Implementing management controls


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Implementing management controls

  1. 1. IMPLEMENTING MANAGEMENT CONTROLS FOR SMALL AND MEDIUM-SIZE COMPANIESFull E-Book: ‘Implementing Management Controls for Smalland Medium-Size Companies’ASIN: B007Z1WTOMDirect Link: JOHN KYRIAZOGLOU First published in May 2012
  2. 2. SynopsisThis book describes, in brief form, management controls for smalland medium-size companies and a methodology for implementingthem. The following chapters describe and analyze managementcontrols, their main types, how to design such a system, how toimplement them via the BSC model, the critical success factorsenabling the design and good operation of management controls,and the role and responsibilities of the various participants inimplementing and operating management controls.The contents of this book are:Chapter 1: IntroductionChapter 2: What is management control?Chapter 3: Why is management control important?Chapter 3: Main Types of Management Controls: FinancialManagement Measures and Controls, Sales and OutputManagement Measures and Controls, Human Behaviour Measuresand Controls (Directive controls, Preventive controls, Detectivecontrols, Corrective controls, Segregation of Duties controls,Compensating controls and Standardization), and IT Measures andControls.Chapter 4: Methodology of Implementing Management ControlsChapter 5: A BSC Approach to Implementing ManagementControlsChapter 6: Example of a BSC ImplementationChapter 7: Roles and Responsibilities in ImplementingManagement ControlsChapter 8: ConclusionBibliography and Short Biography of the AuthorThe purpose of this book is to provide managers with a quickguide to implementing management controls and improve thecontrol of their small and medium-size businesses. John Kyriazoglou
  3. 3. Chapter 3: Main Types of Management ControlsThe main types of management controls are:Type 1: Financial Management Measures and Controls,Type 2: Sales and Output Management Measures and Controls,Type 3: Human Behavior Measures and Controls, andType 4: IT Measures and Controls.These are briefly described next.3.1 Type 1: Financial Management Measures and ControlsYou need financial management measures and controls to evaluateyour financial performance and ensure your company’s short andlong-term survival and profitability. In most companies around the world, the most common measuresmanagers and other stakeholders use to monitor and evaluate acompany’s performance are financial management controls.Usually, senior managers select financial goals they wish theircompany to achieve, such as growth, profitability, and return toshareholders, and then they measure whether or not these financialgoals have been achieved.One reason for the popularity of financial performance measures isthat they are objective. Thus the performance of one company canbe compared with that of another in terms of its stock market price,return on investment, market share, or even cash flow so thatsenior managers and other stakeholders, particularly shareholders,have some way of judging their company’s performance relative tothat of other companies.Stock price, for example, is a useful measure of a company’sperformance primarily because the price of the stock is determinedcompetitively by the number of buyers and sellers in the market.The stock’s value is an indication of the market’s expectations for
  4. 4. the firm’s future performance. Thus, movement in the price of astock provide shareholders with feedback on a company’s and itsmanagers’ performance. Stock market price acts as an importantmeasure of performance because top managers watch it closely andare sensitive to its rise and fall, particularly its fall.Return of investment (ROI) is another popular kind of financialcontrol. At the corporate level, the performance of the wholecompany can be evaluated against that of other companies toconsider its relative performance. Senior managers, for example,can assess how well their strategies have worked by comparingtheir company’s performance with that of similar companies.The Budget is another very common kind of financial control.Once managers at each level have been given a goal to achieve,budgets regulate how managers and employees are to attain thosegoals that are established. A budget is a blueprint that states howmanagers intend to use the company resources to achieveorganizational goals most efficiently and effectively.Other typical financial performance measures are:1. Return on assets and Return on Capital Employed,2. Dividends per share and P/E (Price/Earnings ratio),3. Net results/revenue,4. Gross results, Product profit, Net profit,5. Product cost, Service cost and Sales cost.All these financial performance measures are usuallycomplemented, depending on the type and size of your company,by the following financial management controls, policies,procedures and systems:1. Computerized financial systems,2. Financial Management Responsibility Controls3. Basic Accounting and Bookkeeping Procedures for GeneralLedger, Financial Statements, etc., and4. Segregation of Finance Duties.
  5. 5. 3.2 Type 2: Sales and Output Management Measures andControlsYou need sales and output management measures and controls toensure regular streams of revenue and high quality products andservices, evaluate your performance in sales and productionprocesses and ensure satisfaction to your company’s customers andyour company’s long-term survival.While financial goals and controls are an important part of themanagement controls approach for companies, it is also necessaryto develop goals and controls that tell you how well your strategyis creating a competitive advantage and building distinctivecompetences and capabilities that will lead to the future success ofyour company.When you implement your management controls system, besidesyour financial goals and controls, you must establish goals andmeasures to evaluate efficiency, quality, innovation, andresponsiveness to customers, for the products and services youoffer. You do this by sales and output management control.Sales and output management control is a system of control inwhich your senior managers estimate or forecast appropriateperformance goals for each functional division, department, andemployee and then measure actual performance relative to thesegoals.The same four building blocks of competitive advantage(efficiency, quality, innovation, and responsiveness to customers)act as the goals against which functional performance is evaluated.In the sales function, for example, goals related to efficiency (suchas cost of sales), quality (such as number of returns), and customerresponsiveness (such as the time needed to respond to customerneeds) can be established for the whole function.
  6. 6. Often your company’s rewards system is linked to performance onthese goals, so that output management control also provides anincentive structure for motivating managers and employees at alllevels in the organization.Finally, business functional managers establish goals thatindividual employees are expected to achieve to allow the functionto achieve its goals. Sales personnel, for example, can be givenspecific goals (related to functional goals), which they in turn arerequired to achieve.Business functions and individuals are then evaluated on the basisof achieving or not achieving their goals, and in salescompensation is commonly pegged to achievement.The achievement of these goals is a sign that the company’sstrategy is working and meeting organizational objectives.Examples of typical sales performance measures are:1. Total sales amount per period,2. Sales per person per period,3. Percentage of sales force achieving quota,4. Number of and amount of new orders, and5. Amount of new business from existing customers.Examples of typical output performance measures are:1. Inventory on hand,2. Production cycle time controls (setup time, processing time,queue time, wait time, idle time, throughput time),3. Basic production costs,4. % of new services/products developed,5. Quality costs (% of errors in data entry operations, appraisalcosts, internal failure costs, external failure costs, etc.