There can be a lot of things to do during a workday in a small business or non-profit so that the trains run on time – so many things that may be beyond the capacity of those involved to remember to do regularly. How do you make sure that the activities and outcomes that are supposed to happen in an organization indeed happen? That is the role of a management control system – a series of reinforcing rules, policies, and procedures that ensure the delivery of desired results.

A common example of a management control system is a cash handling policy. As you know, in any small organization, cash is king, so making sure that none of it is lost or stolen is very important. When handling cash, separating the duties that go along with it is a good idea. The policy may look something like this:

       • Person 1 counts the cash received and fills out a “cash received” report   
       • Person 2 records the receipt in the accounting system
       • Person 3 confirms the amount to be deposited and takes the cash to the bank
       • Person 4 performs the bank reconciliations and reviews accounts receivable (this should be a person in the organization with accountability to management/ownership)

This system helps prevent the loss or theft of cash by:

       • Person 1,  2 and 3 because Person 4 will notice that deposits don’t  match cash received
       • Person 1 because Person 2 will notice that the counted cash is short of total cash sales when they’re recording the receipt in the accounting system
      • Person 2 because Person 3 will notice that the cash to be deposited doesn’t match the cash received report(s) for the relevant period
      • Person 4 because management/ownership, upon reviewing the financial statements, will see that cash is unusually low considering the amount of sales and/or that there are strange unpaid balances in    the aged receivables report (this would also be noted by an auditor)

A management control system can also be used to ensure product or service quality before delivery to a customer. Checklists are my personal favourite method of quality control because they remind everyone involved what tasks must be completed, and each person must sign off on their section of responsibility once complete. If the checklist hasn’t been completed, the product or service is not delivered.

The goal of a management control system is to make sure that things happen the way they are supposed to without relying on people to remember to perform their tasks. Asking people to remember is too prone to errors and forgetfulness, and thus is not an effective system. You should also be careful to not install too many controls, as this could add unnecessary cost and effort.

A management control system should only be used to prevent either recurring and costly problems; or a catastrophic event that would put the organization’s survival in jeopardy. An example of a worthwhile control system would be one that prevents a fire from burning down your place of business. On the other hand, installing a procedure to ensure prompt payment of vendor bills in response to one occurrence of a late payment would be not a good use of resources.