Controlling Needs Good Quality Reporting, but Continues

Even under the supervision of a foreign investor, the application of controlling can take years
[10.5.2004, TREND / Slávka Kampová]
  
  
Why is the profit plan not met? The financial director sees not achieving the planned takings as the reason. The head explains that takings would have been met if delivery times had been respected. Production makes excuses that it isn’t their fault, the technical preparation of production was at fault.
“That was the reason why managers didn’t need controlling” affirms Ľudmila Kalafutová who specialises in controlling at Bratislava’s University of Economics.
Even though this management technique was created over two hundred years ago, the popularity of controlling only came to Slovakia with the arrival of supranational companies. When it is well applied, it brings efficiency, increases profit and the chances of survival. It offers in fact the most important tools for decision-making: transparent and up-to-date information.

More than accountancy
Controlling isn’t accountancy or reporting, although it is based on it. It goes further, gathers information from all company levels: from mechanics, warehouse employees, through production heads, administration, accountancy up to the management. This information is then evaluated in order for the company to find out what costs are incurred in which processes. From this, it can then be defined what should be changed and how. For example, which products should be produced more and which less, where there are useless cost reserves and which customers are not worth having.
“Controlling resolves the typical problem of every company: how to increase profit,” explains the director of the company Empiria consult a.s., Bratislava Juraj Poór. Looking for new profit or old, pointless costs is, however, only one part of the work of controllers. Controlling has a critical place mainly in large companies with complicated production processes.
According to Ľ. Kalafutová, the benefit of controlling compared to classic accountancy is the fact of looking not just into the past, but mainly into the future. Controllers plan how financial indicators are going to behave, often several months, even years, in advance.
If reality differs from the estimation more than the deviation allowed, they justify and correct it. “If there are deviations, this does not mean that we are stupid. As long as we can explain them,” affirms the general director of Istrochemu, a.s., Bratislava Ondrej Macko.
A tangible example of when the majority of Western European companies had to correct their plans dramatically was 1989. “They were useless, as new markets suddenly opened up,” reminisces the project manager of the Generali insurance company, Christof Műller.
Thinking in terms of processes
The best-known controlling method is ABC – Activity Based Costing, i.e. attributing costs to processes. “Costs are allocated where they are created,” explains the financial analyst from Empiria Consult Peter Mikuš. It is done by means of cost departments, a concept originating in cost accountancy.
The difference compared to accountancy, however, lies in defining cost departments not according to organisational structure but according to company processes. “If we are able to value activities in the company, we know how to calculate the costs of products and services in a more precise and direct way,” Juraj Lott from the consulting company S&K Management Systems, s.r.o., Bratislava explains the essence of ABC.
In other words, ABC is used for a company to find out which product brings which profit and thus know how to take decisions on which production to expand and which to limit. “Without information on in-house processes, as well as on relations with the surroundings expressed in monetary terms, the management will sooner or later take a wrong decision,” affirms the sector analyst of TREND Analyses, Michal Žilka.
A similar analysis also helps recognise what profit is brought by individual customers. “The basic question which a company must ask itself is: do we sell to a customer because of the volume or because of the profit margin?” emphasises the general director or Istrochem O. Macko.
Next to the driver
There is no clear consensus in their branch on the precise position of a controller in a company, according to Ľ. Kalafutová. Some say that controlling should be a further department of administration, some that the economic department should take over its operation, and others that it should stand above other departments.
The director of internal auditing and controlling of Slovenská Grafia, a.s., Bratislava Silver Luco, prefers the latter possibility: “A controller should be independent. He has to have access to all systems, and information from all departments must be made available for him,” points out S. Luco. Ch. Műller has a car metaphor for the controller’s role: “A manager is the driver of the car and the controller is the one holding the map and doing the navigating,” he compares. Decisions are taken in the end, of course, by the manager. The controller’s responsibility is to provide precise and clear information on the state of the company. An imprecise navigator is not much use.

Oh, all that communication
The stumbling block in companies which try to implement controlling is often communication. Since the controller intervenes in all levels of the companies, in order to work properly, people must accept him. “The best controlling system is worthless if communication between the manager and the controller does not work,” the project manager at Generali shares his experience and adds, “having methods which are accepted is more important than having the best controlling methods.”
According to J. Poór’s experience at Empire Consult, people are often afraid of controllers; they think he is someone who has come to spy on or pursue them. This is why it cannot work without strong support from the top management. Jindřich Škoda from the Czech company Gumotex is also convinced of this: “The main controller in a company is not the person who has it written on his door, but it’s the general director.”
From reporting to controlling
Heineken is a typical example of a company where the foreign investor brought in controlling. Despite this fact, it was a long road even for the biggest beer producer in Slovakia.
The first of four phases began in 1998, when Heineken bought its first brewery in Slovakia. At that time, it was enough for the financial department to send monthly and quarterly classic reports - income statements and balance sheets – to the Amsterdam headquarters.
“The management was satisfied with this to about seventy percent,” the financial manager of Heineken, Alena Mazaniková, assesses the first period. After two years, Heineken moved to a more advanced form of financial reporting.
Data from accountancy began to be used to prepare plans and budgets for the next periods. “However, it was still all in a very passive position,” the brewery’s controller recalls.
There then followed a discussion on how to link up the many reports and information which was really useful. “We asked ourselves what the top management is interested in: the whole plan? All the reports?” explains A. Mazaniková.
The answer was a top sheet, one page of an Excel file where indicators on the company’s value were extracted from the system. “EBIT, net operational profit, productivity, fixed production costs, average number of employees,” A. Mazaniková reads the articles in the table. These indicators are used by Heineken headquarters to compare the Slovak company with others in the group.
ABC specialist
Analyses of deviations from reality came after planning and budgeting. “Of course, reality does not always reflect the plan. However, it’s important to know why. Is it because the price of energy rose, or the consumption of beer fell?”
The three-year plan was changed to yearly plans. These are constantly corrected using the so-called latest estimate which catches the latest developments. “Before, it took us three days to correct the plan, now we can do it in two to three hours,” specifies A. Mazaniková.
The last phase which Heineken went through in 2002 was modern controlling methods. The company decided to recruit an internal ABC (Activity Based Costing) specialist. “For 2003, we already have all complex reports and directions according to the ABC method,” boasts A. Mazaniková.
Programming by an economist
The controller of Gumotexu, a.s., Břeclav Jindřich Škoda also talked at the TREND conference entitled “Financial Management 2004” on changes in reporting. The original system of reporting was indirect, in his opinion, incomplete and lacking information on future development.
“The reports were thick and no-one read them to the end. Ninety percent of information was useless for the receiver,” he justifies the decision to make a change. The company directed the new reporting at its receivers, where each report takes into account priorities, i.e. what is truly important in the company. The owners of processes who know the deviations between plans and reality the best give their opinion.
An essential precondition for effective reporting is the information system. However, this is not everything. “Don’t let yourself get confused by IT systems. Controlling cannot be solved by computers, it’s a process”, affirms J. Škoda.
Gumotex chose its own path in information support. “We just bought a system, we had training and we did the rest on our own,” illustrates J. Škoda. He gives the most credit to his colleague from the economic department, who, even though she was not a programmer, programmed the system to meet Gumotex’s needs in the space of a month and a half.
According to him, she saved the company one and a half million crowns. The advice from the controller of Gumotex is: “Don’t be afraid of your own solutions. Don’t give in to the philosophy of IT companies.”

Changing costs
In Slovenská Grafia, controlling is part of the project of improving company processes. The printing company began it at the end of last year, and invited experts from Deloitte & Touche to carry it out. The whole project, divided into several phases, is supposed to last a year and a half. For the first two months, the external experts carried out a process audit. They tried to eliminate activities which were done twice or more, stoppage time and similar inefficient moments.
New controlling was next in line. “Until then, the system of controlling was not at the level of international standards and the latest economic practice,” the head of the department for internal auditing and controlling at Slovenská Grafia, Silver Luco, explains the motivation behind the change.
The information which the company had until then was not enough to assess orders, for example. “Assessing an order does not mean that I look something up in the accountancy. We need to know the price of every operation, every process,” stresses S. Luco.
When it is found that the company’s products are losing their competitiveness, controllers must know where the problem is. Is it in the costs for administration? Is the production preparation expensive? Or the production itself?
In order to be able to determine this in Slovenská Grafia, they changed the cost departments. They traditionally gather costs according to the names of cost accounts and organisational structure. One cost department usually covers one department. Controlling in Slovenská Grafia, however, created cost departments in such a way that the costs were cumulated according to company processes. They are defined to represent the real price of every performance and activity which is calculated: the hourly rates of machines, processes and operations; naturally for different types of printing from the receipt of an order to dispatch to the customer.
According to S. Luco, this principle has resulted in their number doubling in Slovenská Grafia. In order for prices to correspond to costs, the company revised the cost calculations for products. “It brought about an internal price update, because it also included processes which didn’t used to be valued,” affirms the director of controlling.
Profit centres
After adjusting the economic structure of costs, profit was next in line. This has recently been created in Slovenská Grafia in three profit centres divided according to customers.
The New Business profit centre is focused on new customers. As well as this one, the company has further profit centres for strategic and stable customers. “They are created to actively follow and assess commercial activity” explains S. Luco, with the reminder that controller is here so that everyone in the company can be responsible for what they influence. If a salesman sets a price which means making a lower deal than expected, it can be unfair to deduct his margin from this.
The salesman cannot help what has happened in the production. “If a machine is not working, or the production has used up too much paper, it is the production which is responsible for a lower profit, not the salesman, even though he is at the end of the process,” illustrates the main controller.