Management Controlling: Definitions, Tasks, and Systems
Management Controlling Fundamentals
What is Controlling?
Controlling is a management task that, in the broader sense, consists of elaborating objectives, determining a plan, and steering the organization toward those agreed objectives. We determine success by assessing if we achieve our objectives.
Controlling vs. Other Departments
Controlling must be clearly delimited from related departments:
- External Accounting: Focuses on compliance with statutory accounting and disclosure obligations (the principle of orderly bookkeeping). Due to the adaptation of international standards, there is now little separation between internal and external accounting.
- Internal Audit: Handles internal monitoring tasks, controlling correctness and documentation.
- Financial Department: Primarily finance and liquidity-oriented.
Controller Roles and Qualifications
The Role of the Controller
Controllers ensure transparency, provide active rationality assurance, and act as a critical counterpart within the organization. They are often considered the rational mind of the company, facilitating informed decision-making. Their responsibilities include making necessary corrective actions.
Core Tasks of Controllers
- Budgeting and Planning
- Reporting and Information Supply
- Control
- Transparency
- Business Consultancy
Essential Controller Qualifications
- Independent, analytical thinking
- Strong communication skills
- Team spirit
- Knowledge of controlling tools
- Comprehensive business knowledge
Management vs. Financial Accounting
- Management accounting provides information to people within an organization, while financial accounting is mainly for those outside it, such as shareholders and creditors.
- Financial accounting is required by law, while management accounting is not mandatory.
- Financial accounting covers the entire organization, while management accounting may be concerned with particular products or cost centers.
Specialized Accounting Concepts
Responsibility Accounting
Responsibility Accounting dictates that each responsible management person should track the costs, outputs, and revenues they can directly control within a specific time frame.
Decision Accounting
Decision Accounting involves preparing specific accounts to help managers make informed decisions. For the quality of these accounts, it is centrally important that only those costs, revenues, and volumes that can be really and directly changed by the decision under consideration are included.
Key questions addressed by Decision Accounting:
- Which additional costs are incurred by a given decision?
- Which costs are saved?
- What additional revenue is generated, or how much revenue is lost, as a consequence of the decision?
Key Figure Systems (KPIs)
Defining Key Figure Systems
Purpose and Structure
Key figure systems consolidate several individual key figures (KPIs) to build a comprehensive, interconnected system. They are advisable because they reduce ambiguities in the interpretation of economic facts and help avoid one-sided analysis.
A key figure system is an arrangement of KPIs that are related to one another in a meaningful way. The figures complement and explain each other, organized to clarify a specific business fact.
Important Key Figure Systems
- DuPont System
- ZVEI System
- RL System
Functions and Limitations of Key Figures
Functions of Key Figures
- Assure management rationality when ‘knowledge problems’ occur.
- Inform quickly and in a condensed form about complex situations.
- They are numerically comprehensible, measurable, and countable.
Limitations of Key Figures
- Complexity Reduction: While helpful, the reduction of complexity is also a weakness, allowing for different interpretations based on individual experience and knowledge.
- Focus Bias: Non-quantifiable facts often receive less attention, potentially leading to suboptimal corporate decisions.
- Incentive Misalignment: Using key figures as a basis for bonus payments can lead to decisions focused exclusively on achieving those figures, which may be suboptimal for the overall company.
- Incompleteness: A single key figure cannot provide a true and adequate picture. The solution is using combined key figure systems.
Evaluating the DuPont System (The ROI Tree)
It is false that the DuPont key figure system (sometimes called the “ROI Tree”) is the only generally accepted system or that it has no disadvantages.
While DuPont is a pioneer of KPI systems—known for being clear, transparent, return-focused, and simple—it does have significant drawbacks:
- It does not adequately consider liquidity, which is often more critical than profitability.
- It focuses on a single objective.
- It shares the common problem of reliance on high-quality input data.
The Balanced Scorecard (BSC)
The Balanced Scorecard (BSC) describes key performance areas to be considered in strategy elaboration. A company should concentrate efforts and resources in these areas to ensure sustainable development.
The Four Perspectives of the BSC
Key BSC Perspectives
- Financial Perspective
- What objectives are derived from the financial expectations of our investors (e.g., shareholders)?
- Customer Perspective
- What objectives must be set regarding the structure and requirements of our customers to achieve our financial goals? (i.e., Why should customers buy our products?)
- Internal Processes Perspective
- What objectives must be set regarding our internal processes to fulfill the goals of the financial and customer perspectives?
- Learning and Growth Perspective
- What objectives must be set regarding our potential to cope with current and future challenges? (e.g., employee satisfaction, training, and development.)
The BSC emphasizes that these perspectives are interconnected: If employees are unhappy (Learning/Growth), internal processes suffer, leading to dissatisfied customers, which ultimately impacts financial returns for shareholders. It is a critical chain of cause and effect.