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It can also be calculated by taking operating cash flow and subtracting capital expenditures.
Free Cash Flow of the Firm is calculated as follows:-
A measure of financial performance that expresses the net amount of cash that is generated
for the firm, consisting of expenses, taxes and changes in net working capital and
investments.
Calculated as:
This is a measurement of a company's profitability after all expenses and reinvestments. It's
one of the many benchmarks used to compare and analyze financial health.
A positive value would indicate that the firm has cash left after expenses. A negative value,
on the other hand, would indicate that the firm has not generated enough revenue to cover its
costs and investment activities. In that instance, an investor should dig deeper to assess why
this is happening - it could be a sign that the company may have some deeper problems.
The balanced scorecard suggests that we view the organization from four perspectives and to
develop matrics collect data and analyze it relative to each of these perspective
The Learning and Growth Perspective
The Business Process Perspective
The Customer Perspective
The financial Perspective
This perspective includes employee training and corporate cultural attitudes related to both
individual and corporate self-improvement. In a knowledge-worker organization, people- the
only repository of knowledge- are the main resource. In the current climate of rapid
technological change, it is becoming necessary for knowledge workers to be in a continuous
learning mode. Government agencies often find themselves unable to hire new technical
worker and at the same time is showing a decline in a training of existing employees. This is
a leading indicato of brain drain that must be reversed. Metrics can be put into place to
guide managers in focusing training funds where they can help the most. In any case, learning
and growth constitute the essential foundation for success of any knowledge- worker
organization.
Kaplan and Norton emphasize that ‘learning’ is more than ‘training’, it also includes things
like ‘nentors and tutors within the organization, as well as that ease of communication among
workers that allows them to readily get help on a problem when it is needed. It also includes
technological tools; what the Baldrige criteria call “high performance work systems “ One of
these, the Intranet, will be examined in detail later in this document.
This perspective refers to internal business processes. Metrics based on this perspective
allow the managers to know how well their business is running and whether its products and
services conform to customer requirements (the mission). These metrics have tobe carefully
designed by those who know these processes most intimately, within our unique missions
these are not something that can be developed by outside customers.
In addition to the strategic management process, two kinds of business processes may be
identified a) mission-oriented processes, and b) support processes. Mission-oriented
processes are the special functions of government officers, and many unique problems are
encountered in these processes. This support processes are more repetitive in nature.
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Kaplan and Norton do not disregard the traditional need for financial data. Timely
and accurate funding data, will always be a priority and managers will do whatever necessary
to provide it. In fact often there is more than enough handling and processing of financial
data. With the implementation of a corporate database, it is hoped that more of the
processing can be centralizeeed and automated. But the point is that the current emphasis on
financials leads to the ”unbalanced” situation with regard to other perspective.
There is perhaps a need to include additional financial-related data, such as risk assessment
and cost-benefit data, in this category.
Q.3 (b) Which factors need to be borne in mind by the management in controlling
activities of Research and Development?
Ans.: The control of research and development centres presents its own characteristic
difficulties, in particular, difficulty in relating results to inputs and lack of goal congruence
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programming can not be realized within this period . some organization like public utilities
prepare long range plans for even a period of twenty years .because of the relatively long
time plan, only rough estimates are possible revenues ,expenses and capital expenditure.
Programming is time consuming and expensive. The most significant expense is the
time devoted to it by management, but it also involves a special programming staff and
considerable paperwork. A formal programming process is not worthwhile in some
organization. it is desirable in organization that have the following characteristics
Its top management is convinced that programming is important .otherwise programming is
likely to be or to become, a staff exercise that has little impact on actual decision making.
It is relatively large and complex in small, simple organizations, an informal understanding of
the organizations future directions for making decision about resource allocations, which is
principal purpose of preparing programs.
If the future is so uncertain that reasonably estimates cannot be made preparation of a formal
program is a waste of time.
In summary, a formal programming process is not needed in small, relatively
Stable organizations whose top management does not prefer to manage in this fashion.
2). Budgeting
Budget is formal financial plan for each year .a budget ,known as shorter angel plans
,is a technique of expressing revenues ,expenses ,physical targets like production and sales
,profit ,assets and liabilities usually for a period of one future year .
Budget has the functions of motivating managers, coordinating activities, communicating to
persons within organization, providing standards for judging actual performance s and acting
as control tool.
Budgeting involves operating managers as well as senior manager.
Staff personnel have considerable input to the programming process, but relatively less input
to the budgeting proces3. The program structure consists of program and major project. It
includes both capital expenditure and operating items and it covers a period of several years.
The budged is structured by responsibility centre (which may or may not cut across program)
the focus is on operating revenues and expenses and it typically is for a single year.
4. Budget preparation is done under greater time pressure and is more hectic than
programming
5. A program is abroad brush sketch of the future. A budget has more details both because it
is a fairly specific guide to operating decisions and also because it will be used subsequently
to evaluate the performance of individual manager.
6. Programming decision can have consequences of great magnitude. Budgeting decision are
typically much less significant, because they are made within the context of the current level
of operating activities, except as those activities will be affected by program decision.
7. Behavioral consideration is much more important in the budget preparation process than
in the programming process. The approved project is a bilateral commitment; the program is
not a commitment, because the budget will be used to evaluate performance.
3. Executing:-
After the budget preparation, budgeting is used as a tool for coordinating the actions of
individual and department within the organization. In fact within the execution phase task
control is done to ensure that actions and performance match with the planned or desired
result. While performing the mangers goal is to achieve budgeted targets. However
compliance to budget is not necessary if the plans given in the budget are found as not the
best way of achieving the objective.
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After execution actual performance and result are compared with the budgeted plans and
targets and variance reports are prepared which highlight the variance between the 2 and the
causes for such variances. Variance reports should separate controllable item from non-
controllable item, determine the effects of changes in volume on revenues and cost and if
possible, should mention changes in other circumstances affecting the variances
4. Evaluation:-
Management control Process ends with the evaluation phase in which the performances
of managers are evaluated. Since it is an after- event exercise, the evaluation does not affect
what has happened. However, evaluation phase acts like a powerful stimulus as employees
know that their performances will be subsequently evaluated. Also on the basis of
performance evaluation, the future budget and plans are revised.
Q8. For an engineered (standard) expense center, zero based budgets is not
necessary”- Comment in detail?(2003)
Ans. Introduction
Management control is a must I any organization that practices decentralization. One
view argues that management control system must fit the firm’s strategy. This implies the
strategy is first developed through a formal and rational process, and this strategy then
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dictates the design of the firm’s management systems. An alternative perspective is that
strategies emerge through experimentation, which are influenced by the firm’s management
systems. In this view, management control system can effect the development of strategies.
We will consider both points of view, as well as their implications in terms of the design and
operation of management control systems.
When firms operate in industry contexts where environmental changes are
predictable, they can use a formal and rational process to develop the strategy first and then
design management control systems to execute that strategy.
Defination
Management control is the process by which managers influence other members of
the organization to implement the organizations strategies.
Control
Press the accelerator and your car go faster rotate the steering wheel, and it changes
direction. Press the break pedal, and the car slows or stops. With these devices, you control
speed and direction; if any of the inoperative the car does not do what you want it to. In other
words it is out of control.
An organization must also be controlled; that is, devices must be in place to ensure
that its strategic intentions are achieved. But controlling an organization is much more
complicated than controlling a car. We will begin by describing the control process in simpler
systems.
Elements of control
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Process
Assessor, comparison
Control with standard
device
Entity
being
controlled
A detector or sensor – a device that measures what is actually happening in the process being
controlled.
An assessor – a device that determines the significance of what is actually happening by
comparing it with some standard or expectation of what should happen.
An effector – a device (often called ‘feedback’) that alters behavior if the assessor indicates
the need to d so.
A communications network – devices that transmit information between he detector and the
assessor and between the assessor and effector.
These four basic elements of any control system are described their functioning by giving
following examples
Thermostat The components of the thermostat are (1) a thermometer (the detector), which
measures the current temperature of a room; which compares the current temperature of a
room; (2) an assessor, which compares the current temperature with the accepted standard for
what the temperature should be; (3) an effector, which prompts a furnace to emit heat ( if the
actual temperature is lower than the standard ) or activates an air conditioner (if the actual
temperature is higher than the standard) and which also shuts off these appliances when the
temperature reaches the standard level; and (4) a communications network, which transmits
information from the thermometer to the assessor and from the assessor to the heating or
cooling elements.
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Chief Executive
Staff
Marketing Marketing
Manager Manager
Staff Staff
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Functional Units
Multibusiness companies are typically divided into business units, each of which is
treated as an independent profit-generating unit. The subunit within these business units,
however, may be functionally organized. It is sometimes desirable to constitute one or more
of the functional units – e.g., marketing, manufacturing, and service operations – as profit
centers. There is no guiding principle declaring that certain types of units are inherently profit
centers and others are not. Management’s decision as to whether a given unit should be a
profit center is based on the amount of influence (even if not total control) the unit’s manager
exercise over the activities that affect the bottom line.
Marketing
A marketing activity can be turned into a profit center by charging it with the cost of
the products sold. This transfer price provides the marketing manager with the relevant
information to make the optimum revenue/cost trade-offs, and the standard practice of
measuring a profit center’s manager by the center’s profitability provides a check on how
well these trade – offs have been made. The transfer price charged to the profit center should
be based on the standard cost, rather than the actual cost, of the products being sold. Using a
standard cost base separates the marketing cost performance from that of the manufacturing
cost performance, which is affected by changes in the level of efficiency that are beyond the
control of the marketing manager.
Manufacturing
The manufacturing activity is usually an expense center, with the management being
judged on performance versus standard costs and overhead budgets. This measure can cause
problems, however, since it does not necessarily indicate how well the manager is performing
all aspects of his job. For example,
A manager may skip on quality control, shipping products of inferior quality in order to
obtain standard cost credit.
A manager may be reluctant to interrupt production schedules in order to produce a rush
order to accommodate a customer.
A manager who is measured against standard may lack the incentive to manufacture products
that are difficult to produce – or to improve the standard themselves.
Advantages
Smooth Functioning : The rational for the functional form of organization involves the
notion of a manager who brings specialized knowledge to bear on decisions related to a
specific function, as contrasted with the general – purpose manager who lacks that
specialized knowledge. A skilled marketing manager and skilled production manager are
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likely to make better decisions in their respective fields than would a manager responsible for
both functions. A skilled manager helps for the smooth functioning of the business activities.
Efficiency : The skilled specialist should be able to supervise workers in the same function
better than the generalist would, just as skilled higher – level managers should be able to
provide better supervision of lower – level managers in the same or similar function. Which
helps to increase the efficiency of the labour.
Disadvantages
Advantages
The quality of decisions may improve because they are being made by managers closest to
the point of decision.
The speed of operating decisions may be increased since they do not have to be referred to
corporate headquarters.
Headquarter management, relieved of day-to-day decision making, can concentrate on
broader issues.
Manager, subject to fewer corporate restraints, are freer to use their imagination and
initiative.
Disadvantages
Decentralized decision making will force top management to rely more on management
control reports than on personal knowledge of an operation, entailing some loss of control.
If headquarter management is, more capable or better informed than the average profit center
manager, the quality of decisions made at the unit level may be reduced.
All the above are the advantages and disadvantages of the Functionally structured
organization and profit center decentralized organization.
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Q.12
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