Effective Management Control Systems and Budgeting

Understanding Management Control

Control is the process of measuring and correcting individual and organizational performance to ensure that facts are consistent with the plans and objectives of the company. It facilitates the achievement of these plans.

Purpose and Function of Control

The purpose of control is to ensure the plan succeeds. It consists of four steps:

• Note the means of compliance levels.
• Check performance at regular intervals.
• Determine if there is any variation from the average levels.

Control is exercised through the evaluation of personnel and periodic performance reports.

Types of Control Mechanisms

1. Preliminary Check: This is exercised prior to the action, ensuring the preparation of resources and personnel.
2. Coincidental Control: This involves monitoring by staff and reports observing current activities to ensure policies are met.
3. Feedback Control: This is a post-action control, focusing on past performance to control future activities.

The Control Process

1. Prepare performance reports on actual results.
2. Compare performance.
3. Analyze variations.
4. Develop courses of action.
5. Select alternatives.
6. Make the necessary follow-up to assess correctness.

Control must be supported by feedback.

Feedback and Feedforward Systems

Feedforward: It constitutes a basis for control at the time of the action.

Feedback: It represents a basis for measuring the effectiveness of the posterior control action; it serves for replanning.

The Performance Control Cycle

Desired performance → Actual performance → Measurement of actual performance → Comparison of performance against the standards → Identification of deviations → Analysis of the causes of deviations → Corrective action program → Application of corrections.

Standards and Performance Measurement

Standards are performance criteria. Performance measurements are made so the administrator can see how things are going.

1. Establishing Standards: Reference plans for which the administrator establishes controls.
2. Performance Measurement: The standard serves to avoid problems and to measure the performance of personnel.
3. Correction of Deviations: Deviations can be corrected by the reallocation of tasks.

Budgeting as a Control Tool

Budgets are numeric plans for allocating resources to activities.

Types of Budgets

1. Income: Projected future sales.
2. Cost: Facility planning for activities. Sales are present in every organization.
3. Profits (Utilities): These combine income and expenditure.
4. Cash: A forecast of how much cash is available to the organization and what it needs to cover.
5. Capital Expenditures: Investments in property, buildings, and main equipment.
6. Variable and Fixed: Fixed budgets assume a fixed level of sales or production.

Budgeting Approaches

1. Incremental: Funds are allocated to departments based on previous periods.
2. Zero-Base Budgeting: Used to increase activities that tend to be immortalized without review.

Performance-Based Budgeting (PBC) gives the manager the responsibility for the unit; they must receive that budget because they re-evaluate all organizational functions.