ControllingClass 12 Business Studies Part 1 Notes

Meaning of Controlling

Controlling is one of the essential functions of a manager. Think of it as the process of making sure that everything in an organization is going according to plan. It involves keeping a close watch on activities to ensure they match the standards set in advance, which helps the business achieve its goals.

In simple terms, controlling means ensuring that an organization's resources (like time, money, and materials) are used effectively and efficiently to reach its predetermined goals. This makes it a goal-oriented function.

Controlling is also a pervasive function, which means it's a primary job for every manager, whether they are at the top, middle, or lower levels of management. It's not just for businesses; organizations like schools, hospitals, and the military also need controlling to keep their activities on track.

It's a common mistake to think of controlling as the final step in management. Instead, it's a function that brings the management cycle back to the planning stage. When managers control, they:

• Find out how much the actual performance differs from the set standards.
• Analyze why these differences (or deviations) occurred.
• Take corrective actions to fix the problems.

This entire process provides valuable feedback that helps in making better plans for the future. So, controlling completes one management cycle and improves the next one.

Importance of Controlling

A good plan can fail without proper control. A strong control system is an indispensable function of management and helps an organization in many ways.

• Accomplishing organisational goals: Controlling measures the progress toward the organization's goals. It highlights any deviations from the plan and points out the need for corrective action. This helps guide the organization and keeps it on the right track.
• Judging accuracy of standards: An effective control system allows management to check if the standards they set are accurate and realistic. It keeps track of changes happening both inside and outside the organization, helping managers to review and revise standards when necessary.
• Making efficient use of resources: By exercising control, managers aim to reduce the waste and spoilage of resources. Since every activity is performed according to set standards, it ensures that resources are used in the most effective and efficient way possible.
• Improving employee motivation: When a good control system is in place, employees know exactly what is expected of them and the standards by which their performance will be judged. This clarity motivates them and helps them perform better.
• Ensuring order and discipline: Controlling creates an organized and disciplined atmosphere. It helps minimize dishonest behavior from employees because it involves keeping a close check on their activities.

• Facilitating coordination in action: Controlling gives direction to all activities, ensuring they work together to achieve organizational goals. Each department and employee follows predetermined standards that are coordinated with one another, helping the entire organization move forward as one.

Limitations of Controlling

Even though controlling is a vital management function, it has some limitations.

• Difficulty in setting quantitative standards: A control system is less effective when performance standards cannot be set in clear numerical terms. It's difficult to measure things like employee morale, job satisfaction, or human behavior, making it hard to compare them against a standard.
• Little control on external factors: An organization generally cannot control external factors like government policies, technological changes, or what competitors are doing. These outside forces can affect performance, but they are beyond the company's control.
• Resistance from employees: Employees often resist control because they see it as a restriction on their freedom. For example, employees might object to being monitored by Closed Circuit Televisions (CCTVs).
• Costly affair: Implementing a control system can be expensive, involving a lot of money, time, and effort. A small company might not be able to afford a sophisticated control system. Managers must ensure that the benefits of a control system are greater than the costs of installing and operating it.

Relationship between Planning and Controlling

Planning and controlling are often called the "inseparable twins" of management because they are deeply interconnected.

A control system needs standards to work, and these standards are provided by planning. Once a plan is put into action, controlling is necessary to monitor progress, measure results, find deviations, and take corrective steps. Therefore, planning without controlling is meaningless.

Similarly, controlling is blind without planning. If there are no standards set in advance, managers have nothing to control. Without a plan, there is no basis for controlling. Planning is a clear prerequisite for controlling.

• Planning is prescriptive, controlling is evaluative: Planning is an intellectual process that involves thinking and analysis to decide on a course of action. It prescribes what should be done. Controlling, on the other hand, is evaluative; it checks whether those decisions have been turned into the desired actions.
• Planning is forward-looking, controlling is backward-looking (with a twist): It's often said that planning looks ahead while controlling looks back. This is partially true. Planning is forward-looking because it involves making plans for the future based on forecasts. Controlling is backward-looking because it's like a postmortem of past activities to find deviations from standards.

In short, planning and controlling reinforce each other:

1. Planning based on facts makes controlling easier and more effective.
2. Controlling improves future planning by providing information from past experiences.

Controlling Process

Controlling is a systematic process that involves several key steps.

1. Setting Performance Standards The first step is to establish standards, which are the criteria against which actual performance will be measured. Standards act as benchmarks that the organization works towards. They can be quantitative (numerical) or qualitative (descriptive).

   • Quantitative Standards: These include targets like the cost to be incurred, revenue to be earned, number of products to be produced, or time to be spent on a task. For example, "reduce defects from 10 per 1,000 pieces to 5 per 1,000 pieces by the end of the quarter."
   • Qualitative Standards: These relate to things like improving employee motivation or company goodwill. Even these should be defined in a way that makes them measurable. For instance, to improve customer satisfaction at a fast-food restaurant, standards could be set for the time a customer waits for a table or to receive their order.

   Standards should also be flexible enough to be modified if the business environment changes.

2. Measurement of Actual Performance Once standards are set, the next step is to measure the actual performance. This should be done in an objective and reliable way. Techniques for measurement include personal observation, sample checking, and performance reports. To make comparison easy, performance should be measured in the same units as the standards. For example, if the standard is to produce 100 units per day, the actual performance should also be measured in units produced per day.

3. Comparing Actual Performance with Standards This step involves comparing the actual performance against the set standard. This comparison will reveal any deviation, which is the difference between the actual results and the desired results. The comparison is much easier when standards are set in quantitative terms.

4. Analysing Deviations Not all deviations are significant. Some variation in performance is expected. The key is to determine an acceptable range of deviation. Deviations in key areas of the business need more urgent attention than those in less important areas. Managers use two important principles here:

   Critical Point Control

   It is not practical or cost-effective to check every single activity. Therefore, control should focus on Key Result Areas (KRAs), which are critical to the success of the organization. These KRAs are set as the critical points. If something goes wrong at these points, the entire organization suffers.

   Example

   In a manufacturing company, a 5% increase in labour costs might be more critical and troublesome than a 15% increase in postal charges. Therefore, labour cost is a critical point that needs close monitoring.

   Management by Exception

   Also known as control by exception, this principle is based on the idea that trying to control everything results in controlling nothing. Therefore, only significant deviations that go beyond a permissible limit should be brought to the attention of management.

   Example

   If a company sets a 2% increase in labour cost as an acceptable deviation, only an increase beyond 2% should be reported to management. A major deviation, like 5%, would require immediate action.

   After identifying the significant deviations, managers must analyze their causes. These could include unrealistic standards, a defective process, lack of resources, or external factors beyond the organization's control.

5. Taking Corrective Action This is the final step. If deviations are within acceptable limits, no action is needed. However, when deviations exceed the acceptable range, especially in critical areas, managers must take immediate corrective action to prevent them from happening again.

   • Corrective action might involve training employees if a production target was missed.
   • If a project is behind schedule, it might involve assigning more workers or allowing overtime.
   • If the deviation cannot be corrected through managerial action (perhaps because the original standard was unrealistic), the standard itself may need to be revised.