The following are the essential or basic requirements of an effective management control system:
- Suitable: The control system must be suitable for the kind of activity intended to serve. Apart from differences in the systems of control in different business, they also vary from department to department and from one level in the organization to the other. A system of control useful at a higher level of management will be different in scope and nature from that in use at the operative level. Several techniques are available for control purposes such as budgets, break-even points, financial ratios and so on. The manager must be sure that he is using the technique appropriate for control of the specific activity involved. The tool appropriate are not necessarily the same as between different departments or between two different organizations. For example, the sales department and production department may use different tools of control. Again, a small business will not have as elaborate a control system as a large organization.
- Understandable: The system must be understandable, i.e., the control information supplied should be capable of being understood by those who use it. A control system that a manager cannot understand is bound to remain ineffective. The control information supplied should be such as will be used by the managers concerned. What may be considered valuable and understandable to one manager may not be so to another. It is, therefore, the duty of the manager concerned to make sure that the control information supplied to him is of a nature that will serve his purpose. As an illustration, it is quite possible that top managers may understand a complicated system of control based on statistical break-even charts and mathematical formula whilst to the lower level manager such information would be of very doubtful utility, being beyond their powers of comprehension. In this sense, the data supplied as information must be understandable and helpful.
- Economical: The system must be economical in operation, i.e., the cost of a control system should not exceed the possible savings from its use. The extent of control necessary should be decided by the standard of accuracy or quality required. A very high degree or standard of accuracy or quality may not really be-necessary. Undue complexity of the control system should be avoided to keep a check on the costs of control. It, therefore, becomes necessary to concentrate the control system on factors, which are strategic to keep the costs down and the system economical.
- Flexible: The system of control must be flexible, i.e. workable even if the plans have to be changed. In case the control systems can work only on the basis of one specific plan, it becomes useless if the plan breaks down and another has to be substituted. However thoroughly the plans may have been formed or the planning premises established, unforeseen circumstances can upset the best-laid plans. A good control system would be sufficiently flexible to permit the changes so necessitated. It was possible that some particulars within the managerial plan might fail. The control system should report such failures and should contain sufficient elements of flexibility to maintain managerial control of operations in spite of such failures.
- Expeditious: Nothing can be done to correct deviations, which have already occurred. It is, therefore, important that the control system should report deviations from plans expeditious. No useful purpose can be served by a deviation detected months after its occurrence. The objective of the control system should be to correct deviations in the immediate future. This requires that the lime-lag between the occurrence of a deviation and its reporting be kept at the minimum possible.
- Forward Looking: The control system must, therefore, be forward looking, as the manager canno1 control the past. In fact, the control system can at times be so devised as to anticipate possible deviations, or problems. Thus deviations can be forecast so that corrections can be incorporated even before the problem occurs. Cash forecasts and cash control is an example in point where a financial manager can forecast the future cash requirements and provide for them in advance.
- Organizational Conformity: Since people carry on activities, and events must be controlled through people, it is necessary that the control data and system must conform to the organizational pattern. The control data must be so prepared that it is possible to fix responsibility for the deviations within the areas of accountability. For example, where factory costs are accumulated in a manner other than on me basis of areas of responsibility, they may lose much of their values as an instrument of control. In this case, the actual costs in a department may be out of line with the standards set without the department knowing whether the deviation has been caused by something within its control. In this sense, organization and control are difficult to separate, being dependent on one another for effective management.
- Indicative of Exceptions at Critical Points: The management principle of exception should be used to show up not only deviations but the critical areas must also be fixed for most effective control.
- Objectivity: As far as possible, the measurements used must have objectivity. While appraising a subordinate’s performance, the subjective element cannot be entirely removed. Here the personality of both the manager as well as his subordinate would be reflected in the final judgment.The use of indefinite terms can frustrate the subordinate like being told that he is not doing a good job.
- Suggestive of Corrective Action: Finally, an adequate control system should not only detect failures must also disclose where they are occurring, is responsible for them and what should be done to correct them. Overall summary information can cover up certain fault areas. For instance, it is insufficient to show merely a decline in the profits. The reason for such declined or which also be indicated, such drop in the sales volume or an increase in the costs. Even this is insufficient. The information should also disclose in which market areas the sales decline which specific costs had increased. Where a system merely detects deviations but does not indicate corrective action, the control system becomes an exercise in futility.
Credit: Management Control Systems-MGU