Methods of control, and trends, problems and challenges in controlling
Managers control with financial ratios, budgets and information systems, the balanced scorecard and benchmarking, while facing challenges such as privacy, theft and governance.
Financial controls: ratio analysis
| Ratio group | What it shows | Example ratio |
|---|---|---|
| Liquidity | Ability to pay short-term debts | Current ratio = current assets ÷ current liabilities |
| Leverage | How far the firm uses debt to finance its assets | Debt-to-assets = total debt ÷ total assets |
| Activity | How efficiently assets are used | Inventory turnover = revenue ÷ inventory |
| Profitability | How well the firm earns profit | Profit margin = net profit after tax ÷ total revenue |
A quick ratio check
A Galle hardware company has current assets of Rs. 6,000,000, current liabilities of Rs. 4,000,000, total revenue of Rs. 30,000,000 and net profit after tax of Rs. 1,800,000. Its own standards are a current ratio of at least 1.5 and a profit margin of at least 8%. Is it on standard?
- Current ratio = 6,000,000 ÷ 4,000,000 = 1.5, which meets the standard of 1.5.
- Profit margin = 1,800,000 ÷ 30,000,000 = 0.06 = 6%, which is below the 8% standard.
- Profit needed at 8% = 8% × 30,000,000 = Rs. 2,400,000.
- Shortfall = 2,400,000 − 1,800,000 = Rs. 600,000.
Liquidity is on standard, but profitability is 2 percentage points below standard (Rs. 600,000 short), so managers should investigate costs and prices.
Other methods of control
| Method | Meaning |
|---|---|
| Budgetary control | Comparing actual income and spending with the budget and explaining the variances |
| Management information system (MIS) | A system that gives managers timely, accurate information; the information itself must also be protected |
| Balanced scorecard | Robert Kaplan and David Norton: measures performance from four perspectives: financial, customer, internal business processes, and learning and growth |
| Benchmarking | Searching for the best practices among competitors or other organizations that lead to superior performance |
| Organizational performance measures | Productivity (output ÷ input), organizational effectiveness (goals reached), and industry and company rankings |
| Audits | Internal and external checks on records, systems and controls |
Trends, problems and challenges of controlling
- Adjusting controls for national cultures and for global shocks such as currency crises and pandemics.
- Workplace privacy: monitoring email, internet use and location must be balanced against employees' rights.
- Employee theft and fraud: use feedforward (careful hiring), concurrent (supervision) and feedback (audits) controls.
- Workplace violence and safety.
- Controlling customer interactions: the service-profit chain links engaged employees to loyal customers and profit.
- Corporate governance: strong boards, audit committees and honest financial reporting.
- Problems with control itself: too much control kills initiative, controls can cost more than they save, managers may measure only what is easy, and staff may 'game' targets.
Corporate governance in Sri Lanka
Corporate governance is the system used to govern a company so that the interests of its owners are protected. In Sri Lanka, the Companies Act No. 7 of 2007 sets out directors' duties and requires companies to keep proper accounting records and prepare financial statements. CA Sri Lanka issues a Code of Best Practice on Corporate Governance, and the Colombo Stock Exchange listing rules include governance requirements such as audit committees. Financial statements follow SLFRS and LKAS, which makes them comparable and reliable.
Large Sri Lankan groups such as John Keells and Hayleys publish integrated annual reports that show financial results alongside customer, people and environmental measures, close to a balanced scorecard view. As listed companies, they also follow governance rules on boards and audit committees.
Short answer: “What is benchmarking?” Searching for the best practices among competitors or other organizations that lead to their superior performance, so as to learn from them and improve.
Structured question: “Explain the balanced scorecard.” Kaplan and Norton's tool that measures performance from four perspectives: financial, customer, internal business processes, and learning and growth, with one measure for each.
Essay: “Explain the methods of control and the challenges managers face in controlling today.” Financial controls (ratios with a worked example, budgets), information controls, balanced scorecard, benchmarking, then challenges: culture, privacy, theft, customer interactions and governance.
Balanced scorecard: 'Four Cups In Line' = Financial, Customer, Internal processes, Learning and growth. Ratio groups: 'Little Lions Are Powerful' = Liquidity, Leverage, Activity, Profitability.