To ensure the optimal money management takes place within the corporation, it is necessary to ensure effective and efficient management of money at all levels within the corporation. This tool and techniques that are employed to monitor effectiveness and efficiency of operations go by name of Control systems.
Measuring efficiency and effectiveness
All corporations would like their managers at all levels to be both effective and efficient. By effective goals and targets given to him/her. For example, let us imagine that two competing firms in the light engineering industry e trying to come out with a new product let us say a new monitor. Let us assume that the manager of research and development of Firm A is able to develop the prototype, where as research and development manager of firm B is unable to do so. We would say that R and D of manager of Firm A are effective and that of firm B is not effective. However we need our manager not only be effective, but also to be efficient. The question of efficiency does not arise, in case of managers who are not effective. For example, both the managers of the firm A and B have been able to come out of prototype, and then comparison is possible between them in terms of efficiency. Efficiency can be measured in terms of time and cost, though time by itself often reflects cost. For example if manager of firm A came out with the protype in 2 yrs time and at a cost of Rs 10 Lacs(assumption), where as the firm B manager took much as 3 years time and has to spend Rs 15 Lacs, then we can say that while both of them are effective, the manager of Firm A is efficient. While broad frame work in terms of effectiveness and efficiency can be used to measure managers and organisations, these parameters should be used in relation to the job content. Broadly, the levels of the company can be classified into three categories ? junior level, Middle level and top-level. In line with the difference in the nature of tasks performed by these managerial groups three kinds of control systems are required for effective and efficient management of a company. These are Strategic control, Administrative control and Operational control
Strategic control:-
The main task or function of the top management is to provide leadership to an organisation and to lead it towards the future growth and prosperity. In other words, the main concern of the top management should be in terms of the future of the firm and the instrument for this task is planning. The effectiveness of the top management should be measured by whether they are able to lead their organisation towards the goal laid down in the plans and efficiency would be measured in terms of the costs at which such results are obtained. Thus the instrument of control is the corporate plan and the process of control goes by name of strategic control.
The corporate planning process or strategic control starts with the statement of corporate objectives. Organisations which have not clearly identified their objectives cannot do any meaning full corporate planning or control there operations through such techniques. Objectives of corporation are usually stated in terms of economic and social missions. Usually under economic mission, we state the objectives f the corporation in relation to the share holders of the corporation and under social mission we indicate the obligations of the corporation to society at large. Usually, objectives of a firm are stated in qualitative terms such as Maximise profits, to be the leader in the industry but these will not be much use to the operating manager. There for the next step in the corporation planning process is to state major objectives in terms of specific physical targets and the goals. The corporation will also have to decide a planning period or a planning horizon. Different firms choose different planning periods, depending on the technology involved, complexity of the business, levels of uncertainty involved. In the Indian context, the planning period ranges from 3 years to 25 years, though the 5 year planning period is most common among many firms. Given these specific targets and the planning period forecasting is possible. Assume that one of the important objectives desired by a firm is to increase its sales turnover at an annual rate of 10%, given the planning horizon of 5 years; it is to be possible for the firm forecast is known as the preliminary forecast. It usually indicates wishes, desires and aspirations of the top management.
In actual practice what is desired, may not happen. Two basic factors would determine whether what is desired can be achieved or not. One of them is the organisational capability of the firm for the mission and the other factor is the impact environmental factors make on the firm. Therefore after the preliminary forecast has been made, the second step is for the firm to make what is called as SWOT Analysis. A SWOT analysis objectively examines the strengths, weakness, opportunities and threats in the environmental analysis, the preliminary forecast may be revised upwards or downwards, often downwards thus giving a realistic forecast. As a third step, firm try to close the gap between the preliminary forecast and the second realistic forecast after SWOT analysis, by taking specific strategies steps such as expansion, diversification, acquisition, mergers etc.
Administrative control
Just as top management should really concern with the future of the company, there should be another group of managers with in the firm who should predominantly be concerned with the current year?s operations of the firm. It is often said that this responsibility is that of middle level of management name the heads of departments and their immediate deputies. Thus middle level executives should provide leadership and guidance to the operations in attaining the goals and targets of the current operating year. The major instrument of control used for this purpose is the annual budget. In order to ensure an effective linkage between the corporate plan of a firm and the annual operations, leading organisations evolve their annual budgets from out of their corporate plan, a budget business plan dealing with the business operations of a given period, usually a year. A good business plan consists of a forecast, a time schedule and cost budget.
There are three kinds of budgets normally in use; these are the revenue budget, commercial budget and the performance budget. A revenue budget is usually an estimate of incomes and expenditures for the given financial period. The use of this budget originated from government systems but many commercial concerns even today make use of such a budgetary system. Though this is effective tool to estimate incomes and a plan expenditures, as a control technique monitor performance from time to time this budgetary system is quite inadequate
A commercial budget as it is evolved today, is an effective control technique and is found useful in planning, organising, coordinating and controlling operations of the firm. A good commercial budget usually starts with either sales plan or a production plan, depends on which of these is perceived as the major constraint. For example, if a firm has adequate production facilities but sales are the major bottleneck, then the commercial budget of this firm would start with a sales plan. The next step in the construction of commercial budget starts with the production plan. The next step in the construction of commercial budget is to convert the sales plan or production plan into sales/production budget. This would be done in terms of products, regions and time periods and converting production targets into corresponding costs. From the sales budget it is possible to derive a production budget making adjustments for safety stocks to be held. From the production budget, it is possible to derive the materials budget, the purchase budget, the labour budget, and a host of other budgets and to make projected balance sheets and profit and loss accounts for the period. A commercial budget can be made detailed as a firm desires depending on the requirements of a firm. Budgetary review can take place on a weekly, fortnightly or monthly basis. While in the case of revenue budget the review often takes place after a lapse of 6 to 9 months, a commercial can be reviewed at regular periodic intervals even on weekly basis. The great advantage of this budget is that prompt remedial action is possible and managers at every level can be informed of the operation of the firm. The units ? divisions, departments ? which are responsible for lowering productivity can be immediately identified and prompt remedial action taken
The Performance budget, as its name indicates, is an efficiency budget and has been introduced in recent years to efficiently manage non profit organisations such as govt departments. A performance budget is an adapted version of the commercial budget and a refine form of this budgetary system goes by the name of Planning- programming-Budgetary systems. The method consists in planning for an organisation and the plan is further divided into specific programmes of action. Each program is broken into respective components or activities and each activity is budgeted in terms of costs. Thus as in the case of commercial budget, a periodic and timely analysis of performance of each activity at specified intervals is possible and quick remedial actions can be taken,
The budgetary systems can be said to be very backbone of modern management, Firms which are well managed, usually have a very well organised budgetary system. However in order that budgetary system is effective, real participation by managers at all levels of the organisation is essential, where as budgets are thrust on the organisation by the top management or inadequate understanding of the budgetary norms prevail over certain parts of the organisations, or where budgets are used as pressure devices, budget have been found ineffective.
Operational control
In the framework we have developed, planning for the future and guiding the enterprise to greater heights in the future is entrusted to the top management. Managing the enterprises for excellence during the current year is entrusted to the middle level management. However in order to that the current year is budget is effectively and efficiently carried out, day to day is ensured through operational standards. As there are various operations within the firm, different kinds of operational control systems are required at different levels of the organisation. Thus in order that production function is made effective and efficient, we need production, planning and control, in order that materials are managed efficiently and effectively. We need material control systems, such as ABC analysis, and mini max systems such as cash budgeting are used. However from the financial view point all the operation control are for the primary purpose of controlling the costs of operations, the major operating control technique used for this purpose is cost control, particularly through standard costing and finally pricing these standards.
Once the standards in terms of prices and usage of material labour, wages, rates, machine time etc are established, these are converted into standard costs by pricing each component. For example, in order to make one component, if a firm needs Rs 5 worth material, Rs 2 worth Labour and Rs 2 worth of other expenses( total of 9 Rs per unit) to manufacture 100 such units the total cost could be estimated at Rs 900. However this would be so if all the costs have a linear relationship with production. In actual practice this will not be the case. Therefore further refining is required by the nature of behaviour of costs.
By establishing specific cost standards for manufacturing, selling and admistrative operations and using these as standards in the budget, effective operational control is possible. This control consists in comparing the performance the performance in the relation to the standards and then determining the variances and unfavourable or negative variances. For example, if by using standard cost, the manufacturing cost of 100 units of a particular product, should be only Rs 900 but the actual cost of manufacture amounts to be Rs 950, then there is a negative variance of Rs 50. By examining each operation against specific standards, effective operational control is possible.
Another important operational control technique which has been useful in the system is internal audit. Through the system of internal audit a firm can verify the proprierity and efficacy of operations within the firm during the operation period. Internal audit thus helps the management in systematically spotlighting the problem areas for improvement. It adopts a fact finding approach aiming to achieve efficient administration of operations. Typically an internal audit department would consist of insiders having intimate knowledge of the firms operations. The internal audit team usually reports its findings direct to the chief executive.
In recent times internal audit function is going through a major change. These teams are now being conceived as management audit teams and are headed by management accountants. Instead of seeing themselves as agent for fault findings, these auditors perceive themselves as change agents for improving organisational performance at all levels by providing effective counselling and guidance to operating managers for improving systems and procedures
The three fold control system consisting of Strategic, Administrative and operational controls, though presented separately, is in fact, an integrated management control system. Operational control improves budgetary control and effective budgeting leads to effective attainment of corporate plans. Further an integrated management control system of this kind serves as an excellent information system and makes communication within the organisation flow in all directions. Another major advantage of this control system is the decentralisation it brings about in the organisation by leaving appropriate responsibilities and authorities with different levels of the organisation. Thus it holds the top management solely responsible for policy planning and guiding for the future, the middle level responsible for the results of the current year, and the junior levels responsible for the specific day to day operations. At the same time, it is unifying system, as all the three controls are closely interlinked to each other and thereby form one single unified system. However, in order to make this control system effective, it is essential that operating executives at different levels have appropriate knowledge, skills and attitudes for the right use of these important management controls.
