Management Control

Management Control

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Key Learning Outcomes


To be able to discuss:

  • Four Types of Business Control Systems and their linkages – Controlling involves measuring the deviations from planned performance and taking action to correct them.
  • Financial Control/Budgetary Control and its linkages – Financial Control is where a comparison is made between the actual performance and the planned/expected figures.
  • Credit Control and its linkages – Credit Control regulates the amount of credit advanced and the payment period given to customers.
  • Quality control and its linkages – Quality control is concerned with checking/reviewing/inspecting work done to ensure it meets the required quality standards of the business.
  • Stock Control and its linkages – Stock Control is concerned with keeping stock levels so that a company doesn’t have too much stock or too little stock.

Introduction: Management Control


Controlling involves measuring the deviations from planned performance and taking action to correct them. The Business Syllabus requires knowledge of four types of Business Control Systems:

  • Financial (Budgetary)
  • Credit
  • Quality
  • Stock

Financial Control/Budgetary Control – A financial plan that sets out the expected income and expenditure for a future period of time. The aim is to ensure overall business profitability and liquidity (ability to pay bills due).

Credit Control – Controlling both the amount of credit given to customers and the payment period given to customers. Good credit control ensures that payments are made in full and on time.

Quality Control – Checking/reviewing/inspecting work done to ensure it meets the quality standards required of the business. Effective quality control leads to efficiencies in business, because consistently high quality products are being sold. This results in repeat purchasing, consumer loyalty and the ability to charge higher prices.

Stock Control – Maintaining appropriate stock levels so the company does not have either too much, or too little stock. Effective stock control means having the optimum amount of stock (adequate stocks) in your business to meet the needs of your consumers, while at the same time, keeping stocks to a minimum.

Examples of Control

There are four basic principles (or elements) of control:

  • Set-out target or expected outcome e.g. Monthly Sales Target of €100,000
  • Measure actual performance e.g. Actual Monthly Sales of €90,000
  • Compare set target with actual performance – Manager receives reports of all deviations e.g. Monthly Sales €10,000 below target
  • Take Corrective action – Manager can now take action to ensure the business stays on target e.g. increase advertising

Control Model: 

bq_controlling_01

The 4 types of Business Control Systems:

1. Financial Control

Financial control involves preparing budgets (e.g. cash flow), carrying out ratio analysis, and employing cost control measures. These procedures can provide an early warning of possible financial problems.

Example: Leaving Certificate Business Higher Level, Question 6 (2009)

In September 2008 Buttercup Garden Centre prepared the following Cash Flow Forecast:

Buttercup Garedn Centre

Benefits of Financial Control:

  • Provides a benchmark against which actual performance can be compared, and Planned / target performance and Deviations can be reported, thus aiding control
  • Allows the timing and sources of cash inflows and outflows to be identified
  • Enables establishment of  Net Inflows/Outflows – The business can then plan effectively to meet cash shortages, or consider options in relation to any large cash surplus
  • Necessary when looking for finance from financial institutions

2. Credit Control

Credit control becomes a necessary business function when goods are sold to customers and payment is not made until sometime in the future. A trade debtor is then created. Having trade debtors leads to possible risk of bad debts and an increase in administrative expenses to the business e.g. invoices, credit notes, etc. Shortages of cash may result if the business is not getting paid on time by debtors.

Credit Control involves:

  • Controlling the amount of credit given to customers
  • Controlling  the payment period given to customers
  • Ensuring that payments are made on time
  • Checking the credit worthiness of customers, setting credit limits, credit periods and deciding on penalties for late payments

Benefits of Credit Control:

  • The company controls the amount of goods sold on credit
  • Debtors pay debts on time
  • Bad debts are kept to a minimum
  • The credit worthiness of potential customers is checked in advance
  • Good credit control will ensure that maximum cash is collected from debtors
  • Firms will not have to rely on a bank overdraft to deal with cash shortages

3. Quality Control

Quality control is concerned with finding and eliminating the causes of problems. To achieve this, systematic inspections are carried out during the production process to ensure that high standards of quality are achieved.

As part of a quality control system, the business may achieve a quality control symbol such as the ISO 9000 series award or Q mark. These symbols are now recognised worldwide and achieving them can be of huge benefit to the business in marketing its products, both in Ireland and internationally.

Benefits of Quality Control include:

  • Increased competitiveness
  • Increased customer satisfaction
  • Cost savings (e.g. less waste)
  • Increased efficiency with fewer mistakes
  • Better motivated employees
  • Increased profits

4. Stock Control

Stock Control can achieve efficiencies by eliminating the costs associated with carrying too much or too little stock. For example: high storage and administration costs will result from too much stock; production stoppages will occur due to  lack of raw materials and components for production; sales orders may be lost because of too little stock.

Benefits of Stock Control include:

  • The firm will not lose sales
  • Future sales and profits will also be protected
  • The firm will not be under-utilising storage space
  • Money / cash will not be tied up in having too much stock
  • No shortages of raw materials for production, or production stoppages
  • The firm can more easily identify which goods are selling, which goods are subject to deterioration, obsolescence and shrinkage (e.g. theft)
  • Insurance costs will be reduced

Sample Exam Q&A


Question

Describe how ‘stock control’ and ‘quality control’ achieve efficiencies in business.(20 Marks)

Sample Answer

(a) Stock Control is concerned with keeping optimum stock levels so that the business doesn’t have too much stock or too little stock. Effective stock control means that you have the optimum level of stock in your business. Optimum stock levels lead to efficiencies because you have the right stock, in the right place, at the right time to meet production requirements and satisfy consumer demand.

Efficiencies: An ISDN (Integrated Services Digital Network) can help you achieve efficiencies by eliminating the costs associated with having too much stock i.e. obsolescence, storage costs (Light & Heat, Security, Warehouse space, insurance etc.), deterioration, pilferage and tied up capital. Stock control can achieve efficiencies by eliminating the costs associated with carrying too little stock i.e. production stoppages due to a lack of raw materials and components for production, and lost sales orders because of a lack of finished goods for sale.

(b) Quality Control is concerned with checking/reviewing/inspecting work done to ensure it meets the required standards. As part of a quality control system the business may achieve a quality control symbol such as an ISO 9000 award. This symbol may be recognised worldwide and would be of huge benefit to the business in marketing its products internationally.

Efficiencies: Effective Quality Control leads to efficiencies in business because it minimises the costs associated with selling faulty goods to consumers e.g. administrative costs associated with the return of goods, loss of reputation and the ensuing lost sales, lost productivity due to time spent dealing with complaints.

Effective Quality Control leads to efficiencies in business because consistently high quality products are being sold, resulting in repeat purchasing, consumer loyalty and the ability to charge higher prices, as the business may become the market leader.

Student Activity


Q1 State, giving two reasons, why it would be important for a library to have a Stock Control system.
Q2 Explain the terms Credit Control and Quality Control.
Q3 Greenfare Ltd. is a fruit and vegetable wholesale business in Limerick. Brothers Tom and Patrick Dunne set up the business four years ago. They supply fresh fruit and vegetables to local retailers and to some hotels and restaurants. They give goods on credit (one month) to their longest-serving customers. Although they have been very busy, Tom is worried because some of these customers do not pay their bills on time. They decided to prepare a Cash Flow Forecast for the first three months of next year to see if they need to get a bank overdraft.

Greenfare Ltd Cash Flow Forecast (prepared January 2014)

Greenfare Ltd

(a) What is a bank overdraft?

(b) In which month(s) will Greenfare need a bank overdraft?

(c) Outline two reasons why a business would prepare a cash flow forecast.

(d) Outline two ways in which Greenfare could persuade their customers (debtors) to pay on time.

Q4 Name the four types of control in business
Q5 Murphy Ltd prepared the following Cash Flow Forecast:Murphy Ltd

  1. In which month(s) has the above business got a problem? Outline possible reasons why.
  2. Suggest two things the business can do to help solve the problem(s).
  3. Explain why a business would prepare a Cash Flow Forecast
Q6 Outline the importance of Quality Control to a business.
Q7 Name the four principles of control