1. Chapter 8 Controlling

2. Advanced Organizer

3. Chapter Objective
Describe some of the important elements for establishing financial controls
Explain balance sheets, income statements, ratios.
Explain different non-financial control systems

4. 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.”

5. Steps in the Control Process
2. Measuring Actual Performance
1. Establish Standards
4. Corrective Action
3. Comparing Performance with Standards
Planning
Controlling

6. Steps in the Control Process
Establish Standards
Technical: Quality, Quantity, MTBF
Market: Sales, ROI, Earning Expectation
Planning: Objectives, Schedules, Budgets, Policies
Safety: OSHA
EEO
Historical

7. Steps in the Control Process
Establish Standards—by Benchmarking
Internal Benchmarking: productivity
External Benchmarking
Financial Ratios
Performance Metrics
Best Practices
Critical Success Factors
Target Pricing
Balanced Scorecard: new products, new projects, patents, new partners, new customers, new technology

8. Steps in the Control Process
Measuring Actual Performance
Data collection and analysis
Time study, work sampling, performance rating
Comparing Performance with Standards
Establish limits of tolerance
Note variations (deviation within limits) and exceptions (deviation outside limits)
Provide recognition and warning

9. Steps in the Control Process
Corrective Action
Short-term: Consultants, temporary workers
Long-term: Training, modifying procedures and policies

10. 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.

11. Timing of Control Feed-back control Screening or concurrent control
Feed-forward (or preliminary or steering) control

12. Timing of Control Feedback Control (Output)
Measures system output and variance with predetermined standard
Adjusts system to maintain variance within a specified range

13. Timing of Control Screening Control (Concurrent)
Control applied concurrently with effort being controlled

14. Timing of Control Feed-forward Control (Steering or Preliminary)
Attempts to predict the impact of current actions/events
Current decisions are refined to facilitate goal attainment

15. Characteristics of Effective Control
Efficient
Timely
Flexible
Understandable
Tailored
Highlight deviations
Lead to corrective action

16. Types of Control
Financial
Human Resource
Social

17. Financial Controls
Financial statements provide the basic information for the control of cash and credit, which are essential to the survival of a company.
The balance sheet
The income statement
The cash flow statement

18. Balance Sheet Total Assets = Total Liability + Owner’s Equity
Balance sheet shows the firm's financial position at a particular instant in time (a financial "snapshot.“)
Total Assets = Total Liability + Owner’s Equity

19. Balance Sheet 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)
Tangibles and Intangibles

20. Balance Sheet Liabilities are what the firm "owes" Net worth or Equity
Current liabilities (must be paid within a year)
Long-term debt
Net worth or Equity
Original investment (what was paid in for common and preferred stock)
Retained earnings (the cumulative profits over the years after dividends are paid).

21. TABLE 8-1 Balance Sheet, Sterling Chemicals, Inc., December 31, 2005
Assets
Current assets
Cash $150,000
Securities (at cost) ,000 $250,000
Accounts receivable ,000
Inventories (at lower of cost or market)
Raw materials and supplies 200,000
Work in progress ,000
Finished goods , ,000
Prepaid expenses ,000
Total current assets ,360,000
Property, plant, and equipment 4,500,000
Less accumulated depreciation 2,400,000
Net property, plant, and equipment 2,100,000
Total Assets $3,460,000

22. TABLE 8-1 Balance Sheet, Sterling Chemicals, Inc., December 31, 2005
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $100,000
Installments due within 1 year ,000
Federal income and other taxes 250,000
Other accrued liabilities ,000
Total current liabilities ,000
Long-term debt ,000,000
Total Liabilities $1,500,000
Stockholders' equity
Capital stock ,000
Retained earnings 1,460, ,960,000
Total liabilities and equity $3,460,000

23. 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).

24. TABLE 8-2 Income Statement Sterling Chemicals, Inc., December 31, 2005
Gross sales $3,200,000 Less returns and allowances ,000 Net sales $3,050,000
Less expenses and costs of goods sold Cost of goods sold 2,000,000 Depreciation and depletion ,000 Selling expenses ,000 General and admin. expenses ,000 2,550,000
Operating profit ,000
Plus interest and other income ,000
Gross income ,000

25. Gross income 560,000 Less interest expense 20,000
TABLE 8-2 Income Statement Sterling Chemicals, Inc., December 31, 2005
Gross income ,000 Less interest expense ,000
Income before taxes ,000 Provision for income taxes ,000
Net income ,000
Retained earnings January 1, ,500, ,780,000 Dividends paid ,000 Retained earnings December 31, ,460,000

26. 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).

27. Cash Flow Statement (Income Statement)
Operating Costs
Payments to suppliers,
Employees, and others
Operating Revenue
Interest Payments to Debt Holders
Int. on
Debt
Depr.
Taxable
Income
After-tax
Cash Flow
Net
Income
Income
Tax
Div. RE

28. Cash Flow Statement RE Depr. Sources: Uses: Disposal of New Debt/
Properties
New Debt/
Capital
Depr. RE
Sources:
Uses:
Increase in Working Capital
Working Capital = Current Assets – Current Lib.
Others
Repayment of debt & equity
Capital Expenditures

29. A L  + +  S U Cash Flow Statement
The letters labeling the boxes stand for Uses, Sources, Assets, and Liabilities (broadly defined). The pluses (minuses) indicate increases (decreases) in assets or liabilities.  + S +  U

30. 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.

31. Liquidity Ratios
Liquidity ratios measure the ability to meet short-term obligations.

32. Leverage Ratios
Leverage ratios identify the relative importance of stockholders and outside creditors as a source of the enterprise's capital.

33. Activity Ratios
Activity ratios (also known as operating ratios) show how effectively the firm is using its resources.

34. Profitability Ratios
Profitability ratios describe the organization's profit.

35. 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 budgets
Balance sheet budget

36. Responsibility Centers
Expense or cost centers (expense budget)
Revenue center (revenue budget)
Profit centers (profit budget)

37. Budgeting Process
Top-down approach
Bottom-up approach
Combination

38. Cost Accounting Allocating cost among products
  Product A Product B Total
Production 4,000 1,000 5,000
Direct Labor $40,000 $10,000 $50,000
Overhead $5,000
Set-up Cost $8,000
Total Cost $63,000
Unit Cost
$4,000
$1,000
$4,000
$4,000
$48,000
$15,000
$12
$15

39. 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.

40. Nonfinancial Controls
Human Resource Controls
To assure that human and organizational performance conform to expectations.
Performance appraisal (individual)
Management audit (group) (Figure 8-2)
Human resource accounting (group)
Social controls.

41. Nonfinancial Controls
Human Resource Controls
Productivity
Low Skills
High Skills
Amount of Supervision

42. Non-financial Controls
Social Controls
Standards
Comparison with outcomes
Corrective action

43. Non-financial Controls
Effectiveness of research activities
Systems for release of drawing release
Inventory control
Quality control
Project control