Want to earn a profit? You need financial controls!

Traditional financial controls include:

• Ratio analysis. (See Exhibit 15–6.) Ratios are calculated using selected information from the organization’s balance sheet and income statement.

  

  Exhibit 15–6

  Popular Financial Ratios

  OBJECTIVE	RATIO	CALCULATION	MEANING
  Liquidity ratios: measure an organization’s ability to meet its current debt obligations	Current ratio	${\displaystyle \frac{\text{Current assets}}{\text{Current liabilities}}}$	Tests the organization’s ability to meet short-term obligations
  	Acid test	${\displaystyle \frac{\text{Current assets}-\text{Inventories}}{\text{Current liabilities}}}$	Tests liquidity more accurately when inventories turn over slowly or are difficult to sell
  Leverage ratios: examine the organization’s use of debt to finance its assets and whether it’s able to meet the interest payments on the debt	Debt to assets	${\displaystyle \frac{\text{Total debt}}{\text{Total assets}}}$	The higher the ratio, the more leveraged the organization
  	Times interest earned	${\displaystyle \frac{\text{Profits before interest and taxes}}{\text{Total interest charges}}}$	Measures how many times the organization is able to cover its interest expenses
  Activity ratios: assess how efficiently a company is using its assets	Inventory turnover	${\displaystyle \frac{\text{Sales}}{\text{Inventory}}}$	The higher the ratio, the more efficiently inventory assets are being used
  	Total asset turnover	${\displaystyle \frac{\text{Sales}}{\text{Total assets}}}$	The fewer assets used to achieve a given level of sales, the more efficiently management is using the organization’s total assets
  Profitability ratios: measure how efficiently and effectively the company is using its assets to generate profits	Profit margin on sales	${\displaystyle \frac{\text{Net profit after taxes}}{\text{Total sales}}}$	Identifies the profits that are being generated
  	Return on investment	${\displaystyle \frac{\text{Net profit after taxes}}{\text{Total assets}}}$	Measures the efficiency of assets to generate profits

• Budget analysis. Budgets are used for both planning and controlling.

  • Planning tool: indicates which work activities are important and what and how much resources should be allocated to those activities.

  • Controlling tool: provides managers with quantitative standards against which to measure and compare resource consumption. Significant deviations require action and a manager to examine what has happened and why and then take necessary action.

1. Information—a critical tool for controlling other organizational activities

   Managers need RIGHT INFORMATION at the RIGHT TIME and in the RIGHT AMOUNT to help them monitor and measure organizational activities:

   • about what is happening within their area of responsibility.

   • about the standards in order to be able to compare actual performance with the standard.

   • to help them determine if deviations are acceptable.

   • to help them develop appropriate courses of action.

   

   A management information system (MIS)

   • Can be manual or computer-based, although most organizational MIS are computer-supported applications.

   • System in MIS implies order, arrangement, and purpose.

   • Focuses specifically on providing managers with information (processed and analyzed data), not merely data (raw, unanalyzed facts).

   

2. Information—an organizational resource that needs controlling

   In 2017—79,700 reported security incidents and 2,122 confirmed data breaches.24

   • Information is critically important to everything an organization does—that information needs to be protected.

     • Controls: data encryption, system firewalls, data backups, and other techniques.25

     • Look for problems in places that might not even have been considered, like search engines.

     • Equipment such as laptop computers, tablets, and even RFID (radio-frequency identification) tags are vulnerable to viruses and hacking.

     • Monitor information controls regularly to ensure that all possible precautions are in place to protect important information.

   

• Are employees doing their jobs as planned and meeting goals that have been set?

• If not, employee counseling or employee discipline may be needed. See p. 284 in Chapter 9.

Balanced scorecard approach looks at more than the financial perspective27 by typically looking at four areas that contribute to a company’s performance:

1. Financial

2. Customer

3. Internal processes

4. People/innovation/ growth assets