner.
(iv) The most critical path in the network is the longest path. The longest path consists of those activities which are critical for completing the project on time; hence the name CPM.
(v) If required, necessary changes are introduced in the pre-decided plan for completing the project on time.
Thus, these techniques are so interconnected and are necessary to determine the speed and efficiency of organizations’ operations. These techniques prepare the managers beforehand for the cost and time analysis that would be required to complete the process.
Chapter 8 – Controlling
- Meaning of Controlling
- Techniques of Managerial Control