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Controlling: Strategic Control Systems Identifying Control Problems

Strategic control systems are necessary to ensure companies accomplish strategic objectives. These systems consist of financial analysis and financial ratio analysis. Financial analysis assesses business viability by reviewing financial statements. Ratio analysis evaluates aspects like liquidity, efficiency, leverage, and profitability. Symptoms of inadequate control include declining revenues/profits, poor customer service, unhappy employees, cash issues, idle resources, disorganized operations, and high costs.

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95 views

Controlling: Strategic Control Systems Identifying Control Problems

Strategic control systems are necessary to ensure companies accomplish strategic objectives. These systems consist of financial analysis and financial ratio analysis. Financial analysis assesses business viability by reviewing financial statements. Ratio analysis evaluates aspects like liquidity, efficiency, leverage, and profitability. Symptoms of inadequate control include declining revenues/profits, poor customer service, unhappy employees, cash issues, idle resources, disorganized operations, and high costs.

Uploaded by

Paul Ocampo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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CONTROLLING

STRATEGIC CONTROL SYSTEMS


IDENTIFYING CONTROL PROBLEMS

TINAJA, ALFREDO JR. H.


CE - 5204
STRATEGIC CONTROL SYSTEMS

• To be able to assure the accomplishment of the strategic objectives of the


company, strategic control systems become necessary. these systems
consist of the following:

1. Financial Analysis
2. Financial Ratio Analysis
What is 'Financial Analysis'?
• Financial analysis (also referred to as financial statement analysis or
accounting analysis or Analysis of finance) refers to an assessment of the
viability, stability and profitability of a business, sub-business or project.

• A review off the financial statements will reveal important details about the
company's performance. The balance sheet contanis information about
the company's assets, liabilitis and capital accounts. Comparing the
current balance sheet with previous ones may reveal important changes,
which, in turn, provide clues to performance.
Goals of Financial Analysis
1. Profitability - its ability to earn income and sustain growth in both the short- and
long-term. A company's degree of profitability is usually based on the income
statement, which reports on the company's results of operations

2. Solvency - its ability to pay its obligation to creditors and other third parties in the
long-term;

3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate
obligations;

4. Stability - the firm's ability to remain in business in the long run, without having
to sustain significant losses in the conduct of its business. Assessing a company's
stability requires the use of both the income statement and the balance sheet, as
well as other financial and non-financial indicators. etc.
Methods of Financial Analysis
• Past Performance - Across historical time periods for the same firm (the
last 5 years for example)

• Future Performance - Using historical figures and certain mathematical


and statistical techniques, including present and future values, This
extrapolation method is the main source of errors in financial analysis as
past statistics can be poor predictors of future prospects.

• Comparative Performance - Comparison between similar firms.


What is 'Financial Ratio Analysis'?
• A financial ratio analysis is a quantitative analysis of information contained
in a company’s financial statements. Ratio analysis is used to evaluate
various aspects of a company’s operating and financial performance such
as its efficiency, liquidity, profitability and solvency.

• Financial ratios may be categorized into the following types


1. liquidity
2. efficiency
3. financial leverage
4. profitability
Liquidity Ratios
• These ratios assess the ability of a company to meet its current
obligations. The following ratios are important indicators of lquidity.

1. Current Ratio - This shows the extent to which current assets of th


company can cover its liabilities. The formula for computing the current ratio
is as follows
Current Ratio = Current Assets / Current Liabilities

2. Acid-test Ratio - This is a measure of the firm's ability to pay off short-
term oblgations with the use of current assets and without relying on the sale
of inventories.

Acid-test Ratio = Current Assets - Inventories / Current Liabilities


Efficiency Ratios
• These ratios show how effectively certain assets or liabilities are being
used in the production of goods and services.

• 1. Inventory Turnover Ratio - This ratio measures the number of times


an inventory is turned over or sold each year

Inventory Turnover Ratio = Cost of goods sold / Inventory

• 2. Fixed Asset Turnover - This ratio is used to measure utilization of the


company's investment in its fixed assets, such as its plant and equipment

Fixed Asset Turnover = Net Sales / Net Fixed Assets


Financial Leverage Ratios
• This is a group of ratios designed to assess the balance of financing
obtained through debt and equity sources. Some of the more
important leverage ratios are as follows:

1. Debt to Total Assets Ratio - This ratio shows how much of the
firm's assets are financed by debt.
Debt to total assets Ratio = Total Debt / Total Assets

2. Times Interest Earned Ratio - This ratio measures the nummber


of times that earnings before interest and taxes cover or exceed the
company's interest expense.
Times Interest Earned Ratio = (Profit Before tax + Interest Expense) / Interest Expense
Profitability Ratios
• These ratios measure how much operating income or net income a company is able to generate
in relation to its assets, owner's equity, and sales.

1. Profit Margin Ratio - This ratio compares the net profit to the level of sales.
Profit Margin Ratio = Net Profit / Net Sales

2. Return on Assets Ratio - This ratio shows how much income the company produces for every
peso invested in assets.
Return on Assets Ratio = Net Income / Assets

3. Return on Equity Ratio - This ratio measures the returns on the owner's investment.
Return on Equity Ratio = Net Income / Equity
IDENTIFYING CONTROL PROBLEMS
• Recognizing the need for control is one thing, actually implementing it is
another. When operations become complex, the engineer manager must
consider useful steps in controlling.

• Kreitner's three approaches:


1. Executive Reality Check

2. Comprehensive Internal Aduit

3. General checklist of symptoms of inadequate control


Symptoms of Inadequate Control
If a comprehensivve internal audit cannot be availed of for some reason, the use of a checklist for symptoms of iadequate
control may be used.

1. An unexplained decline in revenues and profits

2. A degradation of service (customer complaints).

3. Employee dessatisfaction (complaints, grievances, turnover).

4. Cash shortages caused by bloated inventories or deliquent accounts receivable.

5. Idle facilities or personnel

6. Disorganized operations ( work flow bottlenecks, excessive paperwork)

7. Excessive cost

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