Explain the techniques of managerial control.
The techniques used for managerial control can be divided into two broad categories namely, Traditional Techniques and Modern Techniques.
Techniques which are being used by the managers since long back, are known as traditional techniques. The following are traditional techniques of managerial control.
i. Personal Observation: This technique includes personal observation by the managers to oversee the work being done. It enables the manager to gather the right information and also creates a pressure on the workers to perform well as they are being continuously observed by their supervisor. However, it is a time consuming process and cannot be used where there are a variety of functions to be overseen.
ii. Statistical Reports: Information in the form various statistical analysis such as averages, ratios, percentages, etc. can be easily presented in the form of graphs, charts and tables. Such presentation facilitates easy comparison of the performance with the standards.
iii. Break-Even Analysis: It involves a study of relation between costs, volume and profits. Break-Even point refers to that quantity of sales where there is neither profit nor loss. It is determined at the point where total cost incurred is equals the total revenue earned. Through this technique, the manager can estimate the costs and profits to the organisation at various levels of quantity and thereby, find the level where profit can be maximised.
iv. Budgetary Control: Budgetary control is a technique of planning the future operations in the form of budgets. Here, 'budget' refers to a quantitative or qualitative statement which presents the objectives to be achieved in a specified period of time. These budgets are then used as standards for measuring the actual performance. It also presents the time-bounded policies to be used for the attainment of the objectives. It also facilitates management by exception by focussing on the activities which deviate significantly from the set budgets. However, to ensure effectiveness of the technique, estimates about the future should be as accurate as possible. In addition, the budgets should be flexible so as to adapt to the changes in business environment.
Modern techniques as the name suggests are modern and recent in origin. They are based on the new thinking of the managers and provide refreshing ideas for a better managerial control. Following are the highlighted modern techniques of controlling.
i. Return on Investment: Return on investment refers to the gains or benefits earned in relation to the investments done. It is a useful technique in measuring whether the invested capital is being used effectively and if a reasonable amount of returns are being generated from these investments. Managers can opt for this technique when comparing the performances of different departments or divisions or when comparing the present actions in relation to the previous year performance.
ii. Ratio Analysis: This technique involves calculating various ratios in order to analyse the financial statements. These ratios are then used as a tool for effective managerial control. Following are the most commonly used ratios for controlling.
(a) Liquidity Ratio, for determining the short-term solvency of business.
(b) Solvency Ratio, for determining the long-term solvency of a business.
(c) Profitability Ratios, for determining the profitability positions of a business.
(d) Turnover Ratios, for determining the efficiency of activities based on the utilisation of resources.
iii. Responsibility Accounting: Under this system, different divisions of an organisation are established as responsibility centres. The head of each centre is responsible for the targets and duties regarding his centre. The following are some of the responsibility centres that can be formed.
(a) Cost Centre, is responsible for the costs incurred by the organisation.
(b) Revenue Centre, responsible for the revenue generated from the sales or marketing activities.
(c) Profit Centre, responsible for the profits generated considering the costs and revenues.
(d) Investment Centre, it takes into account the investment made in the form of assets.
iv. Management Audit: It refers to a systematic approach for analysing and appraising the overall efficiency of the management of a company. It aims at reviewing the efficiency and effectiveness of the management in order to identify the deficiencies in the overall performance. It acts as an important control system by continuously monitoring the working activities of the managers.
v. PERT and CPM: Programme Evaluation and Review Technique (PERT) and Critical Path Method (CPM) are techniques that are based on network analysis. It involves dividing the entire project into various activities and then deciding a time line and cost estimate for each activity and for the entire project. As these techniques deal with time scheduling and resource allocation, they enable effective execution of the projects. Such techniques are generally used in ship-building, construction projects, etc.
vi. Management Information System: MIS is a computer based controlling technique that provides timely data and information to the managers while aiming at effective decision making. It processes the massive data of the organisation and generates useful information to the managers. MIS also ensures cost effectiveness in managing information as it facilitates collection and dissemination of information at different levels.
The aforementioned traditional and modern techniques can be used by the managers for effective and efficient controlling of the organisation.