Business Studies Part I
Business Studies Part II

Managerial Control: Techniques

TECHNIQUES OF MANAGERIAL CONTROL

The various techniques of managerial control may be classified into two broad categories: traditional techniques, and modern techniques.

Traditional Techniques

Traditional techniques are those which have been used by the companies for a long time now. However, these techniques have not become obsolete and are still being used by companies.

These include:

(a)     Personal observation

(b)     Statistical reports

(c)      Breakeven analysis

(d)     Budgetary control

Modern Techniques

Modern techniques of controlling are those which are of recent origin and are comparatively new in management literature. These techniques provide a refreshingly new thinking on the ways in which various aspects of an organisation can be controlled. These include:

(a)               Return on investment

(b)              Ratio analysis

(c)               Responsibility accounting

(d)              Management audit

(e)               PERT and CPM

(f)         Management information system

TRADITIONAL TECHNIQUES

Personal Observation

This is the most traditional method of control. Personal observation enables the manager to collect first hand information. It also creates a psychological pressure on the employees to perform well as they are aware that they are being observed personally on their job. However, it is a very time-consuming exercise and cannot effectively be used in all kinds of jobs.

Statistical Reports

Statistical analysis in the form of averages, percentages, ratios, correlation, etc., present useful information to the managers regarding performance of the organisation in various areas. Such information when presented in the form of charts, graphs, tables, etc., enables the managers to read them more easily and allow a comparison to be made with performance in previous periods and also with the benchmarks.

Breakeven analysis is a technique used by managers to study the relationship between costs, volume and profits. It determines the probable profit and losses at different levels of activity. The sales volume at which there is no profit, no loss is known as breakeven point. It is a useful technique for the managers as it helps in estimating profits at different levels of activities.

Breakeven point can be calculated with the help of the following formula:

Fixed Costs Breakeven Point: Selling price per unit – Variable cost per unit

Breakeven analysis helps a firm in keeping a close check over its variable costs and determines the level of activity at which the firm can earn its target profit.

MODERN TECHNIQUES

Return on Investment

Return on Investment (RoI) is a useful technique which provides the basic yardstick for measuring whether or not invested capital has been used effectively for generating reasonable amount of return. RoI can be used to measure overall performance of an organisation or of its individual departments or divisions. It can be calculated as under.

 RoI=  Net Income                         Sales

                    Sales                    Total Investment

Net Income before or after tax may be used for making comparisons. Total investment includes both working as well as fixed capital invested in business. According to this technique, RoI can be increased either by increasing sales volume proportionately more than total investment or by reducing total investment without having any reductions in sales volume.

RoI provides top management an effective means of control for measuring and comparing performance of different departments. It also permits departmental managers to find out the problem which affects RoI in an adverse manner.

Ratio Analysis

Ratio Analysis refers to analysis of financial statements through computation of ratios. The most commonly used ratios used by organisations can be classified into the following categories:

1.     Liquidity Ratios: Liquidity ratios are calculated to determine short-term solvency of business. Analysis of current position of liquid funds determines the ability of the business to pay the amount due to its stakeholders.

2.     Solvency Ratios: Ratios which are calculated to determine the long-term solvency of business are known as solvency ratios. Thus, these ratios determine the ability of a business to service its indebtedness.

3.     Profitability Ratios: These ratios are calculated to analyse the profitability position of a business. Such ratios involve analysis of profits in relation to sales or funds or capital employed.

4.     Turnover Ratios: Turnover ratios are calculated to determine the efficiency of operations based on effective utilisation of resources. Higher turnover means better utilisation of resources. The table given below gives examples of some ratios commonly used by managers.

RESPONSIBILITY ACCOUNTING

Responsibility accounting is a system of accounting in which different sections, 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 his centre.

Responsibility centers may be of the following types:

Examples of Commonly Used Ratios

Type of Ratio

Examples

Liquidity

Current Ratio Quick Ratio

Solvency

Debt-Equity Ratio

Proprietary Ratio

Interest Coverage Ratio

Profitability

Gross Profit Ratio

Net Profit Ratio

Return on Capital Employed

Turnover

Inventory Turnover Ratio

Stock Turnover Ratio

Debtors Turnover Ratio

  1. Cost Centre: A cost or expense centre is a segment of an organisation in which managers are held responsible for the cost incurred in the centre but not for the revenues. For example, in a manufacturing organisation, production department is classified as cost centre.
  2. Revenue Center: A revenue centre is a segment of an organisation which is primarily responsible for generating revenue. For example, marketing department of an organisation may be classified as a revenue center.
  3. Profit Center: A profit centre is a segment of an organisation whose manager is responsible for both revenues and costs. For example, repair and maintenance department of an organisation may be treated as a profit center if it is allowed to bill other production departments for the services provided to them.
  4. Investment Centre: An investment centre is responsible not only for profits but also for investments made in the centre in the form of assets. The investment made in each centre is separately ascertained and return on investment is used as a basis for judging the performance of the centre.

MANAGEMENT AUDIT

Management audit refers to systematic appraisal of the overall performance of the management of an organisation. The purpose is to review the efficiency and effectiveness of management and to improve its performance in future periods. It is helpful in identifying the deficiencies in the performance of management functions. Thus, management audit may be defined as evaluation of the functioning, performance and effectiveness of management of an organisation.

The main advantages of management audit are as follows.

1.     It helps to locate present and potential deficiencies in the performance of management functions.

2.     It helps to improve the control system of an organisation by continuously monitoring the performance of management.

3.     It improves coordination in the functioning of various departments so that they work together effectively towards the achievement of organisational objectives.

4.     It ensures updating of existing managerial policies and strategies in the light of environmental changes.

Conducting management audit may sometimes pose a problem as there are no standard techniques of management audit. Also, management audit is not compulsory under any law. Enlightened managers, however, understand its usefulness in improving overall performance of the organisation.

PERT AND CPM

PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are important network techniques useful in planning and controlling. These techniques are especially useful for planning, scheduling and implementing time bound projects involving performance of a variety of complex, diverse and interrelated activities. These techniques deals with time scheduling and resource allocation for these activities and aims at effective execution of projects within given time schedule and structure of costs. The steps involved in using PERT/ CPM are as follows:

1.     The project is divided into a number of clearly identifiable activities which are then arranged in a logical sequence.

2.     A network diagram is prepared to show the sequence of activities, the starting point and the termination point of the project.

3.     Time estimates are prepared for each activity. PERT requires the preparation of three time estimates – optimistic (or shortest time), pessimistic (or longest time) and most likely time. In CPM only one time estimate is prepared. In addition, CPM also requires making cost estimates for completion of project.

4.     The longest path in the network is identified as the critical path. It represents the sequence of those activities which are important for timely completion of the project and where no delays can

be allowed without delaying the entire project.

5.     If required, the plan is modified so that execution and timely completion of project is under control.

PERT and CPM are used extensively in areas like ship-building, construction projects, aircraft manufacture, etc.

Management Information System

Management Information System (MIS) is a computer-based information system that provides information and support for effective managerial decision-making. A decision-maker requires up-to-date, accurate and timely information. MIS provides the required information to the managers by systematically processing a massive data generated in an organisation. Thus, MIS is an important communication tool for managers.

MIS also serves as an important control technique. It provides data and information to the managers at the right time so that appropriate corrective action may be taken in case of deviations from standards.

MIS offers the following advantages to the managers:

1.      It facilitates collection, management and dissemination of information at different levels of management and across different departments of the organisation.

2.     It supports planning, decision- as It ensures cost effectiveness in making and controlling at all managing information levels.

3.   It reduces information overload.

4.     It improves the quality of information the managers as only nation with which a manager relevant information is provided works to them.

  1. Analysing deviation and taking corrective action are being discussed in the above lines.
  2. Since it may neither be economical nor easy to monitor each and every activity in the organisation, therefore, every organisation identifies ar\d states its specific key result areas (KRAs) or critical points which require tight control are likely to have a significant effect on the working of the business. Any deviations on these points are attended to urgently by the management.
  3. The two points that highlight the importance of the controlling function are listed below:
    • Accomplishing organisational goals:The controlling function helps in accomplishing organisational goals by constantly monitoring the performance of the employees and bringing to light the deviations, if any, and taking appropriate corrective action.
    • Making efficient use of resources:The controlling function enables the managers to work as per predetermined standards. This helps to avoid any ambiguity in business operations and reduce wastage and spoilage of resources in the organisation.