Financial control operations are a continuous process, since they include various different stages or phases that are executed over a fairly extended period, normally coinciding with the tax year.
Although there are different kinds of controls, which require different processes to be followed, in general we can distinguish three stages that are quite common in the majority of financial control processes: the establishment of standards or indicators, the measurement and analysis of variances, and corrective action in response to variances.
The establishment of indicators or standards
The first stage consists in establishing a series of measurements considered appropriate to the activity or activities of the company over which control is being exercised: these are known as indicators or standards.
The suitability of these indicators is closely linked to the achievement of the objectives set by the company. For example, if the business aim is to achieve a certain level of profitability, these standards must set down specific costs (of production, personnel, maintenance of infrastructure, etc.), as well as the income levels needed (from the sale of goods or services, obtaining new clients, average income per operational centre, etc.) in order to reach the intended goals.
Measurement and analysis of variances
The second stage of the financial control processes is based on a comparison of the predicted budget (targets) against the actual results obtained.
After the data has been gathered, it must be analysed, and conclusions must be drawn. The results may show a close match to the targets set, or there may be a favourable or an unfavourable variance.
A favourable variance refers to results that exceed expectations. In this case, it may be a good idea to consider setting more ambitious targets. If, on the other hand, the variance is unfavourable, that is, the results are below what had been calculated, appropriate corrective action would have to be set in motion.
During this stage it is very important to determine the specific causes of variances, bearing in mind that they can be caused not only by poor execution of one or more of the company's activities, but also by a flawed or insufficiently objective appreciation of the organization's potential, meaning that the targets are completely unachievable with the means available.
Correction of variances
The true purpose and ultimate point of financial control is not simply to discover the errors, but to correct them as soon as possible and avoid their future recurrence.
The corrective measures necessary will depend on the kind of reasons behind the variances, and may range from making small adjustments in a very specific area of the company to complete changes in production, planning, organizational and/or management processes.
