When we talk about management control we refer to a set of technical-accounting tools that help the management of a company to make certain decisions, to seek the conditions for effectiveness and efficiency. All with the goal of achieving the goals the company has set for itself.
To get there, a company must measure and monitor operating results, which are expressed by means of economic and financial data. Simplifying, we can say that management control is a valuable aid to entrepreneurs and provides them with useful data and numbers to make the most cost-effective choices.
The main objectives of management control
The immediate function of management control is concerned with monitoring and measuring results in the economic and financial spheres. These data, however, must be supported by other elements. In fact, even a well-crafted report, supported by clear charts, does not give entrepreneurs confidence that they can conduct, optimally, their business.
One should not, therefore, regard management control as an activity made only of graphs, accounting and numbers but should be thought of looking beyond that is by considering the technical-accounting tools that ensure its proper functioning.
Attention, therefore, should be directed toward the dual role that management control plays within an enterprise, viz:
- Guidance for achieving the goals of an enterprise (we refer to both short-term and medium- and long-term goals);
- tool to give greater accountability to those managing key roles within the company in terms of goals achieved.
Cost-related accounting
Succeeding in achieving business goals also means making cost-effective decisions. This is why cost accounting, which is fundamental and central to any kind of system, takes on a crucial role, a very important aid for product or job order costing. It also ensures relevant information for the so-called mark-up, which is the mark-up that is applied to cover indirect costs.
Calculating product costs is a particularly difficult type of activity for any business. This is done in several steps. The first step is the classification of various costs according to the type of activity. Among these classifications, the best known are: fixed and variable costs, direct and indirect costs, standard and actual costs, and finally, common and special costs.
The action of dividing on each product the indirect costs, results in the use of different calculation techniques. The best known are cost centers and cost configurations, direct and full costing, and, finally, activity-based costing.
Critical to the successful operation of cost accounting is the support of forecast data that are made using budgeting actions.
When you have to define precise product pricing tactics or strategic choices have to be made regarding precise market positioning, the costs of product are essential. In addition to these, however, there are also other important elements that must be carefully measured and evaluated. These include production efficiency, the possibility of incorporating new investments that improve quality, financial sustainability, and assessment of the positioning of direct and indirect competitors.
The different levels of control related to management control
We can distinguish as many as three different levels with regard to activities that relate to management control.
The first level is operational control. These are actions that are carried out every day in an enterprise. These include constant research to improve the effectiveness and efficiency of operational processes. Several tools are used to achieve these results, such as, for example, cost accounting and industrial accounting, as well as surveys that relate to KPIs.
The second level is directional control, which refers to short-term goals, usually one year. These are often expressed in economic-financial terms. In this case, the key tool to be used is the budget activity.
Finally, we have the third level, which is strategic control that focuses on goals that come out of strategic planning. Simply put, strategic control is nothing more than checking the consistency of budgeting (i.e., annual programs) with the medium- and long-term strategic plan.
How to do management control
In the previous section, we summarized the timeframes and areas of focus involving management control. We referred, in fact, to when to intervene and what to do. However, it is also crucial to understand the how, that is, the type of methodology to be deployed.
In fact, in this area, there is a definite pattern to be implemented for different measurable activities. This action is known as “Deming” and can be divided into four distinct steps, namely:
- planning, which is concerned with the framing of goals and useful activities to be able to achieve them;
- The execution and measurement related to results;
- control;
The study of any corrections to be made.
The starting point of management control
As we have seen, management control is divided into three distinct levels. It should be pointed out, however, that this type of activity can have different configurations depending on the type of enterprise and its specific peculiarities, as well as the different goals, habits and types of software used.
This means that control systems change from one company to another. This determines certain consequences. Fortunately, there is a starting and reference point that is the same for all companies, and that is the balance sheet. The latter is distinguished by three fundamental characteristics: its completeness, in that it encompasses a summary of all transactions carried out over a given period of time; its being audited, in that the data contained within a financial statement is extremely accurate and is validated through painstaking accounting records; and it is available, that is, it enables tax obligations to be met.
The financial statements, however, are prepared according to statutory and fiscal logic and do not explicitly report some “management” information needed to control and govern corporate management. Management control, in fact, uses the same detailed data that make up the financial statements and often enriches them with data that are not purely accounting in order to re-aggregate them according to views of analysis and timing that are more useful for preparing structured information in reports that are fundamental to the operational and prospective or rather strategic management of the company.
Speaking of timing, management control presupposes the construction of organizational processes that enable the collection on a monthly basis (at least) of data and information for the construction of analysis views and reporting. The information must then be compared with a baseline plan to analyze deviations and take corrective action. This reference plan is the corporate budget. Therefore, the implementation of a management control system also presupposes the construction of cost and revenue budgeting logic.
The process of implementing a management control system usually starts with analysis of the revenue model, analysis of the logic of cost formation, classification of the nature of costs (e.g., direct, indirect, fixed, variable, etc.). This process should be constructed according to the control needs of the company and the timing appropriate to the business organization to ensure the results shared with company management.
The figures involved in management control
There are usually three different people involved in management control activity in an enterprise.
The first figure is that of the entrepreneur.
The second is that of those responsible, or managers, who in agreement with the entrepreneur set the goals to be achieved and then divide them up to the various internal company departments. In addition, managers are also responsible for evaluating actual results by comparing them with the budget forecast so that they can implement well-optimized strategies that lead to business success.
The latter activity is carried out together with the third figure involved in management control, namely the controller, who is responsible for implementing the various technical procedures for evaluating results. After the data have been collected, they can be compared with those that were first assumed in the budget, so that an accurate analysis can be made of the actual performance of the activity. Controllers conduct variance analyses together with functional area managers. The goal is to evaluate the performance of resources according to the previous assumption, so that new goals that are truly attainable can be created.
The importance of relying on industry professionals in the field of management control
Those seeking professional and concrete support in the field of management control can choose to rely on Maia Management, which gives every company the option of adopting a Digital Chief Financial Officer (DCFO) with a subscription model. The CFO is responsible for professionally and accurately structuring management control, making use of digital tools to do better and in less time.
It is, therefore, also a valuable resource for being able to find digital solutions to everyday business problems.
Maia Management carefully analyzes the processes, builds the useful activity plan to be able to achieve all the business goals of a company, and also takes care of coordinating the different activities. All at a sustainable cost and setting, in agreement, the goals to be achieved. The advantage is the possibility of having support while avoiding selection, recruitment and training costs.
Ask us about placing a temporary Digital CFO in your company by writing to info@maiamangement.it or fill out the test to find out the digital level of your finance area.
