Chap 8 Controlling
D ecision Mak ing
P lanning
O rganizing
Leading
C ontro lling
Managem ent Functions
R esearch
D esign
Production
Q uality
Marketing
Project Managem ent
Managing Technology
Tim e Managem ent
E thics
C areer
Personal Technology
Managing Engineering and Technology
Advanced Organizer
Chapter Objective
Explain different financial and non-financial systems
Definition of “Controlling”
“compelling events to conform to plans” -- Goetz
“Control techniques and actions are intended to insure, as far as possible, that the organization does what management wants it to do.”
Steps in the Control Process
4. Corrective Action
2. Measuring Actual Performance
3. Comparing Performance with Standards
1. Establish Standards
Planning
Controlling
Closed-Loop vs. Open-Loop Control
Closed-loop control (also known as automatic or cybernetic control) monitors and manages a process by means of a self-regulating system.
Open-loop control (or non-cybernetic control) requires an external monitoring system and/or an external agent to complete the control loop.
3 Perspectives on the Timing of Control
Feed-back control. Screening or concurrent control. Feed-forward (or preliminary or steering) control.
Timing of Control
Feedback Control (Output)Measures system output and variance
with predetermined standardAdjusts system to maintain variance
within a specified range
Timing of Control
Screening Control (Concurrent)Control applied concurrently with
effort being controlled
Timing of Control
Feedforward Control (Steering or Preliminary)Attempts to predict the impact of
current actions/eventsCurrent decisions are refined to
facilitate goal attainment
Characteristics of Effective Control
Effective. Efficient. Timely. Flexible. Understandable. Tailored. Highlight deviations. Lead to corrective action.
Three Types of Control
Financial
Human Resource
Social
FINANCIAL CONTROLSFinancial statements provide the
basic information for the control of cash and credit, which are essential to the survival of a company.
The balance sheetThe income statement, and The cash flow statement.
Balance SheetBalance sheet shows the firm's financial
position at a particular instant in time (a financial "snapshot.“)
Assets are what the company "owns" current assets (assets that can be converted into cash within a year)fixed assets (property, plant, and equipment at original cost, less the cumulative depreciation of plant and equipment [but not land] and depletion of natural resources since they were purchased).
Balance SheetLiabilities are what the firm "owes" current liabilities (must be paid within
a year) long-term debt.
Net worth or Equity (difference between assets and liabilities) original investment (what was paid in
for common and preferred stock) retained earnings (the cumulative
profits over the years after dividends are paid).
TABLE 8-1 Balance Sheet, Sterling Chemicals, Inc.,
December 31, 2001AssetsCurrent assets
Cash $150,724Securities (at cost) 99,866 $250,590Accounts receivable 416,304Inventories (at lower of cost or market)
Raw materials and supplies 208,046Work in progress 182,702Finished goods 289,610 680,358
Prepaid expenses 29,498Total current assets 1,376,750
Property, plant, and equipment 4,461,150Less accumulated depreciation 2,402,024Net property, plant, and equipment 2,059,126
Total Assets $3,435,876
Liabilities and Stockholders' EquityCurrent liabilities
Accounts payable $105,056Installments due within 1 year 26,836Federal income and other taxes 239,194Other accrued liabilities 120,768Total current liabilities 491,854
Long-term debt 968,664Total Liabilities $1,460,518 Stockholders' equity
Capital stock 505,130Retained earnings 1,470,228 1,975,358
Total liabilities and equity $3,435,876
Balance Sheet, Johnson & Johnson and SubsidiariesMed-Year, 2000
AssetsCurrent assets
Cash and cash equivalent $2,937MMarketable Securities 1,562MAccounts receivable, trade, net4,441MInventories 3,060MOther current assets 2,366M
Total current assets 14,366MMarketable Securities, non-current 398MProperty, plant, and equipment, net 6,692MIntangible assets, net 7,395MOther Assets 1,454MTotal Assets $30,305M
Liabilities and Stockholders' EquityCurrent liabilities
Loans and notes payable $870MAccounts payable 1,785MAccrued and other liabilities 3,950MTotal current liabilities 6,605M
Long-term debt 2,434MOther liabilities 3,287MShareholders' equity
Common stock 1,535MNote receivable from employee stock ownership plan
(35M)Accumulated other comprehensive income(350M)Retained earnings 17,839M
18,989MLess common stock held in treasury, at cost1,010M
Total shareholders' equity 17,979MTotal liabilities and shareholders' equity 30,305M
Income Statement
Income statement (also called a profit and loss or revenue and expense statement) shows the financial performance of the firm over a period of time (usually three months or a year).
Sterling Chemicals, Inc., Gross sales $3,246,386
Less returns and allowances 150,050Net sales $3,096,336
Less expenses and costs of goods soldCost of goods sold 2,002,376Depreciation and depletion 258,502Selling expenses 104,500General and admin. expenses 180,076
2,545,454Operating profit 550,882
Plus interest and other income 59,480Gross income 610,362
Less interest expense 33,260Income before taxes 577,102
Provision for income taxes 261,142Net income 315,960Retained earnings January 1, 2001 1,370,988
1,686,948Dividends paid
216,720Retained earnings December 31, 2001 1,470,228
Cash Flow Statement
Cash flow statement (or sources and uses of funds statement) shows where funds come from (net profit plus depreciation, increased debt, sale of stock, sale of assets) and what they are used for (plant and equipment, debt reduction, stock repurchase, and dividends).
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
operating activitiesoperating activities,
investing activitiesinvesting activities, and
financing activitiesfinancing activities.
operating activitiesoperating activities,
investing activitiesinvesting activities, and
financing activitiesfinancing activities.
This statement reports cash inflowsinflows and outflowsoutflows based on the firm’s
A summary of a firm’s payments during a period of time.
Statement of Cash Flows
Cash Flow from Operating Activities
Shows impact of transactions not defined as investing or financing
activities.
These cash flows are generally the cash effects of transactions that enter into the determination of net income.
Cash Flow From Operating Activities
Cash InflowsCash InflowsFrom sales of goods or servicesFrom interest and dividend income
Cash OutflowsCash OutflowsTo pay suppliers for inventoryTo pay employees for servicesTo pay lenders (interest)To pay government for taxesTo pay other suppliers for other operating
expenses
Statement of Cash FlowsStatement of Cash Flows
Cash Flow from Financing ActivitiesCash Flow from Financing Activities Shows impact of all cash transactions with
shareholders and the borrowing and repaying transactions with lenders.
Cash Flow from Financing ActivitiesCash Flow from Financing Activities Shows impact of all cash transactions with
shareholders and the borrowing and repaying transactions with lenders.
Cash Flow from Investing ActivitiesCash Flow from Investing Activities
Shows impact of buying and selling fixed assets and debt or equity securities of other entities.
Cash Flow From Investing Activities
Cash InflowsCash InflowsFrom sale of fixed assets (property, plant,
equipment)From sale of debt or equity securities (other than
common equity) of other entities
Cash OutflowsCash OutflowsTo acquire fixed assets (property, plant,
equipment)To purchase debt or equity securities (other than
common equity) of other entities
Cash Flow From Financing Activities
Cash InflowsCash InflowsFrom borrowingFrom the sale of the firm’s own equity
securities
Cash OutflowsCash OutflowsTo repay amounts borrowedTo repurchase the firm’s own equity
securitiesTo pay shareholders dividends
Ratio Analysis Financial ratios are ratios of two financial
numbers taken from the balance sheet and/or the income statement. compared with average values for the industry the firm is in to evaluate relative financial health, and compared with earlier values from the same firm to evaluate trends.
Liquidity RatiosLiquidity ratios measure the ability
to meet short-term obligations. Current ratio = Current Assets / Current
Liabilities (Min. 2)
Acid test ratio = [Current Assets – Inventory] / Current
Liabilities (Min. 1)
Leverage RatiosLeverage ratios identify the relative
importance of stockholders and outside creditors as a source of the enterprise's capital.
Debt-to-assets ratio = Total Debt / Total AssetsDebt-to-equity ratio = Total Debt / Total Equity
Activity RatiosActivity ratios (also known as
operating ratios) show how effectively the firm is using its resources. Inventory turnover = [Cost of good sold] / InventoryAsset turnover = [Net sales] / Total assetsAccounts receivable turnover = [Net sales] /[Accounts receivable]
Profitability RatiosProfitability ratios describe the
organization's profit. Profit margin = [Net income] / [Net sales]Return on total assets =[Net income] / [Total assets]Earning per share = [Net income – Dividends (P.S.)] / [# of outstanding shares]
Budgets
Financial budgets describe where the firm intends to get its cash for the coming period and how it intends to use it. Cash budgets Capital expenditure budgetsBalance sheet budget
Responsibility Centers
Expense or cost centers (expense budget)Revenue center (revenue budget)Profit centers (profit budget)
Budgeting Process
Top-down approachBottom-up approachCombination
Cost Accounting Allocating cost among products
Product A Product B Total
Production 4,000 1,000 5,000Direct Labor $40,000 $10,000 $50,000Overhead $4,000 $1,000 $5,000Set-up Cost $4,000 $4,000 $8,000Total Cost $48,000 $15,000 $63,000Unit Cost $12 $15
Audits of Financial Data
Audits are investigations of an organization's activities to verify their correctness and identify any need for improvement. accounting and financial systems and records internal or external.
NONFINANCIAL CONTROLSHuman Resource ControlsTo assure that human and
organizational performance conform to expectations. Performance appraisal (individual)Management audit (group) (Figure 8-2)Human resource accounting (group) Social controls.
Non-financial ControlsSocial Controls
StandardsComparison with outcomesCorrective action
Non-financial Controls
Effectiveness of research activitiesSystems for release of drawing releaseInventory controlQuality control