Steps in the Control Process:

1. Establishing Standards:
o Define the performance standards and expectations for the organization.
2. Measuring Performance:
o Collect data and information to assess actual performance against the
established standards.
3. Comparing Performance Against Standards:
o Analyze the measured performance against the set standards to identify
variations or deviations.
4. Corrective Action:
o If variations are found, take corrective action to address the discrepancies
and bring performance back in line with standards.
5. Feedback:
o Provide feedback to relevant individuals or departments about their
performance and the effectiveness of corrective actions.
6. Adjusting Standards:
o Periodically review and adjust standards, if necessary, based on changes in
the internal or external environment.

Three Types of Control:

1. Feedforward Control:
o Takes place before the actual work begins, aiming to prevent potential
problems.
2. Concurrent Control:
o Happens during the execution of tasks, ensuring that activities are on track
and adjustments can be made in real-time.
3. Feedback Control:
o Takes place after the completion of tasks, assessing the results and making
corrections for future activities.
Characteristics of Effective Control Systems:

1. Timeliness:
o Information and feedback should be provided promptly to be useful for
decision-making.
2. Accuracy:
o Data and information used for control should be accurate and reliable.
3. Flexibility:
o Control systems should be adaptable to changes in the internal and
external environment.
4. Comprehensiveness:
o Cover all relevant aspects of organizational activities.
5. Integration:
o Control systems should be integrated into the organization's overall
structure and processes.

Financial Controls:

a. Financial Ratios used in Ratio Analysis:

 Liquidity Ratios (e.g., current ratio, quick ratio)

 Profitability Ratios (e.g., net profit margin, return on equity)
 Leverage Ratios (e.g., debt-to-equity ratio)
 Efficiency Ratios (e.g., inventory turnover, accounts receivable turnover)

b. Financial and Operating Budgets:

 Financial Budgets include the capital budget, cash budget, and budgeted income
statement.
 Operating Budgets include sales budgets, production budgets, and expense
budgets.

c. Nature of Budgeting Process:

  Setting Goals: Establish financial and operational goals.
 Collecting Information: Gather relevant data for budget preparation.
 Budget Preparation: Create detailed budgets for various organizational activities.
 Negotiation and Approval: Review and adjust budgets, gaining necessary
approvals.
 Implementation: Execute plans according to the budget.
 Monitoring and Control: Regularly compare actual performance against the
budget and take corrective action if needed.
 Evaluation: Assess the effectiveness of the budgeting process and make
improvements as necessary.

Steps in the Control Process:

1. Establishing Standards:

 Standards serve as benchmarks or criteria against which actual performance is

measured. These can be set for various aspects such as quality, time, cost, and
quantity.

2. Measuring Performance:

 This step involves collecting data and information about actual performance. It
may include quantitative data like sales figures, production output, or qualitative
data like customer feedback.

3. Comparing Performance Against Standards:

 Comparing actual performance with established standards helps identify any

variances or deviations. Variances can be positive (better than expected) or
negative (worse than expected).

4. Corrective Action:
  When discrepancies are identified, corrective actions are taken to address the
issues and bring performance back in line with the established standards. This
could involve changes in processes, resource allocation, or personnel training.

5. Feedback:

 Providing feedback to employees or departments is crucial for continuous

improvement. It helps individuals understand how well they are performing and
what adjustments, if any, are needed.

6. Adjusting Standards:

 Standards should be periodically reviewed and adjusted to reflect changes in the

internal or external environment. This ensures that standards remain relevant and
realistic.

Three Types of Control:

1. Feedforward Control:

 Involves anticipating potential problems and taking preventive actions before they
occur. For example, training employees before implementing a new process.

2. Concurrent Control:

 Occurs during the actual execution of activities. Managers monitor ongoing

processes to ensure they align with established plans. This allows for real-time
adjustments if needed.

3. Feedback Control:

 Takes place after the completion of activities. Performance is assessed, and

lessons learned are applied to future tasks. It emphasizes learning from past
experiences.
Characteristics of Effective Control Systems:

1. Timeliness:

 Information should be provided in a timely manner to enable quick decision-

making and intervention.

2. Accuracy:

 Control systems must rely on accurate and reliable data to ensure the information
used for decision-making is trustworthy.

3. Flexibility:

 Effective control systems are adaptable to changes in the business environment.

Flexibility allows for adjustments to plans and strategies.

4. Comprehensiveness:

 Control systems should cover all significant aspects of organizational activities to

provide a holistic view of performance.

5. Integration:

 Control mechanisms should be integrated into the organization's overall structure

and processes to ensure coherence and alignment.

Financial Controls:

a. Financial Ratios used in Ratio Analysis:

 Liquidity Ratios: Measure the ability to meet short-term obligations.

 Profitability Ratios: Assess the company's ability to generate profits.
 Leverage Ratios: Evaluate the proportion of debt in the capital structure.
 Efficiency Ratios: Measure how well assets are utilized to generate revenue.
b. Financial and Operating Budgets:

 Financial Budgets: Include capital budgets (for long-term investments), cash

budgets (forecasting cash inflows and outflows), and budgeted income statements.
 Operating Budgets: Include sales budgets, production budgets, and various
expense budgets.

c. Nature of Budgeting Process:

 Setting Goals: Clearly define financial and operational goals.

 Collecting Information: Gather relevant data and involve key stakeholders in the
budgeting process.
 Budget Preparation: Develop detailed budgets based on historical data, market
trends, and organizational objectives.
 Negotiation and Approval: Review and adjust budgets as necessary, obtaining
approvals from relevant authorities.
 Implementation: Execute plans according to the budget, allocating resources and
monitoring progress.
 Monitoring and Control: Regularly compare actual performance with budgeted
figures and take corrective action if needed.
 Evaluation: Assess the effectiveness of the budgeting process and use insights to
improve future budget cycles.

Definition of Controlling:

Controlling is a fundamental function of management that involves the systematic

process of ensuring that organizational activities are directed towards the achievement of
predetermined goals and objectives. It is the managerial process of monitoring,
evaluating, and regulating ongoing activities to ensure they align with established plans
and standards. Controlling is a dynamic and iterative process that involves measuring
actual performance against predetermined benchmarks, identifying any variances, and
taking corrective action to bring performance back in line with the organizational goals.
The control function encompasses various steps, including the establishment of standards,
measurement of performance, comparison of actual results against standards,
identification of deviations, and the implementation of corrective measures. It is an
essential element of the management cycle, providing feedback and insights that
contribute to the continuous improvement and optimization of organizational processes.

Compelling Events to Conform to Plans:

At its core, controlling involves compelling events and activities to conform to the plans
and standards set by the organization. This compulsion is not necessarily authoritarian
but rather a strategic and proactive management approach. Managers utilize various
control mechanisms, such as feedback systems, performance metrics, and corrective
actions, to influence and guide the course of organizational activities.

1. Feedback Systems:
o Controlling involves the establishment of feedback systems that provide
timely and accurate information about ongoing activities. This feedback
allows managers to assess whether the activities are progressing according
to the set plans.
2. Performance Metrics:
o Metrics and key performance indicators (KPIs) are essential tools in the
controlling process. By defining and measuring specific metrics, managers
can objectively evaluate performance and identify areas that require
attention or improvement.
3. Corrective Actions:
o Controlling is not just about identifying deviations but also about taking
corrective actions. Managers may need to intervene, adjust plans,
reallocate resources, or provide additional training to ensure that
organizational activities align with established objectives.
4. Adaptability and Flexibility:
o Controlling is not a rigid process. It recognizes the dynamic nature of
business environments. As such, effective controlling involves the ability
 to adapt plans when necessary, accommodating changes in internal and
external conditions.
5. Continuous Improvement:
o The controlling function contributes to a culture of continuous
improvement within an organization. By learning from past experiences,
understanding the root causes of deviations, and implementing changes,
organizations can enhance their efficiency and effectiveness over time.

Steps of Controlling

1. Establishing Standards:
o This is the initial phase where management defines the benchmarks or
criteria against which the performance of organizational activities will be
measured. Standards can relate to various aspects such as quality, quantity,
time, cost, and more.
2. Measuring Actual Performance:
o Once the standards are established, the next step involves collecting data
and information to assess the actual performance of the organization. This
involves quantitative and qualitative measurements of the activities in
progress.
3. Comparing Performance with Standards:
o In this step, the measured performance is compared against the
predetermined standards. This analysis reveals any variances or deviations
between what was planned and what has actually been achieved.
Variances can be positive or negative.
4. Corrective Action:
o When discrepancies or significant variances are identified, corrective
action is taken. This step involves making adjustments to bring actual
performance back in line with the established standards. Corrective actions
can include process improvements, reallocation of resources, training, or
any other necessary interventions.
These steps collectively form the controlling process, which is an ongoing and dynamic
function within the management cycle. It emphasizes the importance of feedback and
continuous improvement to ensure that organizational activities are aligned with the
overall goals and objectives.

Closed-Loop versus Open-Loop Control:

Closed-Loop Control:

Closed-loop control, also known as feedback control, is a system where the output
of a process is continuously monitored and used to adjust the input in order to
maintain the desired output or setpoint.

 Characteristics:
o Involves a self-regulating system.
o Automatically monitors and manages a process.
o Uses feedback to make real-time adjustments.
 Example: In a thermostat-controlled heating system, the temperature is
continuously measured, and the heating input is adjusted to maintain the desired
temperature.

Open-Loop Control:

Open-loop control, also known as feedforward control, is a system where the

input is determined without direct reference to the output. It does not use feedback
to adjust the process based on the actual output.

 Characteristics:
o Relies on predetermined inputs without real-time feedback.
o Lacks continuous monitoring of the output.
o May be less adaptive to changes.
 Example: A washing machine with a timer setting that runs for a predetermined
duration without considering the actual cleanliness of the clothes.
In Engineering Management, the Last Step in Control Usually Requires Human
Judgment:

 In complex systems, especially those involving intricate processes or unique

problem-solving, the last step in the control process often requires human
judgment.
 Example: In a machining process that fails to maintain a specific tolerance, the
control system may identify the issue, but determining the root cause and
implementing a solution might require human judgment.

Example - Machining Process:

 Problem: The machining process fails to maintain a specific tolerance.

 Control System Detection: The closed-loop control system identifies the variance
from the desired tolerance.
 Human Judgment Required: The last step, which involves understanding why the
tolerance is not met and implementing a solution, may require human judgment.
 Possible Causes:
o The machining equipment needs maintenance or calibration (mechanical
issue).
o The operator lacks the necessary skills or training (human factor).
o The material being used is challenging to work with (material issue).
 Solutions:
o Mechanical issues might be addressed through maintenance.
o Operator skills could be improved through training.
o Adjustments may be needed in the machining process for certain
materials.

Three Perspectives on the Timing of Control

1. Feedback Control:
 o Definition: Feedback control involves adjusting actions based on
information received about the outcomes of past actions. It is a reactive
approach where corrections are made after the fact.
o Example - Thermostat: In a heating system, a thermostat measures the
current temperature (output) and adjusts the heating input to reach the
desired temperature. If the actual temperature deviates, the thermostat
provides feedback to correct the heating.
2. Screening or Concurrent Control:
o Definition: Screening or concurrent control is a real-time monitoring and
adjustment of ongoing activities. It involves continuous observation of
processes to ensure they conform to established standards.
o Example - Step-by-step Control: In a manufacturing process, screening
control involves monitoring each step of production in real-time. If any
deviations from standards are detected during the process, corrective
actions can be taken immediately to prevent defects or errors.
3. Feedforward Control (Preliminary or Steering Control):
o Definition: Feedforward control is a proactive approach where actions are
adjusted in anticipation of future events or outcomes. It involves
predicting the impact of current decisions on future goals and making
adjustments accordingly.
o Example: In business, feedforward control might involve forecasting
demand for a product. Based on this prediction, the production schedule,
inventory levels, and marketing strategies can be adjusted in advance to
meet the expected future demand.

Examples for Illustration:

 Feedback Control (Thermostat Example):

o Scenario: A room is too cold.
o Action: The thermostat detects the low temperature.
o Adjustment: It sends a signal to the heating system to increase warmth.
 o Outcome: The room temperature rises, and the thermostat provides
feedback that the desired temperature has been reached.
 Concurrent Control (Step-by-step Control):
o Scenario: Quality control in a manufacturing process.
o Action: Each step of the production process is continuously monitored.
o Adjustment: If a deviation from quality standards is detected, corrective
actions are taken immediately.
o Outcome: Defects are minimized, and the production process remains on
track.
 Feedforward Control (Business Forecasting):
o Scenario: Planning for future demand for a product.
o Action: Analyzing market trends and customer preferences.
o Adjustment: Production schedules, inventory levels, and marketing
strategies are adjusted in anticipation of future demand.
o Outcome: The company is better prepared to meet customer needs,
avoiding overstock or shortages.

Characteristics of Effective Control Systems:

1. Effective: Measure What Needs to be Measured and Controlled:

o A control system must accurately measure and monitor the critical
parameters and activities relevant to organizational goals. It should focus
on key performance indicators (KPIs) that directly impact the success and
effectiveness of the organization.
2. Efficient: Economical and Worth Their Cost:
o Control systems should be designed with efficiency in mind. The
resources invested in implementing and maintaining the control
mechanisms should be justified by the benefits they provide. An efficient
control system optimizes the use of resources while effectively managing
performance.
3. Timely: Allow Enough Time for Corrective Action:
 o Timeliness is crucial for effective control. The system should provide
timely feedback, allowing managers to intervene and make corrections
before issues escalate. Delays in information can hinder the ability to take
prompt corrective actions.
4. Flexible: Adjustable to Changing Conditions:
o Effective control systems are adaptable to changing circumstances. They
should be designed to accommodate shifts in the internal and external
environment, ensuring that the organization can respond effectively to new
challenges and opportunities.
5. Understandable: Easy to Understand:
o The complexity of control systems should not hinder understanding.
Information presented by the control system should be clear and
comprehensible to all relevant stakeholders. This enhances the system's
usability and promotes informed decision-making.
6. Tailored: Deliver Information According to Each Level of Manager:
o Control systems should be tailored to the needs and responsibilities of
different levels of management. Executives may require a high-level
overview, while front-line managers may need more detailed and specific
information. Customization ensures that information is relevant to each
managerial level.
7. Highlight Deviations: Flag Parameters Deviating from Planned Values:
o An effective control system promptly identifies and highlights deviations
from planned values. By drawing attention to discrepancies, it allows
managers to focus on areas that require immediate attention, facilitating
timely corrective actions.
8. Lead to Corrective Action: Incorporate Means of Corrective Actions:
o The ultimate purpose of a control system is to facilitate improvement.
Therefore, effective control systems should not only identify problems but
also suggest or guide the implementation of corrective actions. This may
involve providing recommendations, guidelines, or automated responses
to bring performance back on track.
CONTROLLING

Delegation and Control

In human aspects of organization, we have seen delegating the authority.

Delegation requires effective control system. You have to apply the rules for making the
controls more effective after delegating the authority.

-The act of giving a particular job, duty, etc. to someone else: the delegation of
authority/power/responsibility. The main principle involved is the delegation of
responsibility for budgets to accountable units, each of which has defined objectives.

-Some examples of delegation in the workplace with varying levels of trust and
autonomy include: Giving directions to a subordinate and telling them exactly what to do.
Assigning someone to compile research, gather feedback, and report back to you so you
can make informed decisions.

-For example, you can assign one group to have full control of all objects in an
OU; assign another group the rights only to create, delete, and manage user accounts in
the OU; and then assign a third group the right only to reset user account passwords.

Controlling Financial and Controls

Provide basic information for the control of cash and credit which are essential for
company survival.

Financial controls are the procedures, policies, and means by which an

organization monitors and controls the direction, allocation, and usage of its financial
resources. Financial controls are at the very core of resource management and operational
efficiency in any organization.

There are 3 types of financial statements:

1.Balance Sheet: Company’s financial position at a particular instant in time.

-A balance sheet is a financial statement that contains details of a company's

assets or liabilities at a specific point in time. It is one of the three core financial
statements (income statement and cash flow statement being the other two) used for
evaluating the performance of a business.

2. Income statement: Financial performance of the firm over a period of time.

-An income statement is a financial statement that shows you the company's
income and expenditures. It also shows whether a company is making profit or loss for a
given period. The income statement, along with balance sheet and cash flow statement,
helps you understand the financial health of your business.

3. Cash Flow: Statement showing where funds come from.

-Cash flow is the movement of money in and out of a company. Cash received
signifies inflows, and cash spent is outflows. The cash flow statement is a financial
statement that reports a company's sources and use of cash over time.

CONTROLLING balance Sheet:

-Control accounts are most commonly used to summarize accounts payable and
accounts receivable as these tend to contain a lot of transactions. Therefore they are
separated into subsidiary ledgers rather than clutter up the general ledger with too much
detailed information.

- Accounting controls consists of the methods and procedures that are

implemented by a firm to help ensure the validity and accuracy of its financial
statements.

- A balance sheet summarizes a company's assets, liabilities and shareholders'

equity at a specific point in time (as indicated at the top of the statement). It is one of the
fundamental documents that make up a company's financial statements.

CONTROLLING Statement of Income and Retained Earnings

- The statement of retained earning shows the accumulated profit of a company

after dividend are paid to shareholders. The statement of retained earnings is a key
financial document that shows how much earnings a company has accumulated and kept
in the company since inception.

- The purpose of an income statement is to provide financial information to

investors, creditors, and readers, whether the company is profitable during the financial
year. In the context of corporate finance, the income statement is the record of the
company's profit and loss over the financial year.
Controlling financial ratios involves using various financial metrics to assess and
manage a company's performance and financial health. These ratios provide insights into
different aspects of a business, such as profitability, liquidity, solvency, and efficiency. By
monitoring and controlling these ratios, businesses can make informed decisions, identify
areas for improvement, and maintain financial stability.

Here are some key financial ratios and examples, along with explanations of how they
can be controlled:

1. Liquidity Ratios:

Example Ratio: Current Ratio

Formula: Current Ratio = Current Assets / Current Liabilities
Explanation: The current ratio measures a company's ability to cover its short-
term liabilities with its short-term assets. A ratio below 1 indicates potential
liquidity problems.
Control Mechanism: Increase current assets (e.g., by efficient inventory
management) or decrease current liabilities (e.g., by negotiating better payment
terms with suppliers) to improve the current ratio.
2. Profitability Ratios:

Example Ratio: Net Profit Margin

Formula: Net Profit Margin = (Net Profit / Revenue) x 100
Explanation: This ratio assesses the percentage of revenue that translates into net
profit. Higher net profit margins indicate better profitability.
Control Mechanism: Increase revenue, reduce expenses, or improve operational
efficiency to enhance net profit margins.
3. Solvency Ratios:

Example Ratio: Debt-to-Equity Ratio

Formula: Debt-to-Equity Ratio = Total Debt / Shareholders' Equity
Explanation: This ratio measures the proportion of debt used to finance the
 company's assets. A higher ratio may indicate higher financial risk.
Control Mechanism: Reduce debt or increase equity to lower the debt-to-equity
ratio and improve financial stability.
4. Efficiency Ratios:

Example Ratio: Inventory Turnover

Formula: Inventory Turnover = Cost of Goods Sold / Average Inventory
Explanation: This ratio measures how many times a company's inventory is sold
and replaced over a period, indicating how efficiently inventory is managed.
Control Mechanism: Improve inventory management, reduce excess inventory, or
negotiate better terms with suppliers to increase inventory turnover.
5. Return Ratios:

Example Ratio: Return on Assets (ROA)

Formula: ROA = Net Profit / Average Total Assets
Explanation: ROA measures how efficiently a company utilizes its assets to
generate profit.
Control Mechanism: Increase net profit or optimize asset utilization to improve
ROA. Liquidity Ratios
Current Ratio
Current Assets
Current
140000
=
0

Measure the ability

to meet short-term
obligations.
As minimum 2.0 is
used
but it varies. A
current
 Liquidity Ratios
Acid Test Ratio
Current Assets-Inventory
Current Liabilities

1400000-700000 = 1,56
450000

For quickly converting

to cash we calculate
this ratio.
It is difficult to convert
inventories to cash,
Therefore, inventory is
extracted.
Over 1.0 is OK.
 Leverage Ratios
Debt-to-assets ratio
Total Debt
Total Assets

1450000
= 0,33
4400000

Relative importance of
stockholders and
outside creditors as a
source of enterprise’s
capital.
Rate is dependent on
the industry.

Activity Ratios
Inventory Turnover
Cost of Goods Sold
Inventory

2000000
= 2,86
700000
 Activity Ratios
Inventory Turnover
Cost of Goods Sold
Inventory

2000000
= 2,86
700000
Controlling financial ratios are quantitative measurements used to analyze and monitor
a company's financial performance, specifically in terms of its ability to control and
manage its resources. These ratios help evaluate the efficiency, profitability, liquidity, and
solvency of a company by comparing different financial elements or variables within the
organization's financial statements.

Some common controlling financial ratios include:

1. Return on Investment (ROI): This ratio measures the profitability of an investment by

comparing the net profit to the cost of the investment.

2. Return on Equity (ROE): ROE measures the ability of a company's management to

generate profits from shareholders' equity.

3. Gross Profit Margin: This ratio shows the profitability of a company after deducting
the cost of goods sold from the total revenue.

4. Operating Profit Margin: This ratio indicates the profitability of a company's core
operations by measuring the operating income as a percentage of revenue.

5. Current Ratio: The current ratio assesses a company's ability to pay off its current
liabilities using its current assets. It is calculated by dividing current assets by current
liabilities.

6. Debt-to-Equity Ratio: This ratio measures the company's financial leverage and risk by
comparing the amount of debt to the shareholders' equity.

Overall, controlling financial ratios provide insights into a company's financial health,
aiding in decision-making processes and identifying areas that require improvement or
further analysis.

Activity Ratios:

Activity ratios are classified into three main categories:

1. Working Capital

Working capital, also referred to as operating capital, is the excess of current assets over
current liabilities. The level of working capital provides an insight into a company’s
ability to meet current liabilities as they come due. Achieving a positive working capital
is essential; however, working capital should not be too large in order not to tie up capital
that can be used elsewhere.

There are three main components of working capital are:

Receivables

Inventory

Payables

Profitability ratios

1. Net profit margin = After tax net profit / Net sales

Shows the net income generated by each dollar of sales. It measures the percentage of
sales revenue retained by the company after operating expenses, interest and taxes have
been paid.

2. Return on shareholders’ equity = Net income / Shareholders' equity

Indicates the amount of after-tax profit generated for each dollar of equity. A measure of
the rate of return the shareholders received on their investment.

3. Coverage ratio = Profit before interest and taxes / Annual interest and bank charges

Measures a business's capacity to generate adequate income to repay interest on its debt.

4. Return on total assets = Income from operations / Average total assets

Measures the efficiency of assets in generating profit.

6. Explanation: ROA measures how efficiently a company utilizes its assets to
generate profit.
Control Mechanism: Increase net profit or optimize asset utilization to improve
ROA.

Activity Ratio
Asset Turnover
Net Sales

Total Asets

4000000 = 0,91
4000000

Profitability Ratios
Profit Margin

Net Income

Net Sales
Plus interest and other income 100000 Profitability Ratios
Return on Total
Gross income 1400000 Assets

Net Income
Less interest expense 50000
Total Assets
Income before taxes 1350000

Provision for income taxes 300000

1050000
Net income 1050000 4400000 = 23,8%

Retained earnings January 1, 2003 1500000

Controlling budgets involves creating plans for the future allocation and use of
resources over a fixed period of time, typically a year. This process helps organizations
manage their financial resources effectively and achieve their goals by outlining the
anticipated revenue and expenses.

Forecasting: Budgeting starts with forecasting the organization's revenue and expenses
for the upcoming period. This involves analyzing historical data, market trends, and other
relevant factors to predict future financial performance.

Revenue Budgeting: The first step in controlling budgets is to plan and estimate the
revenue streams. This may include sales projections, grants, fees, investments, or any
other sources of income.

Expense Budgeting: Once the revenue is estimated, the next step is to determine how
resources will be allocated. This includes budgeting for various expenses such as salaries,
operational costs, marketing, research and development, debt servicing, etc.

Setting Targets: Budgets help set specific targets for each department or cost center
within an organization. This facilitates better resource allocation and performance
measurement against predetermined objectives.

Resource Allocation: In the budgeting process, organizations need to allocate resources

efficiently based on priorities and strategic goals. This requires considering the needs of
different departments, projects, or initiatives and distributing resources accordingly.

In summary, controlling budgets involves developing comprehensive plans for the future
allocation and use of resources to achieve financial goals, enhance decision-making, and
ensure efficient resource management.

Financial budget planning of cash for the coming period involves estimating and
forecasting the inflows and outflows of cash for the company.

Assess the current financial situation: The company needs to evaluate its current cash
position, including analyzing the existing cash reserves, outstanding debts, pending
payments, and any other financial obligations.
Forecast cash inflows: The Company should estimate the expected cash inflows from
various sources, such as sales revenue, loans, investments, and any other income streams.
This estimation should be based on historical trends, market conditions, sales projections,
and other relevant factors.

Project cash outflows: The Company needs to project the anticipated cash outflows for
the upcoming period. This may include operating costs, raw material procurement, rent,
salaries and wages, loan repayments, taxes, marketing expenses, and other expenditures.

Three types of financial budgets

1. Cash Budgets: Estimate future revenues and expenditure and their timing during
budgeting period. Cash budgets are an essential tool for businesses and
individuals alike as they provide a comprehensive estimate of future revenues and
expenditures, along with their respective timing, during a specific budgeting
period. This enables individuals and businesses to effectively plan and manage
their finances, ensuring that they can meet their financial obligations and make
informed decisions regarding spending and saving
2. Capital Expenditure Budgets: Describes future investments in plant and
equipment. This are crucial financial plans that outline the projected investments
in plant and equipment that a company plans to carry out in the near future.
3. Balance Sheet Budget: Uses the first two estimates to predict what balance sheet
look like at the end of budgeting period. It is a financial management tool that
utilizes the first two estimated budgets to provide a projection of what the balance
sheet will appear at the conclusion of the budgeting period.
Budgets

Plans for the future allocation and use of resources over a fixed period of time.

Budget control refers to the process of managing, monitoring, and adjusting a

company’s budget and cash flow to ensure that the business remains on track to meet its
financial goals and deliver on the organization’s objectives.

The budget itself which illustrates estimated revenue and expenses over a specific period
of time is an essential part of business planning, allowing companies to make informed
decisions during financial planning activities. Budget planning should take several things
into account, including fixed costs, such as office rental payments, as well as variable
expenses, such as the cost of raw materials.

Budget control, meanwhile, is an ongoing process that supports the budget and helps
achieve its wider financial aims. Budget control requires:

*Reviewing budgets regularly to track business spending, expenses, and

performance against the budget’s figures.

*Identifying reasons for variance, which occurs when actual spending and
business expenses are higher than budgeted.

*Taking quick corrective action where variance is identified. This may include
reducing expenses, increasing income, or both, to ensure business performance remains
on track.

COMMON PRINCIPLES OF BUDGETARY CONTROL

Methods used for budget control can vary from organization to organization, but there are
a few guiding principles that apply across the board:

 Set realistic budgets. A budget should be achievable and built on accurate data
from previous years or comparable information.
 Be flexible. Adjustments may be necessary due to changes in the market or
business environment, so budgets – and businesses – need to be able to adapt as
needed.
  Communicate. Everyone within a business should know how their role helps
deliver on the organisation’s budget. In fact, budget control relies on two-way,
collaborative communication with staff.
 Monitor progress. Budgets need to be monitored regularly to ensure that any
issues are identified as early as possible.
 Take corrective action. Any variances should be addressed straight away to ensure
that spending and expenses get back on track.

There are responsibility centers in organizations.

In designing a responsibility accounting system, management must examine the

characteristics of each segment and the extent of the responsible manager’s authority.
Care must be taken to ensure that the basis for evaluating the performance of an expense
center, profit center, or investment center matches the characteristics of the segment and
the authority of the segment’s manager. The following sections of the chapter discuss the
characteristics of each of these centers and the appropriate bases for evaluating the
performance of each type.

Cost Center: Primary financial concern is control of costs

An expense center is a responsibility center incurring only expense items and

producing no direct revenue from the sale of goods or services. Examples of expense
centers are service centers (e.g. the maintenance department or accounting department) or
intermediate production facilities that produce parts for assembly into a finished product.
Managers of expense centers are held responsible only for specified expense items.

Revenue Center (Sales or Marketing): The manager has revenue targets to meet

A distinct operating unit of a business that is responsible for generating sales and
is judged solely on its ability to generate sales; it is not judged on the amount of costs
incurred. Revenue centers are employed in heavily sales-focused organizations.

Profit Centers: For manipulating costs to increase profit.

A profit center is a responsibility center having both revenues and expenses.

Because segmental earnings equal segmental revenues minus related expenses, the
manager must be able to control both of these categories. The manager must have the
authority to control selling price, sales volume, and all reported expense items. To
properly evaluate performance, the manager must have authority over all of these
measured items. Controllable profits of a segment result from deducting the expenses
under a manager’s control from revenues under that manager’s control.

Operating budgets can be created like expense budget, revenue budget and profit budget.

Budgeting Process

Budgets can be prepared by a central group and imposed on everyone by top

management (top-down approach). This does not take the advantage of information from
lower management.

The budgeting process lets an organization plan and prepare its budgets for a set
period. It involves reviewing past budgets, identifying and forecasting revenue for the
coming period, and assigning amounts to spend on a company’s various costs. When
done well, the process involves input from senior management, your finance team, and
budget managers across the organization. Think of your budget as putting your business
plan into action. You’ve set priorities and goals for the company in the coming year, and
the budget allocates financial resources to achieving these.

The importance of business budgeting

At their most basic, the benefits of budgeting are fairly obvious: if the business
runs out of money, the business can’t survive. So a clear cash flow plan that all teams can
follow is essential.

But beyond simply ensuring the business sustains, there are several great reasons to
cherish your budgeting process:

 It helps to set clear targets and expectations. Your budget sets targets for costs and
revenues, which helps other teams tailor their work to achieve them.
 It’s vital for funding. If you’re asking venture capital firms or a bank for more
money, they’re going to want to know how you’ll spend it. They’ll also want to
see that you’ve made and followed budgets in the past.
  It sets out your priorities tangibly. It’s likely that your teams set their own
deadlines and timeframes to a certain extent. The budget gives them global
guidelines for this, and involving them in the budgeting process makes this
possible earlier.
 It avoids difficult conversations. Individuals will always have exciting ideas and
campaigns they want to run. While this should be encouraged, your budget gives
you firm numbers to keep expectations in check.
 It connects finance teams with the rest of the business. This is an integrated
process that requires input from all over the company. Finance will learn more
about other teams’ priorities, and then can offer structured guidance.

Audits of Financial Data

Audits are investigations of an organization’s activities to verify their correctness

and identify any need for improvement. A financial audit is an objective examination and
evaluation of the financial statements of an organization to make sure that the financial
records are a fair and accurate representation of the transactions they claim to represent.

 External Audits: required at least once a year for publicly held organization by
independent companies

Unqualified audits performed by outside parties can be extremely helpful in removing

any bias in reviewing the state of a company's financials. Financial audits seek to identify
if there are any material misstatements in the financial statements. An unqualified, or
clean, auditor's opinion provides financial statement users with confidence that the
financials are both accurate and complete. External audits, therefore, allow stakeholders
to make better, more informed decisions related to the company being audited. External
auditors follow a set of standards that are different from those of the company or
organization hiring them to do the work. When audits are performed by third parties, the
resulting auditor's opinion expressed on items being audited (a company's financials,
internal controls, or a system) can be candid and honest without affecting daily work
relationships within the company.
  Internal Auditing Staff: They spend their times in auditing several units of
organization

Internal auditors are employed by the company or organization for whom they are
performing an audit, and the resulting audit report is given directly to management and
the board of directors. Consultant auditors, while not employed internally, use the
standards of the company they are auditing as opposed to a separate set of standards.
Internal auditors are used when an organization doesn’t have the in-house resources to
audit certain parts of its own operations. The results of the internal audit are used to make
managerial changes and improvements to internal controls. The purpose of an internal
audit is to ensure compliance with laws and regulations and to help maintain accurate and
timely financial reporting and data collection.

Importance of Audits

Audits are a necessary and important part of the financial world. That's because a
company's financial health and well-being can't be upheld without proper accounting.
Routine audits ensure that companies are following reporting standards and, more
importantly, that they are being truthful and honest about their financial position. Audits
are particularly important for shareholders and lenders as well as consumers and
suppliers.

The process of auditing also helps companies in other ways, including:

 Finding inefficiencies
 Improving production and operations
 Meeting compliance requirements
 Establishing procedures for monitoring
 Fraud prevention

Non-financial Controls

Controls where nonfinancial performance outcomes are measured.

 Human Resource Control: Seen in Human Aspects of organizing. Controls that
focus on employee behavior, employee performance and developing and
upholding policies and procedures.
 Management Audit: By answering some questions about management such as
planning, organizing and staffing, directing, control, resource planning and
control. An independent and systematic analysis and evaluation of a company's
overall activities and performances. It is a valuable tool used to determine the
efficiency, functions, accomplishments and achievements of the company.
 Human Resource Accounting: Investments in acquiring people and in extensive
training. The process of identifying and reporting investments made in the human
resources of an organization that are presently unaccounted for in the
conventional accounting practice. It is an extension of standard accounting
principles.
 Social Control: Building an organizational culture and controlling. The use of
social pressure by parents, police, and other authority figures in society to
influence the actions, beliefs, and movements of individuals. It is the process by
which a group regulates itself according to the beliefs and values which most of
its individuals hold.
GROUP 5

1. Abijay, Jumel M.
2. Hisham Galiga
3. AC Pangandag
4. Jonathan Codeniera
5. Kim Dedoro