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Foundations of Control - Coggle Diagram
Foundations of Control
what should managers control?
Most organizations have countless activities taking place in different locations and functional areas.
So, back to the original question, what should managers control?
Two areas where controls are very important to all organizations include:
finances and information
.
Finances:
Every organization wants to be financially viable. Businesses want to earn a profit and non-profit organizations at least want to break-even with costs.
Therefore, financial controls are extremely popular with organizations.
Popular
financial tools
used by managers to check for problems include:
Financial statement/ratio analysis
,
Budget analysis
.
The use of these tools to measure performance and then exert control is really only useful for Feedback control. It is difficult and costly for Concurrent control and impossible for Feed-forward control.
All organizations keep track of their income and expenses through accounting. It is from an organization’s financial accounts that the organization’s
financial statements
are generated.
Using
financial ratios
based on the numbers in the financial statements, managers can find potential problems and then implement Feedback control if necessary.
There are four different and popular types of financial ratios:
Liquidity
Liquidity refers to an organization’s ability to meet its debt obligations.
Two important liquidity ratios are the Current Ratio and the Acid Test Ratio.
Both focus on an organization’s current assets and liabilities.
The Current Ratio
tests an organization’s ability to meet its short-term obligations. Short-term usually means less than one year. In other words, it tells a person whether an organization has enough to make any and all payments during that time period.
The Acid Test Ratio
is like the Current Ratio, except that it is more accurate when inventories turn over slowly or are difficult to sell.
Current Ratio=
Current Assets/Current Liabilities
Where can the numbers be found?
Current Assets: Accounting Balance Sheet of the Organization
Current Liabilities: Accounting Balance Sheet of the Organization
Acid Test Ratio=
(Current Assets-Inventories)/Current Liabilities
Where can the numbers be found?
Current Assets: Accounting Balance Sheet of the Organization
Inventories: Accounting Balance Sheet of the Organization, Assets part
Current Liabilities: Accounting Balance Sheet of the Organization
Leverage
Leverage refers how an organization uses debt to finance its assets and operations.
The more debt an organization has the more leveraged it is. In addition, the higher the leverage of an organization is the less of a chance it will pay back its debts (not good).
Two important leverage ratios include: Debt to Assets and Times Interest Earned.
The Debt to Assets Ratio
simply tells an organization’s degree of leverage. The higher the ratio the more leveraged an organization is.
The Times Interest Earned
Ratio measures how many times the organization is able to cover its interest expenses. The higher numbers are better for organizations.
Debt to Assets Ratio=
Total Debt/Total Assets
Where can the numbers be found?
Total Debt: Accounting Balance Sheet of the Organization
Total Assets: Accounting Balance Sheet of the Organization
Times Interest Earned Ratio=
EBIT/Interest Expense
Where can the numbers be found?
EBIT (Profits Before Interest and Taxes): Accounting Income Statement of the Organization
Interest Expense: Accounting Income Statement of the Organization
Activity
Activity refers to what the organization does.
Activity Ratios measure how efficiently an organization is using its assets.
Two important ratios, particularly for business organizations, are the Inventory Turnover and Total Asset Turnover Ratios.
Both ratios divide the organization’s sales by another number.
In the case of the Inventory Turnover Ratio, that number is the organization’s inventory.
In the case of the Total Asset Turnover, that number is total assets.
In both cases, the higher the number the better. High numbers indicate that an organization is acting efficiently.
Inventory Turnover Ratio =
Sales/ Inventory
Where can the numbers be found?
Sales: Accounting Income Statement of the Organization
Inventory: Accounting Balance Sheet of the Organization, Assets part
Total Assets Turnover=
Sales/Total Assets
Where can the numbers be found?
Sales: Accounting Income Statement of the Organization
Total Assets: Accounting Balance Sheet of the Organization