9. Controlling the business plan
(László Szőllősi)
The original function of yearly business planning is to retain and/or involve equity, but through decades this have expanded with the following:
Comparison of financial performance on yearly basis
Balance of objectives (comparisons of business units)
Measuring costs
Evaluation of performance
Forecast of operating profit and sales volume
After planning is finished launch of plans can be initiated. Whilst original goals emerge a deflection phenomenon can occur. If the business plan was prepared dynamically data should be recorded continuously during execution. So, the plan becomes more and more exact as we approach in implementation. Ongoing monitoring of the business plan is closely linked to the plan and to comparison of the actual and expected data. Critical differences should be addressed with dispatch packages.
The primary purpose of plan monitoring is continuous tracking, and gaining feedback.
Controlling is a tool to ensure that everything is accurate and correct. The main task of controlling is to investigate the execution of operative goals, and to evaluate. It’s common that the financial year was positive by its end, but failed to meet objectives provided by the business plan. In this case, a more thorough examination is required because the strategy might have failed, it wasn’t well defined, or couldn’t adapt to the environment. Any of these can highly endanger sustainability.
An essential element of the business plan is implementation and analysis of factual data.
Monitoring is surveillance, controlling is operational supervision. Its name is originated in its function as it “controls” (“to control”). Controlling is a comprehensive management tool used to controlling functions and it is a management subsystem which is responsible for planning, controlling and coordinating information flows. Thus controlling is a mainstay of management: it allows the manager to operate the enterprise goal-oriented, and in line with the environmental changes. The development of the controlling system allows management to solve problems in a new innovative way. A properly designed controlling system provides a secure; state of the art performance for the company.
The purpose of controlling is to maintain coordinating, responsive, and adaptive abilities of managers to reach corporate goals. During controlling plans are continuously compared with actual data accordingly to a planned structure. Analysis of differences result in appropriate decision making and finding responsibles. A controlling system cannot be operated without a well-functioning responsibility system.
A controlling philosophy manifests first-time during planning, as all costs and expenditures must be designed to, recorded and later accounted where they actually incurred (cost centers).
Costs of cost-centers can be projected into exact products, which enable us to find out more of unit profitability and self-cost. Essentials of theoretical controlling thinking based on Tóth (1999):
Goal orientation: Continuous goal setting is an important factor of controlling. All evaluation and measuring is based upon the latter. To evade the defensive state we must set up goals in reach.
Congestion orientation: These are weak points of an enterprise, which turn out problematic for the first if stressed.
Future orientation: Past is only interesting for us if it has concrete effect on the future.
Cost awareness: Costs can only be accepted if they are in favor of future income.
Variance and cause analysis: Comparison of planned and factual data. An analysis of differences can reveal hidden causes and based on these we can propose additional measures
Analysis of difference and decision making: Analysis of difference is considered as a learning process also. By analyzing favorable and non-favorable decisions managers can gain knowledge of reasonable decisions in relation with cost-benefit principle Controlling has evolved in profit-oriented companies, thus its principles are related to profitability as well. Management is in need of support which enables effective coordination and transparent operation given the available resources and environmental conditions. The sound basis of controlling makes these available. Tóth, 1999; Maczó, 1999; Horváth &
Partner, 2000 put emphasis on the following:
Controlling based quantified and measureable performance management
Personalized liability;
Responsibility and authority united;
Drafting clear and agreed objectives; Plan agreement
Response to unplanned differences
Obligation of competent personnel to forecast and to act
Management support through co-ordination of subdivisions
The aforementioned are considered the foundations of controlling since decades. Current financial and economic circumstances put more pressure on companies these days, such as need of information, customer-orientation, global view etc. These have an effect on the previous, by adding more factors.
Customer-orientation, market-orientation
Self-controlling, emphasized controlling concept, conceptual thinking in controlling
Process approach
Strategic thinking: controlling is in service of the long term corporate strategy as it is involved in the development, transition and pursuit.
Objectives, goals and their needed performance must be transparent, sufficiently simple and known inside the organization.
Use of financial and non-financial aspects during the design and evaluation of performance-planning.
Support of information technology during controlling
Shorten planning cycles
Application of all these principles will lead to a consistent, flexible, cost-benefit based controlling system.
The control loop (figure 9.1.) is a conceptual image that shows the position of controlling inside the operations of an enterprise. Planning, management (basically controlling:
measuring, and analysis) and feedback are equal areas of the loop. Planning is a time-limited phase which is between execution (addressing goals) and the start of implementation.
Management is also time-limited but is between the aforementioned and the reaching of a goal. Also it contains more phases in connection with organizational hierarchy and cycles of them. The circle is complete when it starts to address future tasks, forecasts, information based on past experiences.
9.1. Figure: Controlling loop Based on: Maczó, 1999
Utility of planning can be derived from the utility of the other two phases. This approach suggests that planning, management (controlling) and feedback should have the same consistency in structure, form and content. (Maczó, 1999)
A scheme for a controlling system is described in figure 9.2. The process can be divided into 5 main pillars namely: planning, implementing, accounting, processing and controlling. The scheme puts emphasis on the importance of planning, which is a key element of operating an enterprise. This represent the goals, databases of planned and achieved goals and their differences. (Tóth, 1999)
9.2. Figure Controlling processes of financial enterprises Based on: Tóth, 1999
While modernizing plans we must underline that time has changed since the socialist regime, and its centralized economic policies and both these have affected planning. Plans today are only made in order of an enterprise own success. Needs of controlling changed accordingly:
A plan is considered good if it’s feasible in terms, but cannot be over-fulfilled.
A plan is considered good if it’s not underestimated. Underestimation leads to resource vacancy.
A plan is considered good if it can be controlled. “To plan without controlling makes no sense.” (Maczó, 1999)
Yearly financial planning will lose its significance in favor of long term planning in the future. A more sound method of planning will take place, which will take into account the limits of annual planning, and will encourage the use of foresight, financial and non-financial indicators, and less detailed but more accurate planning methods.
Control questions:
1. How would you describe the logic of controlling 2. Describe the principles of controlling!
3. What is the professional content of the controlling-loop?
Competence development:
1. Describe the controlling operation inside a financial organization throughout highlighting the importance of operative planning!
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