Upon arrival as a new student at the Harvard Business School a few years ago (1975), I noted with interest—and some concern—that one of the major instruction categories was titled Control. Control what?, I wondered.
After checking into it, however, I discovered that “control” was simply Harvard’s word for accounting. Having already worked as an accountant, I felt relieved. Even so, I wondered why the business school folks had chosen to use the word control in this context. It soon became clear.
Every successful business develops plans which set actions into motion. Control implies measurement of these actions. Two key questions are central to control:
- How effective are we in achieving our desired outcomes?
- How well are we executing our actions in pursuit of those outcomes?
Control, as an accounting term, typically presents data organized into financial statements (income statements, balance sheets, cash flow statements, etc.) that answer the first question. These documents let us know if our actions are creating the results we want.
Based on that answer, we then are able to examine the actions that have created those outcomes. A few that are typical include:
- How well have the sales plan and forecast been executed?
- How well has our sales team done in minimizing discounts?
- How well have we managed production costs?
- How well has our buyer done in minimizing acquisition costs?
- How well are we sticking to our budget? Where have unexpected costs crept in?
By virtue of producing financial statements and asking these key questions, managers control their businesses.
The key to control is the comparative between planned actions and what is actually done, and any variances between the two. This allows for mid-course understanding of cause and effect. We learn if the assumptions underlying our plans were accurate, and we are able to revise those plans if they were not. We also are able to assess whether our actions have lived up to our plans. This motivates change in the form of recommitment to the efforts required to succeed.
Control, based on these understandings, is an essential component of financial success. That is why it is the centerpiece of my PACER™ Action Model:
Without measurement of Actions, and comparison to Plans, accurate Evaluation can’t take place—and Revision of actions or plans is mere reaction rather than thoughtful change. Rewards also tend to be less than objective without the Control function.
Beyond the use of control as an internal function with which to manage a business, external stakeholders rely on the financial indicators from critical accounting documents. Most banks, for instance, rely on either Risk Management Association (RMA) or Dun & Bradstreet (D&B) ratios that they compare to the financial data of their clients and prospects. RMA ratios provide a standard for sixteen clearly defined “classic” financial statement ratios for over 600 different industries. D&B provides a similar service.
While these standard ratios do not compare a company’s planned outcomes to its actualities, they do compare those actualities to industry metrics whereby the financial community can assess the success, riskiness, and potential of borrowers, investors, and prospects. This external control function is essential in making defensible lending and investment decisions.
Today, my view of control has significantly expanded from my days as a graduate student. While sound accounting practices provide reliable financial statements and ratios, these key performance indicators (KPIs) are always lagging indicators. As one of my good CPA friends puts it, “We accountants help you see clearly what is in the rear-view mirror.”
In order to truly control business outcomes, we need to focus on what creates our financial results: leading indicators.
Planning to succeed financially is an exercise in futility if we don’t plan for creating the environment that will motivate prospects to become paying customers. KPIs that reflect such an environment are leading indicators that result in desirable financial outcomes. Actions compared against such customer metrics are an important part of any business leader’s regular dashboard.
That dashboard might also include KPIs that deliver desired customer outcomes through operating effectiveness and efficiency, employee competency development, and/or recruitment and retention of the best team to execute the company’s plans. This more comprehensive dashboard provides a “balanced scorecard” by which executives may enhance their effectiveness in controlling, managing and leading.
Successful leadership today involves continuous attention and growth in a variety of disciplines. One of the most critical is control.
Richard Tyson is the founder, principal owner and president of CEObuilder, which provides forums for consulting and coaching to executives in small businesses.