Management control

Management control is the administrative process of planning, executing and controlling the quality and compliance with the strategies and objectives proposed by organizations, both private and public.

There are important differences between the classical and modern conceptions of management control. The first is the one that only includes operational control and develops it through an information system related to cost accounting, while the second integrates many more elements and contemplates a continuous interaction between management with planning and control.. The new concept of management control is full and integrated by including the administrative process itself and requires a strategic orientation that gives meaning to its most operational aspects.

Management control system

The SCG relies on diagnosis or analysis to understand the root causes that condition the behavior of physical systems, allowing the establishment of functional links that link technical variables- organizational-social with the economic result of the company and is the starting point for the improvement of standards; through planning it guides the actions in correspondence with the outlined strategies, towards better results; and, finally, it has the control to know if the results meet the objectives set.

Introduction and summary

Taylor (1895) was one of the initiators of the industrial CG, he introduced analytical accounting, timing of direct labor times, standards, allocation of indirect costs, remuneration for performance. Brown (1907) established the formula for the return on capital. Many examples are still observed today in companies where the CG revolves around the control of the internal efficiency of the company, focusing its attention on the resources it consumes, on the immediate benefit and on external financial information.

In the second half of the 20th century, substantial changes have occurred in the environment, which has gone from stable with fixed rules of the game, to turbulent and highly competitive. These environmental changes have triggered a large number of internal changes in companies, in variables such as customer orientation, technological development and innovation, the leading role of strategic management, quality approaches, the role of human resources in the organization, information management and others. Business success, therefore, requires a continuous adaptation of the company to its environment and competitiveness becomes the economic criterion par excellence to guide and evaluate performance inside and outside the company.

Development

• About the definition of management control (CG)

According to García (1975), management control (MC) is above all a method, a means to conduct thought and action in order, the first thing is to anticipate, establish a forecast on which to set objectives and define a action program. The second thing is to control, comparing the achievements with the forecasts at the same time that all the means are used to compensate the observed differences.

Blanco (1984) states that the modern CG philosophy presents the control function as the process by which managers ensure the obtaining of resources and their effective and efficient use in meeting the objectives of the company.

Management is a mixture of local decisions with global objectives of the company, as Goldratt (1990) sees it, from his theory on management of constraints (TOC), specifying that control is a part of the information system that answers one of the most troubling managerial questions: how to objectively and constructively measure past local performance?

According to Huge Jordan (1995), the CG is a management instrument that provides aid to the decision and its management tools will allow the directors to achieve the objectives; it is a decentralized and coordinated function for the planning of objectives, accompanied by an action plan and the verification that the objectives have been achieved.

Since 1990, the term controlling (4) appears in Germany, Spain and the United States. The qualitative leap is not in the definition of management control itself, but in what the literature now emphasizes with this term: the new characteristics that management control must present in the face of the radical change that is taking place in business improvement models. Kupper (1992) sees it as a means of coordinating the many parts of the management system. Pacher-Theinburg (1992) stresses the significance of controlling due to the integration achieved between planning and control functions. García Echevarría (1994) highlights both its strategic and global dimension of the company as well as its specific dimension in the function that is directed. Controlling, like management control, is oriented more towards the future than the past and where the company is fundamentally seen from outside itself, integrated with the client and the competition.

If we continued citing authors, it would be verified that the definition of CG is not unique, it varies with each author and over the years, since the constant change of the business environment leads to an evolution in the way of thinking and acting, as well as in the methods and tools used to run an organization.

Reviewing different definitions of management control, it is observed that:

• All authors recognize that the objectives are the governing category, because the decision-making process is aimed at achieving the targets and then these are the pattern for assessing management, that is to the extent that management results are approaching the previously established goals. Management control relates to the following activities: objective formulation, standard setting, action programmes (budgets), resource utilization, measurement of results (verification), deviation analysis, performance correction or improvement.

• It is differentiated between the concept of management, management control and the control function, but the same precision is not observed when establishing its borders. Some believe that management control includes both the forecasting stage and the control or verification stage itself; others see it closer to execution and verification; for another, it encompasses resource allocation processes, monitoring of actions and evaluating the outcome.

• In this framework, management is considered to comprise all the processes described above, as they constitute the way to realize and achieve the overall policy of the company, and therefore includes management control as its tool to assess whether the decisions taken in the allocation and use of resources, move away or approach the objectives. It is also considered that management control should not be reduced to the control function (understood as evaluation and performance correction only) but also includes the planning phase (because during the goal-defined process the methods of measuring them are determined, and their quantification in the standard), which in turn is determined by the improvement processes that are those that give the diagnostic capacity to management control.

• Authors such as Goldratt draw attention to the role of management and CG as a bridge between global objectives and local objectives, reflecting the existing problem that many management control systems (SCG) remain in the measurement of the company's global objectives but are unable to measure whether local performances are contributing to the scope of global objectives. It is contrasting that all definitions are associated with the CG with the notion of measuring and, however, one of the unresolved issues regarding the SCGs are information systems, which are left on the surface or globally. Many GCs are good to assign tasks and resources by departments, but inefficient to assess whether or not local performance contributes to the performance of the organization.

• Most of the bibliography consulted identifies, explicitly or implicitly, the GC with economic control only, based on the advantage of the homogeneity offered by monetary measures.

Here it is considered that the CG must offer homogeneous information as it ascends in the information pyramid to offer aggregate information on states or results, but when it goes in the opposite direction, what is handled is information on decisions, some as direct and heterogeneous as are those related to the processes on which they act. Under these conditions, the problem to be solved by the CG is to serve as a bridge between the economic results and the decisions that are made on the physical processes of the company, revealing their functional links.

• Most of the management and management control definitions consulted do not specify who is the subject of management and when they do they refer to managers or managers denoting a traditional management control approach where staff are regarded as a more resource of production whose use should be calculated at the lowest possible cost; workers are not effectively part of the system or actively participate in the decision-making process.

• However, only through the involvement of all staff, a company can respond to the demands of flexibility and responsiveness that the changing environment poses to it today.(3) Competitive organizations that maintain a division between those who think and those who act; intelligent organizations are stepping up (learning organizations) which are based on learning and knowledge management, which is equivalent to the fact that human resources become the main distinguishing factor in the current context.

• Until the 1970s, it is a tendency to consider the GC as a verification of what has been done, rather than a process of continuous learning and improvement of performance.

• Only some authors underline the GC subordinated to strategic planning. (1)(5)(12) Very important aspect if the turbulent environments are concerned, since management will only lead to successful results if the goal and strategy to achieve it has been previously marked.

• The previous consideration leads to another very important one and is that the management and the GC subordinated to the strategic approach offer a dynamic vision, of change in the design of the GS, which must be modified at the speed with which the strategies change. This is what Lorino calls "the problem of coherence between strategy and management rules"

Components of a Management Control System

Editorial Profit has a series of books that list various components of the Management Control System. It is important to mention some of them to understand how together they represent a dashboard of indicators that shows the situation of a company with respect to its strategy and resources:

• Strategic Plan Determination
• Establishment of a responsible or Controller
• The definition of the catalogue of accounts and cost centres.
• The establishment of an internal control system.
• The use of a computer system for accounting.
• The determination of fiscal risks.
• Using Benchmarking techniques.
• The establishment of a Cost System.
• Risk detection system.
• Preparation of a Budget.
• Determination of performance indicators in each of the areas of the company.
• System of variable compensations or remunerations depending on the scope of goals.
• Definition of the monthly closing process.
• Determination of the monthly financial report.
• Determination of the monthly management control report.

To mention one example, Rieckhof mentions the importance of measuring and improving natural resources. The environmental impact of companies is one of the components of Management Control;

"Challenged by decreasing natural resources, corporations need to significantly improve their resource efficiency. For the purpose of a more efficient and sustainable use of natural resources, the internationally standardized approach of MFCA is a promising tool. However, goals such as resource efficiency can only be achieved if corporations commit themselves to these targets on a strategic level and transfer them to all corporate levels by using MCS. Thus, MFCA requires an increased interrelation with MCS, which can drive corporate strategy toward resource efficiency".

Conclusions

• The GC is a process that serves to guide management towards the objectives of the organization and a tool to evaluate it. Its definition has evolved to the extent that the business model changes to the requirements of the environment.

Principles of Control

Control systems are based on a series of basic principles, which allow the objectives proposed by any control system to be achieved. Namely they are:

• Use of Accounting as an informative element
• Control economy
• Exceptional control
• Liability control
• Integration of control systems
• Coincidence between the budget and the accounting plan
• Relevant, accurate, synthetic and timely information
• Appropriate measures as a result of control