Various control techniques have been developed to help the managers in both business and non-business organisation.
Traditional Techniques of Control:
(a) Personal Observations:
This is the most effective and oldest method of control. In this technique the manager observes the operations on the spot and directs the subordinate accordingly. This will have the psychological impact on the employees.
The merits of this technique are:
(i) Better performance can be achieved as the work is subject to constant personal observation.
(ii) Easy for the manager to locate errors and take immediate corrective action.
(iii) Best method to collect various behavioural and operational information which may be safely used in further planning and control.
Its demerits are:
(i) It is a time consuming process and a manager cannot afford personal observation all times.
(ii) In the case of enlightened and self-motivated employee does not like to be closely supervised as the employee may resent interference in performance.
(iii) The observer may be biased in performance evaluation.
(b) Statistical Reports and Analysis:
Statistical reports and their analysis is an important instrument of control. Every manager prepares a report on the performance of his subordinates and submits them to his higher authority. Analysis of statistical data in the form of averages, percentages, ratios, correlations etc.; provides help for control.
Areas like production, planning and control, quality control, inventory control can make use of these techniques. Various tools can indicate deviation from standards and suitable managerial actions can be initiated. Diagrammatic presentation and graphical presentation may provide factual data for and trends which are useful for managerial actions.
For problem areas special reports and analysis can be prepared to reveal necessary information for control. An investigating team can be appointed to study in detail this problem and asked to prepare reports for submission to management.
(c) Break-Even Analysis:
Other name cost, volume profit analysis. Because this deals with cost of production, volume of production, price level of output sales mix and profits. In this approach total cost is divided into fixed and variable costs. This approach helps in determining the volume of sales or production at which total cost is fully covered and beyond which profit is earned. Breakeven point is one where there is no profit or no less. That is total cost is equal to total sales. This can be presented graphically.
This can be calculated by using the following formula:
The uses of B.E.P. are:
(i) Helps in determining the minimum volume of sales at which costs can be recovered fully.
(ii) Helps the management in exercising control over variable costs wherever possible.
(iii) Facilitate the management in estimating the turnover by considering the quantum of profit.
(iv) Useful in Judging the managerial results of their decisions.
(d) Budgetary Control:
This is the oldest technique of control which is still used by business organisations. This involves the use of budgets to plan, coordinate and control day-to-day operations of business in accordance with overall objectives of the business. Budgetary control is used as a tool of management to plan, carry out and control the operations of the business.
Walter W. Bigg has defined budgetary control as a system of management and it tries to control all operations and output which were pre-determined. This attempts at comparing actuals with the budget estimates.
This technique refers to the use of budgets to control the operations to see that they conform to the goals specified by the budget. So budgets provide the basis of budgetary control. Therefore it is appropriate to discuss about budget.
Budget is a rational action plan in quantified terms, with definite time frame. It is expressed in financial or physical terms. It is a short-term, operational tool of management to plan and implement control and to co-ordinate organisational activities to achieve its goals. It is an estimate of future needs, arranged according to an orderly basis covering some or all the activities of an enterprise for a definite period of time.
It has the following features:
i. It is prepared in advance and is based on a future plan of actions.
ii. It relates to a future period and is based on objectives to be attained.
iii. It is a statement expressed in monetary and/or physical units prepared by the top management for the implementation of framed policies.
Modern Techniques of Control:
(a) Management Audit:
Management Audit is an overall and scientific appraisal of the quality of management. It is an independent and critical examination of the entire process of management. It is very much like the periodical medical check-up of the business to ensure its sound and healthy growth.
Management audit is an attempt to evaluate the performance of various management processes and functions. It is a comprehensive and critical review of all the aspects of management of a business to ensure optimum utilization of resources. It provides an independent expert assessment of the efficiency and the potential of the management.
Scope of Management Audit:
This is a new control device and it has not developed fully. Its scope is still not defined because of the various practices in management audit. The scope depends on the skill, ingenuity and tact of management auditor. Management audit is to cover all aspects of management or it may be related to any one of its functional areas.
This was developed originally as a tool for investment appraisal. As the management process is the same to all types of organisation its scope was extended to all kinds and sizes of organisation.
The principal appraisal areas which have been identified as management audit are:
(a) Organisation structure
(b) Executive appraisal
(c) Functioning of management board
(d) Soundness of earnings
(e) Economic functioning
(f) Service to shareholders
(g) Research and development
(h) Fiscal policy
(i) Production Efficiency
(j) Sales vigour.
Procedure for Management Audit:
For conducting management audit a separate management auditor is appointed. This auditor may be an outside agency or an internal agency from the experts of the organisation. The object of this appointment is that they present a realistic view of the organisation about its performance.
The person or persons who are appointed as management auditors should have a thorough knowledge of management principles, behavioural aspects and financial areas of management. His terms of appointment must be clear and specific. The management auditor after completing his study is to submit a detailed report to the top management. The report is to specify the deficiencies in the management system and of the managers including chief executive.
The steps in management audit are:
(i) Identification of the objectives of the organisation whose audit is undertaken.
(ii) Identification of targets fixed for each segment to achieve the objectives with their respective plans.
(iii) Reviewing the organisational structure of the entire organisation so as to fix the responsibilities to achieve the overall objectives.
(iv) Evaluation of the actual performance of each responsibility centre by relating inputs with outputs and its comparison with the predetermined objectives and targets.
(v) Suggesting a realistic motivational course of action and other constructive measures such as linkage of the system of incentives with assessment.
Advantages of Management Audit:
(i) This assesses the total system of management that helps to locate present and potential deficiencies in management on the basis of such information. This provides the basis for necessary structural reforms.
(ii) It puts the entire management to test. It facilitates the improvement of control and communication.
(iii) Constant and continuous review of all aspects of management facilitates the administration to improve its performance by focusing on deficiencies and helps the organisation to move in the right direction.
(iv) It provides the right atmosphere for continuous innovations in the light environmental changes.
(v) It facilitates to improve co-ordination and evaluates control mechanism.
Limitations of Management Audit:
(i) The scope, principles, and practices of management audit are not well defined. There are no standard techniques to evaluate management performance. Much depends on the wisdom and capability of management auditor.
(ii) There are possibilities for the creation of complexities in authority relationships.
(iii) Management may generally resent the critical appraisal of its policies and actions. The management audit report may be subjective.
The management audit report should contain the following essential elements:
(i) Table of contents to guide the readers as to what is contained in the report.
(ii) Preface giving a brief statement of scope and objectives of audit.
(iii) Auditor’s findings of investigation carried out by the auditor. Separate sections may be allotted for each function.
(iv) The auditor is to give the summary of suggestions and recommendations for improvement.
(v) Appendix to include supporting data may be given separately.
(b) Return on Investment:
This is regarded as a useful technique of control to evaluate the relative as well as absolute success of business enterprise. It determines the ratio of earnings of the enterprise to its investment. The essence of this approach is that profit is not taken as an absolute figure but is considered in relation to invested capital. This helps in comparing the rate of return of two companies whose profit figures and capital invested are different. Formula used for calculating ROI is,
E stands for Earnings,
I stands for investment
The advantages of ROI are as follows:
(i) It focuses attention on profits and relates them to the most important stake in the company. It indicates how effectively resources are employed.
(ii) It facilitates the comparison of performance of a company. Further it helps in comparing the performance of various divisions, products and also different companies.
(iii) It helps in locating areas where capital is fruitfully employed and in planning future operations.
The limitations of this technique are:
(i) Compiling information for comparison of costs, sales, assets and investments regarding products is a difficult job.
(ii) Excessive emphasis on ROI may lead to the neglect of other important variables.
(iii) Because of inflation there is no appreciation of assets. As the book value of assets is based on historical cost profits earned by the organisation are not reflective of its true position.
(iv) Rate of return of investment may tend to encourage conservation and discourage risk taking in the long-run. ROI does not consider qualitative factors which are important in the long run decision-making.
(c) Responsibility Accounting:
Responsibility accounting focus main attention on responsibility centres. The managers of different activity centres are responsible for controlling the costs of their centres. Information about costs incurred for different activities is supplied to the person’s in-charge of various centres. The performance is constantly compared to the standards set and this process is very useful in exercising cost controls.
The steps involved in responsibility accounting are:
(i) The organisation is divided into various responsibility centres. Each centre is under the charge of a responsibility manager. The managers are responsible for the performance of their departments.
(ii) The targets for responsibility centre are set in. They are established in consultation responsibility centre heads. The goals of these centres are properly communicated to them.
(iii) The actual performance of each centre is recorded and communicated to the concerned executive and actual performance is compared with goals set and this helps in assessing the work of these centres.
(iv) Variations in performance is conveyed to the top management. Personnel who are responsible for performance are also identified.
(v) Timely remedial action is taken to achieve performance standards.
The merits of responsibility accounting are:
(i) It fixes responsibility for performance. So proper identification of performers and under achievers is made to improve performance.
(ii) It improves performance. By assigning responsibility the personnel will know that their performance will be reported to their top management. So they will try to improve performance. For under achievers it acts as a deterrent because they know that they are accountable for poor performance.
(iii) This accounting provides full information about costs and revenues. This is helpful in planning future costs, fixing standards and preparing budgets.
(iv) This facilitates management to delegate authority while retaining overall control. The designing of delegation is done in such a manner to meet the requirements of the organisation and the circumstances.
(v) This is also helpful in decision-making. The information collected under this system is helpful to management in decision-making. The past performance of various cost centres also helps in fixing their future targets. So this system enables management in making important decisions.
(d) P.E.R.T. and C.P.M:
Network analysis is being widely used as a management tool in both commerce and industry. In network analysis, a project is broken down to small activities or operations which are arranged in a logical sequence. After this the order in which various operations should be performed is decided. So a network diagram is prepared to identify the flow plan. The network shows the interdependence of various activities of a project and also points out the activities which have to be completed before others are initiated.
The object of network analysis is to help in planning, organising and controlling the operations to enable the management in accomplishing projects efficiently and economically. A number of network techniques have been developed by various research scholars. But PERT and CPM have gained wide popularity.
(e) Management Information System:
Management information system (MIS) is a system designed to supply information required for effective management of an organisation. Designing an effective information system is vital for the efficient working of an organisation. MIS is designed to supply information required for effective management of an organisation.
Any organisation is managed by means of a variety of decisions made at various levels of its hierarchy. Information is needed to make these decisions. Quality of decisions will largely depend on the nature and quality of information provided for making decisions. So provision of an adequate information system is vital for the effective functioning of an organisation.
The functions of an information system can be broadly classified into two groups:
(i) Data Collection
(ii) Data Management.
(i) Data Collection:
The nature and form of data collected will vary from organisation to organisation based on its objectives. The manner of data collection will depend upon the purpose for which the data is collected. After collecting the data it should be filtered and the relevant data should be classified and tabulated for easy use.
(ii) Data Management:
A good data management system should have the following features:
(a) It should be efficient in respect of routine processing operations.
(b) It should be flexible.
(c) The retrieval of information in case of an enquiry should be efficiently accomplished.
MIS is the link pin of the planning and control function of management.
Objectives of MIS are:
(i) The required information must be made available to the right person, at the right form and at the right time.
(ii) The cost involved in the supply of information must be reasonable.
(iii) To use the most efficient methods of processing data.
(iv) To provide necessary security and secrecy for important and confidential information.
(v) To keep the information up-to-date.
The steps in MIS are:
The system is to be planned by describing in generalised terms the course of action and the limitations within which the system has to be designed.
Organising the flow of information means the designing the number of files to be maintained. Equipment to be used for processing the data, personnel to be employed for this purpose, the ways of processing and storing the information and cost-benefit analysis is to be made.
In this step the fitting in of MIS into the organisation structure is to be made. This is to be made in a phased manner wherein the old should give room for the new one to be introduced without troubling the existing one.
Finally MIS should give the correct feedback for performance. It should also be capable of accommodating changes in the environment.