Chapter 16 Control MGMT Chuck Williams Designed & Prepared by B-books, Ltd Basics of Control After reading this section, you should be able to: describe the basic control process The Control Process Begins Begins by by establishing establishing clear clear standards standards of of performance performance Involves Involves comparing comparing actual actual performance performance to to desired desired performance performance Takes Takes corrective corrective action action to to repair repair performance performance deficiencies deficiencies Is Is aa dynamic, dynamic, cybernetic cybernetic process process But… But… control control isn’t isn’t always always worthwhile worthwhile or or possible possible Consists Consists of of feedback feedback control, control, concurrent concurrent control, control, feedforward feedforward control control Setting Standards A good standard must enable goal achievement Listening to customers or observing competitors Benchmarking other companies – Determine what to benchmark – Identify the companies against which to benchmark – Collect data to determine other companies’ performance standards 1.1 Corrective Action • 1.3 Identify performance deviations • Analyze those deviations • Develop and implement programs to correct them Correct Correct Identify Identify Control Control Process Process Analyz Analyz ee Dynamic, Cybernetic Process Set Set Standards Standards Develop Develop && Implement Implement Program Program for for Corrective CorrectiveAction Action Measure Measure Performance Performance Compare Compare with with Standards Standards 1.4 Analyze Analyze Deviations Deviations Identify Identify Deviations Deviations Feedback, Concurrent, and Feedforward Control 1.5 Feedback Feedback Control Control Gather Gatherinformation informationabout aboutperformance performance deficiencies deficienciesafter afterthey theyoccur occur Concurrent Concurrent Control Control Gather Gatherinformation informationabout aboutperformance performance deficiencies deficienciesas asthey theyoccur occur Feedforward Feedforward Control Control Monitor Monitorperformance performanceinputs inputsrather rather than thanoutputs outputsto toprevent preventor orminimize minimize performance performancedeficiencies deficienciesbefore beforethey they occur occur Feedforward Control Guidelines for Using Feedforward Control 1.1 Thorough Thoroughplanning planningand andanalysis analysisare arerequired required 2 Careful Carefuldiscrimination discriminationmust mustbe beapplied appliedin inselecting selecting input inputvariables variables 3 The Thefeedforward feedforwardsystem systemmust mustbe bekept keptdynamic dynamic 4 AAmodel modelof ofthe thecontrol controlsystem systemshould shouldbe bedeveloped developed 5 Data Dataon oninput inputvariables variablesmust mustbe beregularly regularlycollected collected 1.5 6.6 Data Dataon oninput inputvariables variablesmust mustbe beregularly regularlyassessed assessed 7.7 Feedforward Feedforwardcontrol controlrequires requiresaction action Control Loss Is control worthwhile? Maybe, maybe not Managers must assess the regulation costs and the cybernetic feasibility Control Methods After reading these sections, you should be able to: discuss the various methods that managers can use to maintain control describe the behaviors, processes, and outcomes that today’s managers are choosing to control their organizations 10 The Balanced Scorecard Customer Customer Perspective Perspective Innovation Innovation and and Learning Learning Perspective Perspective Internal Internal Perspective Perspective Financial Financial Perspective Perspective 3.1 19 Advantages of the Balanced Scorecard Forces managers to set goals and measure performance in each of the four areas Minimizes the chances of suboptimization – performance improves in one area at the expense of others 3.1 20 The Balanced Scorecard: Southwest Airlines 3.1 21 The Financial Perspective Cash Cashflow flow analysis analysis Predicts Predictshow howchanges changesin inaabusiness business will willaffect affectits itsability abilityto totake takein inmore more cash cashthan thanititpays paysout out Provide Provideaasnapshot snapshotof ofaacompany’s company’s Balance sheets Balance sheets financial position at a particular time financial position at a particular time Income Income statements statements 3.2 Financial Financial ratios ratios Show Showwhat whathas hashappened happenedto toan an organization’s organization’sincome, income,expenses, expenses, and andnet netprofit profitover overaaperiod periodof oftime time Used Usedto totrack trackliquidity, liquidity,efficiency, efficiency, and andprofitability profitabilityover overtime timecompared compared to toother otherbusinesses businessesin inits itsindustry industry 22 Beyond the Book Basic Accounting Tools Steps Steps for for aa Basic Basic Cash Cash Flow FlowAnalysis Analysis Forecast sales Project changes in anticipated cash flows Project anticipated cash outflows Project net cash flows by combining anticipated cash inflows and outflows 23 Beyond the Book Basic Accounting Tools Parts Parts of of aa Basic Basic Balance Balance Sheet Sheet Assets • • Current assets Fixed assets Liabilities • • Current liabilities Long-term liabilities Owner’s equity • • • Stock Additional paid in capital Retained earnings 24 Beyond the Book Basic Accounting Tools Basic Basic Income Income Statement Statement + = = = = = SALES REVENUE sales returns and allowances other income NET REVENUE cost of goods sold GROSS PROFIT total operating expenses INCOME FROM OPERATIONS interest expense PRETAX INCOME income tax NET INCOME 25 Financial Ratios Beyond the Book LIQUIDITY LIQUIDITYRATIOS RATIOS LEVERAGE LEVERAGE RATIOS RATIOS Current Current Ratio Ratio Debt Debt to to Equity Equity Quick Quick (Acid (AcidTest) Test) Ratio Ratio Debt Debt Coverage Coverage EFFICIENCY EFFICIENCYRATIOS RATIOS PROFITABILITY PROFITABILITYRATIOS RATIOS Inventory Inventory Turnover Turnover Gross Gross Profit Profit Margin Margin Average Average Collections Collections Period Period Return Return on on Equity Equity 26 Beyond the Book Common Kinds of Budgets Revenue Revenue Budgets Budgets Expense Expense Budgets Budgets Profit Profit Budgets Budgets Cash Cash Budgets Budgets Capital Capital Expenditure Expenditure Budgets Budgets Variable Variable Budgets Budgets 3.2 Used Used to to project project or or forecast forecast future future sales sales Used Used to to determine determine spending spending on on supplies, supplies, projects, projects, or or activities activities Used Used by by profit profit centers, centers, which which have have “profit “profit and and loss” loss” responsibility responsibility Used Used to to forecast forecast the the cash cash aa company company will will have have for for expenses expenses Used Used to to forecast forecast large, large, long-lasting long-lasting investments investments Used Used to to project project costs costs across across varying varying levels levels of of sales/revenues sales/revenues 27 Economic Value Added (EVA) Economic Economic Value Value Added Added The Theamount amountby bywhich whichcompany company profits profitsexceed exceedthe thecost costof ofcapital capital in inaagiven givenyear year Common Common Costs Costs of of Capital Capital   Long-term Long-termbank bankloans loans Interest Interestpaid paidto tobondholders bondholders  Dividends Dividendsand andgrowth growthin instock stockvalue valuethat thataccrue accrueto to shareholders shareholders 3.2 28 Economic Value Added (EVA) 3.2 1 Calculate Calculate net netoperating operating profit profitafter aftertax tax $3,500,000 $3,500,000 2 Identify Identifyhow howmuch muchcapital capital the the company companyhas hasinvested invested $16,800,000 $16,800,000 3 Determine Determine the the cost costpaid paid for forcapital capital 10% 10% 4 Multiply Multiplycapital capital used used (step (step 2) 2) times timescost costof ofcapital capital (step (step3) 3) (10% (10%xx$16,800,000) $16,800,000)== $1,680,000 $1,680,000 5 Subtract Subtract total total dollar dollarcost costof of capital capital from fromnet netprofit profit after after taxes taxes $3,500,000 $3,500,000net netprofit profit -$1,680,000 -$1,680,000cost costof ofcapital capital $1,820,000 $1,820,000EVA EVA 29 Why Is EVA Important? 3.2 • Shows whether a business, division, department, profit center, or product is paying for itself • Makes managers at all levels pay closer attention to their segment of the business • Encourages managers and workers to be creative in looking for ways to improve EVA performance 30 The Customer Perspective Controlling Customer Defections • Monitoring customer defections: – identify which customers are leaving the company – measuring the rate at which they are leaving • Obtaining a new customer costs ten times as much as keeping a current one • Customers who have left are likely to tell you what you are doing wrong • Understanding why a customer leaves can help fix problems and make changes 3.3 31 The Internal Perspective Controlling Quality Excellence Excellence Value Value Conformance Conformanceto toExpectations Expectations 3.4 32 The Innovation and Learning Perspective Continuous Continuousimprovement improvementin in products productsand and services services Relearning Relearningand and redesigning redesigningthe the processes processesby bywhich which products products And And services servicesare are created created 3.5 33 ... section, you should be able to: describe the basic control process The Control Process Begins Begins by by establishing establishing clear clear standards standards of of performance performance Involves... without managers – group members control processes, output, and behaviors 2.4 16 Self-Control • Also known as self -management • Employees control their own behavior • Employees make decisions... spending spending on on supplies, supplies, projects, projects, or or activities activities Used Used by by profit profit centers, centers, which which have have “profit “profit and and loss” loss” responsibility