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Management Control System Budgeting

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Management Control System Budgeting

A control system is necessary in any organization in which the activities of different divisions, departments, sections, and so on need to be coordinated and controlled. Most control systems are past-action-oriented and consequently are inefficient or fail. For example, there is little an employee can do today to correct the results of actions completed two weeks ago.

Steering controls, on the other hand, are future-oriented and allow adjustments to be made to get back on course before the control period ends. They therefore establish a more motivating climate for the employee.

What's more, although many standards or controls are simply estimates of what should occur if certain assumptions are correct, they take on a precision in today's control systems that leaves little or no margin for error. Managers would be better off establishing a range rather than a precise number and changing standards as time passes and assumptions prove erroneous. This would be fairer and would positively motivate employees. There are three fundamental beliefs underlying most successful control systems.

First, planning and control are the two most closely interrelated management functions.

Second, the human side of the control process needs to be stressed as much as, if not more than, the tasks or 'numbers crunching' side.

Finally, evaluating, coaching, and rewarding are more effective in the long term than measuring, comparing, and pressuring or penalizing

The Management Planning Process

Few managers realize that a company plan must provide the framework for the company control system. If missions, goals, strategies, objectives, and plans change, then controls should change. Unfortunately, they seldom do. Although this error occurs at the top, repercussions are felt at all levels.

Often, too, the standards of the control systems are derived from previous years budgets rather than from current objectives of company plans The result is that employees at lower levels are simply given "numbers to make" based on factors of which they have little knowledge and over which they have practically no influence.

Step 1: Setting Performance Standards

Performance standards may be set by staff or managers, by managers and staff, or by managers with input from employees whose performance is being measured. The last method is the best because employees believe that line and staff do not have enough information about the conditions of various jobs to set realistic standards.

Managers should see that objectives and standards are measurable and that individuals are held accountable for their accomplishment. The level of difficulty should be challenging but within the capabilities of the employee. Standards set too low are usually accomplished but not exceeded, while standards set too high usually do not motivate the employee to expend much effort to reach the goal.

It is important that standards be complete; however, it is difficult to develop a single standard or goal that will indicate the effective overall performance. For example, consider the automobile dealer who decided to measure sales peoples performance on the basis of the number of automobiles sold. Sales increased impressively, but it was later learned that many sales had been made to poor credit risks, and too high prices had been allowed on trade-ins.

Too many managers are looking for that one magic number that will tell them how well the company is doing or how their employees are performing. Standards for the automobile salespeople might have included number of sales, losses from poor credit risks, and profit on resale's. Standards should also be expressed in terms that relate to the job and are meaningful to the employees.

For example, the foremen in one plant were assigned standards based on break-even analysis, although none of them had any knowledge of this analytical technique. From a behavioral standpoint, it is extremely important that the employee be able to significantly influence or affect the standard assigned.

In the early 1970's, the performance of a hotel manager in Florida was based on profit and room occupancy rates. During this period, OPEC caused a fuel crisis and relatively few tourists could travel to Florida. The hotel manager was penalized for failing to accomplish a standard over which, in this case, he had no influence.

Finally managers should see that the number of standards assigned, like planning objectives, are limited and placed in priority order for the employee. If there are too many controls assigned, the employee will not be able to give enough attention to any of them and will become frustrated and confused.

Management Planning and Control Systems

Step 2: Measure and compare actual with planned results

As with setting standards, the objectivity of the measurement and the person who measures and compares the performance are important. Measuring and comparing can be accomplished by the person performing the task, by the boss, or by a staff person; even an automated system can measure and compare. From a behavioral standpoint, the last method is the least popular, followed by measurement by a staff person only.

An employee believes an automated system, a staff person, or even the boss does not know enough about the conditions of the job to make a fair comparison between actual and planned results.

Also, the employee often distrusts the staff person and sometimes even the boss. At the same time, the employee is usually not trusted enough by the company to perform the measurement and comparison alone. The best solution is to have the measurement done by the person most trusted by the employee and to allow the employee some input.

Behavioral Responses to Control Systems

When employees have relatively low trust in a control system, they sometimes behave in various ways that are harmful to the organization. They may do what is required by the system.

For example, when bonuses for salespeople in a department store were based on sales volume, many employees soon lost interest in customers who did not immediately purchase an item, and they spent little time helping customers, making merchandise attractive, or performing stock work.

Quite often employees will report data in such a way that performance will look good

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