After implementing a strategic decision, management needs a way to judge its performance.
Typically this involves the comparison of the firm's current financial performance against its financial performances from past quarters or years. Feedback controls include the information used by the manager to alter their plans and strategies. While numerous types of feedback controls exist, four are the most common: budgets, ratio analysis, audits, and objectives and goals.
Budgets allow upper management to monitor the expenses and profits of an individual department or product group.
Evaluations will be based on the variations of the revenue and expense accounts, and management should investigate any disparity beyond reasonable expectations. Not only should they inquire about rising expenses, but rising profits as well. Once the source for the increased profits is discovered, this knowledge might be transferable to other products or services. The source for increased expenses needs to be discovered so the company can alter their operations accordingly.
Companies need to create a process, however, to evaluate budgets without discouraging management from investing in research and development, training, and beneficial capital equipment. Management should not be punished for making long-term investments that are vital to the future success of the firm. Adding back these investments, or the creation of separate accounts, will provide a more adequate comparison to past years.
Return on investment, return on equity, debt-to-equity ratios, liquidity ratios, and other financial ratios offer reliable measurements of company and individual department performance.
Just like budgets, long-term investments should be added back to avoid short-term orientations by management. Firms need to be careful when using financial ratios to evaluate performance because they may not be useful for certain company structures. For instance, related diversified firms create cost efficiencies and competitive advantages by creating synergies between their products. Basing a reward system on return on investment figures encourages competition between business units. Cooperation rarely arises among competitors, and decreases the probability of creating necessary synergies.
On the other hand, financial ratios are appropriate for unrelated diversified firms to judge the performance of individual business units and their managers. These firms are not concerned with creating synergies because their products and services usually lack commonality. Therefore, separating and evaluating individual business units is an adequate process for gauging manager performance.
Audits allow a company to measure its operations based on certain guidelines to include financial, social, and customer evaluations.
Financial audits focus on the accounting systems of the firm to ensure their compliance with generally accepted accounting principles and government regulations. With the growing expectations by consumers for socially responsible companies, audits regarding a firm's ethical behavior and charitable contributions are common. Customer surveys can be considered customer service audits, and provide the company with valuable feedback about consumers' perception of the firm.
Target Objections and Goals
Certain operating goals for individual business units and departments give managers a target for which to strive. These goals, however, need to properly motivate managers and employees. If the goals and objectives are so high that they are viewed as unattainable, employees will not even try to meet them. If they are set too low, the abilities of employees are not being maximized by the firm.