Control (Leaving Cert Business): Revision Notes

Control

Control is a vital management activity that helps businesses stay on track and achieve their objectives. Understanding how to implement effective control systems can make the difference between business success and failure.

What is controlling?

Important

Controlling is the management activity of monitoring the performance of the organisation to ensure that goals are met, comparing it to the targets set and taking corrective action when needed.

The manager regularly checks that the business is still on track to achieve the objectives that were set during the planning stage. When performance falls short of expectations, managers must identify the problem and take steps to get back on course.

Principles of control

Effective control follows a logical four-step process that helps managers maintain oversight of business performance:

Step 1: Set targets

The organisation establishes clear targets or standards that need to be achieved. For example, a retail business might set a target to increase monthly sales by 20%.

Step 2: Measure actual performance

The organisation's actual performance is measured over a specific period. This might involve tracking sales figures, production output, or customer satisfaction levels.

Step 3: Compare target with performance

Managers compare the actual results with the original target. If performance meets or exceeds the target, no further action may be needed. However, if there's a gap, the manager must investigate why the target wasn't met.

Step 4: Implement corrective action (if necessary)

When performance falls short, managers must take corrective action to address the underlying issues. This action should be implemented quickly and should tackle the root cause of the problem.

Types of control

There are four main areas where businesses need effective control systems: stock, quality, credit, and finance.

1. Stock control

Important

Stock control is the monitoring of stock levels to ensure that optimum stock levels are kept to meet demand while keeping stock holding costs to a minimum.

Effective stock control helps businesses avoid the costs and risks associated with having too much stock (such as storage costs and wastage) or too little stock (such as production delays and lost sales). This applies to all items held by the business, including raw materials, work in progress, finished goods, and merchandise.

Key stock control concepts

Maximum stock levels represent the largest amount of stock that a business should hold at any given time, while minimum stock levels represent the smallest amount. The reorder level is the stock level at which new orders should be placed, and the reorder quantity is the amount ordered each time.

Electronic Data Interchange (EDI)

Important

Electronic Data Interchange (EDI) is an automated system for stock ordering and transaction processing that allows businesses to send each other standard documents electronically, with little to no human input.

When stock falls to the reorder level, the computer automatically orders new stock from the supplier. This system offers several advantages:

• Faster processing of transactions, invoices, deliveries and payments
• Reduced human error, which can be costly for businesses
• Cost-effectiveness due to reduced staff numbers and office expenses
• More efficient stock control, reducing associated costs

However, EDI also has disadvantages. Installing and maintaining the system can be expensive, it may replace some employees (affecting industrial relations), and it's most useful for businesses with large stock volumes. Smaller businesses may find it isn't cost-effective.

Just-in-Time (JIT)

Important

Just-in-Time (JIT) is an inventory system whereby a business receives deliveries of stock precisely when they are needed.

JIT requires careful planning, as raw materials and parts go straight to where they'll be used with minimal stock being kept. This system needs highly reliable suppliers who can deliver the right quantities on time. The lead time (the number of days between placing an order and receiving delivery) must be carefully considered.

Advantages of JIT:

• Less storage space required, reducing storage costs
• Reduced waste as stock won't become obsolete
• Increased financial flexibility as money isn't tied up in stock

Disadvantages of JIT:

• Bulk buying is avoided, so economies of scale are lost
• Delivery delays may cause major production problems
• More frequent deliveries have a bigger carbon footprint and higher transportation costs

Benefits of effective stock control

Well-managed stock control provides numerous benefits:

• Stock levels that meet customer demand help ensure steady sales and strengthen customer loyalty
• Reduction of costs associated with having too much or too little stock
• Constant real-time feedback allows slow-moving stock to be identified quickly
• Close monitoring discourages theft
• Optimum stock levels aid cash flow management as less money is tied up in stock

2. Quality control

Important

Quality control is the process of checking that goods or services provided by a business meet required quality standards at all times.

Failing to meet quality expectations can cause long-term reputational damage and lead customers to abandon the business. Quality control is essential for maintaining customer trust and competitive advantage.

Ways to improve quality control

Appoint a quality controller (inspector) to inspect all aspects of production regularly. Inspections can examine every individual product or inspect a random sample. If sampling is used, a certain number must pass or the whole batch fails.

Set up a quality circle consisting of employees who meet regularly to discuss quality issues. The group brings findings and recommended solutions to the manager. This approach motivates employees, reduces costs, and boosts quality control practices.

Apply for independent quality indicators such as the Q Mark (awarded by Excellence Ireland Quality Association to Irish businesses) or ISO 9000 certification (an international quality management standard). These indicators help Irish businesses compete in international markets.

Benefits of effective quality control

Good quality products and services:

• Enhance the reputation of the business, increase customer satisfaction and can increase market share
• Reduce costs associated with defective goods, such as returns, refunds, court cases, reputational damage or falling sales
• Minimise waste, which reduces business costs and harmful environmental effects through unnecessary disposal

3. Credit control

Important

Credit control is the process of monitoring the amount of goods sold on credit to ensure that debts are paid fully and on time.

Many businesses sell goods to customers on credit, expecting payment within a reasonable timeframe (such as 30 days). However, this doesn't always happen, so businesses need credit control systems to protect their cash flow and liquidity.

Credit control monitors:

• Which customers are receiving credit
• Limits set on how much credit is given
• Periods of credit given (such as 30 or 60 days)
• Payments received from debtors

Bad debt

Important

Bad debt occurs when a debtor fails to pay the full amount they owe for goods or services.

This can happen for various reasons, including when the debtor has been declared bankrupt. Businesses can avoid bad debt by:

• Assessing potential customers' creditworthiness in advance (asking for references from banks and other businesses, or consulting a credit bureau)
• Setting appropriate credit limits and periods with customers before credit is given
• Running an efficient administrative system that issues invoices, reminders, payment demands and follow-up phone calls promptly
• Offering incentives such as discounts for early payment or adopting a 'cash sale only' policy with certain customers

Benefits of credit control

Careful credit control allows a business to:

• Reduce the risk of bad debts
• Increase sales by allowing access to more customers
• Improve cash flow management by freeing funds for other areas of the business

4. Financial control

Important

Financial control involves ensuring that a business is profitable and has sufficient finance to meet its payments.

It helps a business plan its finances sensibly and 'live within its means'. A business that fails to maintain financial control runs a high risk of losses or even closure.

Elements of financial control

Cash flow forecast: A financial control tool used to measure actual cash flow against planned future income and expenditure.

Ratio analysis: A technique used to examine the financial performance of the business.

Creating budgets for each department and monitoring costs and accounts are also essential elements.

Benefits of financial control

Good financial control provides many benefits:

• Greater likelihood of financial success, stability and longevity
• Avoidance of debt and bankruptcy
• Close monitoring of actual financial health, allowing rapid corrective action if necessary
• The ability to make wise decisions regarding future goals (such as expanding or diversifying)
• Keeping investors happy with up-to-date financial information and encouraging new investors

Remember!

• Control involves four key steps: set targets, measure performance, compare results, and take corrective action when needed
• The four main types of control are stock, quality, credit, and financial - each serving different but equally important purposes
• Effective stock control balances meeting customer demand whilst minimising holding costs through systems like EDI and JIT
• Quality control protects business reputation and reduces costs associated with defective products or services
• Credit control helps maintain cash flow by ensuring customers pay what they owe on time