Controlling Preview Steps in the Control Process Three types of Control Characteristics of Effective Control Systems Financial Controls a. Financial Ratios used in Ratio Analysis b. Financial and Operating Budgets c. Nature of Budgeting Process Assoc.Prof.Dr.B.G.Çetiner Other nonfinancial Controls

Controlling Definition of Controlling Assoc.Prof.Dr.B.G.Çetiner Compelling Events to Conform to Plans Steps of Controlling 1.Establishing Standards Planning 2. Measuring Actual Performance 3. Comparing Performance with Standards 4. Corrective Action Controlling

Closed-Loop versus Open-Loop Control Assoc.Prof.Dr.B.G.Çetiner Closed-Loop: Automatic Control which monitors and manages a process by means of a self-regulating system Open-Loop: Requires an external monitoring system In Engineering Management, last step in control usually requires Human judgment Example; Machining process fails to maintain a specific tolerance The machining problem (fixing) Operator is not skilled enough (training) Tolerance cannot be achieved for that material

Controlling Three Perspectives on the Timing of Control Assoc.Prof.Dr.B.G.Çetiner Feedback Control: Thermostat example Screening or concurrent control: Step-by-step control Feedforward (or preliminary or steering control): Predict the impact of current actions or events on future outcomes and adjust the current decisions to meet the future goals

Controlling Characteristics of Effective Control Systems Assoc.Prof.Dr.B.G.Çetiner Effective: Measure what needs to measured and controlled Efficient: Economical and worth their cost Timely: Enough time for corrective action Flexible: should be adjustable to changing conditions Understandable: should be easy to understand Tailored: Deliver the information according to each level of manager Highlight Deviations: Flag parameters deviating from planned values Lead to corrective action: should incorporate means of corrective actions

Controlling Delegation and Control Assoc.Prof.Dr.B.G.Çetiner In human aspects of organizing, we have seen delegating the authority. Delegation requires effective control systems. You have to apply the rules for making the controls more effective after delegating the authority.

Controlling Financial Controls Assoc.Prof.Dr.B.G.Çetiner Provide basic information for the control of cash and credit which are essential for company survival. There are 3 major types of financial statements: 1. Balance Sheet: Company’s financial position at a particular instant in time 2. Income statement: Financial performance of the firm over a period of time. 3. Cash Flow: Statement showing where funds come from

Controlling Balance Sheet (EXAMPLE: Company X, December 2002) Assoc.Prof.Dr.B.G.Çetiner What company Owns What company Owes

Controlling Statement of Income and Retained Earnings Assoc.Prof.Dr.B.G.Çetiner (EXAMPLE: Company X, End of 2002)

Controlling Financial Ratios (EXAMPLE: Company X, 2002) Assoc.Prof.Dr.B.G.Çetiner Liquidity Ratios Current Ratio Current Assets Current Liabilities = 3,11 Measure the ability to meet short-term obligations. As minimum 2.0 is used but it varies. A current ratio of 10 shows assets are not using efficiently.

Controlling Financial Ratios (EXAMPLE: Company X, 2002) Assoc.Prof.Dr.B.G.Çetiner Liquidity Ratios Acid Test Ratio Current Assets-Inventory Current Liabilities = 1,56 For quickly converting to cash we calculate this ratio. It is difficult to convert inventories to cash, Therefore, inventory is extracted. Over 1.0 is OK.

Controlling Financial Ratios (EXAMPLE: Company X, 2002) Assoc.Prof.Dr.B.G.Çetiner Leverage Ratios Debt-to-assets ratio Total Debt Total Assets = 0,33 Relative importance of stockholders and outside creditors as a source of enterprise’s capital. Rate is dependent on the industry.

Controlling Financial Ratios (EXAMPLE: Company X, 2002) Assoc.Prof.Dr.B.G.Çetiner Activity Ratios Inventory Turnover Cost of Goods Sold Inventory = 2,86

Controlling Financial Ratios (EXAMPLE: Company X, 2002) Assoc.Prof.Dr.B.G.Çetiner Activity Ratios Accounts Receivable Turnover Net Sales Accounts Receivable = 10

Controlling Financial Ratios (EXAMPLE: Company X, 2002) Assoc.Prof.Dr.B.G.Çetiner Activity Ratios Asset Turnover Net Sales Total Assets = 0,91

Controlling Financial Ratios (EXAMPLE: Company X, 2002) Assoc.Prof.Dr.B.G.Çetiner Profitability Ratios Profit Margin Net Income Net Sales = 26,3%

Controlling Financial Ratios (EXAMPLE: Company X, 2002) Assoc.Prof.Dr.B.G.Çetiner Profitability Ratios Return on Total Assets Net Income Total Assets = 23,8%

Controlling Assoc.Prof.Dr.B.G.Çetiner Budgets Plans for the future allocation and use of resources over a fixed period of time. Financial Budgets Planning of cash for the coming period and how the company intends to use it. Three Types of Financial Budgets 1.Cash Budgets: Estimate future revenues and expenditure and their timing during budgeting period 2.Capital Expenditure Budgets: Describes future investments in plant and equipment 3.Balance Sheet Budget: Uses the first two estimates to predict what balance sheet look like at the end of budgeting period

Controlling Assoc.Prof.Dr.B.G.Çetiner Budgets Plans for the future allocation and use of resources over a fixed period of time. There are responsibility centers in organizations. Cost Center: Primary financial concern is control of costs Revenue Center (Sales or Marketing): The manager has revenue targets to meet Profit Centers: For manipulating costs to increase profit. Operating budgets can be created like expense budget, revenue budget and profit budget.

Controlling Assoc.Prof.Dr.B.G.Çetiner Budgeting Process Budgets can be prepared by a central group and imposed on everyone by top management (top-down approach). This does not take the advantage of information from lower management. Alternatively, budgets can be prepared in responsibility centers. They tend to be inflated and doesn’t consider upper management goals and objectives.

Controlling Assoc.Prof.Dr.B.G.Çetiner Audits of Financial Data Audits are investigations of an organization’s activities to verify their correctness and identify any need for improvement. External Audits: required at least once a year for publicly held organization by independent companies Internal Auditing Staff: They spend their times in auditing several units of organization

Controlling Assoc.Prof.Dr.B.G.Çetiner Non-financial Controls Human Resource Control: Seen in Human Aspects of organizing (Chapter 6) Management Audit: By answering some questions about management such as planning, organizing and staffing, directing, control, resource planning and control Human Resource Accounting: Investments in acquiring people and in extensive training Social Control: Building an organizational culture and controlling.