The controlling approach as an integral part of financial culture

Posted on:Sep 8,2022


One of the fundamental characteristics of the market economy is that it does not protect the weak; market environment is ruthless in terms of its punishment of any management mistakes, therefore only businesses with the right organisation, leadership culture and prepared management are able to survive in the market competition (Lentner et al., 2019a). In an economy where the battle for customers and profits is a permanent battle, only companies that persevere and remain consistent will win. The operation of business organisations and the maintenance of their competitiveness can only be achieved through planned management that ensures constant monitoring. In today’s competitive environment, a controlling approach is an essential part of management culture. Currently, the Hungarian business community also regards planning and continuous monitoring, analysis and comparison of planned and actual data as a natural process and task.

In the present short paper, the role of controlling in financial culture is described and the methods of cash-flow analysis used to examine financial management are presented. The topic is inexhaustible, therefore a follow-up paper is planned that will explore the role of cash flow in the valuation of companies by presenting the methods of company valuation using model calculations.

A controlling approach to financial culture

Increasing competition and the growth of business activities are making corporate governance an increasingly complex task, and the role of the decision support function is becoming more important. Its success is in the fundamental interest of managers, as they need to rely on the information available to them when making decisions (Horváth, 2011:98; Görcsi, 2017; Lentner et al.,2020). The active use of diverse market information also contributes to the efficiency of the product development of companies and their overall performance (Moenaert – Souder, 1990; Moorman, 1995).

According to Horváth (2009), controlling is – from a functional point of view – a subsystem of management that coordinates planning, control and information supply. The general task of controlling is planning, the systematic monitoring and periodic evaluation of corporate activities, the provision of information, and the management of activities to help adapt to environmental conditions in order to achieve strategic goals (Günther, 2008:45; Hahn-Hungenberg, 2001:107,291). The primary purpose of controlling is to provide planning and management with accurate, reliable and timely information on the state of the business and its ongoing operations. This means providing short-term operational information towards operative management and providing comprehensive information to inform strategic decisions. Controlling has thus become an important part of corporate management (Weber-Schäffer, 1999:740; 2013), which Küpper et. al (1990:283) have termed a coordination-oriented approach (Figure 1)

Figure 1: Structure of the corporate governance system

Source: own editing based on Küpper, 2015, p. 30.

The role of management, including the functions of leadership, organisation and control, plays a key role in improving the effectiveness and efficiency of any business (Lentner et al., 2019b). The importance of the role of management was already highlighted by Frederich W. Taylor (1880), Henri Fayol (1916) and, to some extent, Max Weber. This is also confirmed by a 2012 multi-country study, in which Bloom, Sadun and Reenen (2012) examined the role of management in corporate performance. The findings of this research suggest that three factors play a decisive role: (1) the quality of identifying short- and long-term objectives and tasks, which includes productivity, (2) the system of performance measurement related to incentives and compensation, and (3) a sophisticated, differentiated and continuously analysed performance measurement and controlling system. Research participants also examined whether companies with excellent management are more successful than companies with a less appropriate one. The survey showed that the vast majority of enterprises are poorly managed, but that companies with a good management perform overall better and that business growth is smoother in these cases. The foundation for this aspect of corporate growth theory was laid by Penrose’s work in 1959, in which he viewed the company as a system of productive resources. In his work, Penrose describes companies that operate in imbalanced environments and under uncertain conditions, but are able to adapt flexibly to these conditions. According to Penrose, the learning process within the company is of paramount importance. He believes that the management of a company becomes more effective over time as their daily tasks become routine, which results in a constant release of managerial input, enabling managers to focus on value-creating growth opportunities (Katits-Zsupanekné, 2017:58).

One of the key challenges of modern strategic management is how to build and sustain a competitive advantage. The most important feature of resource-based strategies is that they cannot be simply acquired, but must be built by the firm itself through learning by doing (Markides and Williamson, 1995). Strategic resources are therefore the product of organisational learning and knowledge, and consequently the history of the organisation plays an essential role in their development (according to Penrose’s ideas).

The Balanced Scorecard (BSC) model as a basis for financial culture

The economic environment for businesses has changed significantly since the mid-1990s. The relative stability and predictability of the past has been replaced by volatility, posing a major challenge for business management. Adapting to this dynamically changing environment required a change in management methods. Whereas until the end of the 20th century, financial indicators were a good description of the value of a company, in the globalised, turbulent economy of the 21st century, there was (is) a need for methods that assess human capital, quality, customer capital and their changes. Recognising and capturing these factors, Nolan Norton and Robert Kaplan examined the relevance of performance measurement approaches in the analysed period, which have previously been based on financial indicators. The authors recognised that it is necessary to look beyond financial indicators to consider other so-called soft factors if the performance of a business is to be comprehensively mapped. In this light, they created the Balanced Scorecard (BSC). The BSC model was developed in response to the need to create competitive advantages, to take account of a wider range of internal and external environmental influences and to balance the need to comply with traditional accounting models; it naturally includes financial indicators, which are considered to be traditional. The objectives and indicators formulated in the BSC are defined on the basis of the corporate strategy (mostly as a top-down process) and the model fills the corporate strategy with actual content while taking into account four fundamental perspectives, thus avoiding the exclusivity of the financial approach (Horváth & Partners, 2015:205; Zéman-Tóth, 2018) and also meeting the complex challenges of the modern era.

There is a close link between the BSC model and corporate strategy, which Kaplan-Norton (1998:142) interprets in terms of the following:

  • The BSC model expresses the company’s vision for the entire organisation, thus creating a basis for common understanding.
  • With the help of the BSC model, it becomes clear to each employee in the organisation how they can contribute to the success and sustainable success of the company’s strategy. Employees need to know first and foremost the financial consequences of their actions and decisions, while managers need to know the factors that have the most important impact on long-term financial results.
  • The certain sub-objectives and proposed indicators included in the BSC will allow the objectives to be effectively achieved and analysed in progress. The BSC model thus breaks down the strategy into a harmonised set of indicators, and thus allows monitoring of strategy implementation and management intervention in case of deviation from the direction indicated in the strategy (Kaplan-Norton, 2018:8).

According to Norton and Kaplan’s (1998) model, four equally weighted aspects are needed around a central strategy to provide a complete overview of an organisation’s activities, which are the following (Figure ):

  • the financial (What the owners expect) perspective,
  • the customer (What customers and consumers expect) perspective,
  • the perspective of internal operational processes (What processes are required to deliver high quality, outstanding performance), and
  • the perspective of learning and development, usually in relation to human resources; (How to maintain innovative, developmental and learning skills).

Figure 2: Process model of the Balanced Scorecard strategy, planning and measurement system

Source: based on Kaplan and Norton, 2018, p. 9

The four perspectives of the BSC model allow a balance to be created between short and long-term goals, desired outcomes, key factors that affect business performance, and hard and soft indicators (Norton-Kaplan, 2018:24).

The BSC model is more than a tactical or operational “measurement system”. Enterprises in the 21st century see it as a strategic management system to track and effectively achieve their set objectives and to identify critical management processes (e.g. explaining corporate vision and strategy, linking strategic objectives and processes, planning and setting objectives, improving the effectiveness of strategic learning, etc.). The Balance Scorecard model addresses the corporate gap that is present in most management systems, i.e. the lack of systematic processes that are essential for the implementation and feedback of corporate strategy. The corporate processes that are developed in the BSC model system enable the company to implement and monitor its strategy more effectively.

Of course, it is important to point out that different objectives are set for the BSC model at different stages of the life cycle of a company. The analysis of the life cycles of business organisations is dealt with in detail in the so-called ‘life cycle models’ or ‘life course models’. The characteristics of the individual life stages have been examined by Jeffry Timmons (1990), Ischak Adizes (1992), Larry Greiner (1998) and, in the domestic context, by Anna Salamonné Dr. Huszti, László Szerb, István Jávor and György Kocziszky. Without exception, in almost all business organisations, the individual life cycle stages of a company are present, as is its entire life cycle. However, it must be seen that there are many factors that influence the life cycle of different companies, how long they spend in each phase, and what kind of life cycle they follow. It depends on countries, regions, economic sectors, leadership and management skills, external economic influences – and one could go on and on about the determining factors – whether a company is able to have a shorter life cycle and while another can have a longer one.

Kaplan and Norton (2018) also highlight this issue, stating in their book that “…financial objectives may vary widely across the different corporate life cycles […] and need to be fully aligned with the strategy written for the particular corporate life cycle.” The authors distinguish, for the sake of simplicity, three basic stages

  • growth,
  • the maturity stage, and
  • the “harvest” phase, corresponding to the stage of the milking cow, according to the BCG matrix. (Kaplan-Norton, 2018:47).

Given that the main part of the paper is not related to this area of management, it is not considered necessary to present a more detailed analysis and literature review.

By designing and implementing the strategy, management aims to meet the fundamental objective of increasing shareholder value, i.e. to achieve positive added shareholder value. However, maximising shareholder value is closely linked to ensuring long-term sustainable growth (Zéman-Tóth, 2018). Of course, this sustainability is made more difficult by globalised economic processes and is significantly influenced by the internal and external financial processes of the company. Technology is a very important external influencing factor. Automation, accelerating technological change and modern IT solutions are posing fundamental new challenges to economic systems, and in this new world, which requires different skills, new ideas, processes and strategies must be found that can provide a competitive advantage. Norton and Kaplan (2018:3-7) highlight the following factors in their new book:

  • the spread of workflows that integrate business functions, resulting in the hiring of professionals with complex, competitive knowledge;
  • the continuous shortening of the product life cycle drives companies toward constant innovation, while at the same time a shorter market interval is needed for the innovation to return;
  • in a world of economic and social globalisation, it is necessary to integrate local and global business opportunities while maintaining efficiency and competitiveness.

All of these internal and external financial factors can be identified as elements of financial culture and their impact on corporate financial strategy is examined. The Balance Scorecard model is one of the key bases of corporate financial culture, which provides help during the planning, monitoring and analysis of processes.

In the following section, the methodology of cash flow analysis, which has become common in Hungarian practice is described in detail.

Cash-flow as a generally accepted tool for financial planning and analysis

The sustainable operation of farming organisations must focus on two fundamental processes. The fundamental objective is profitable management, since the growth of assets and the expansion of the stock of assets necessary for the continuation of activities can only be achieved in the long term through profitable management. The second priority is to maintain solvency; liquidity is essential to ensure dynamic operations and to maintain the confidence of market players. A logical question arises. If it is established that profitability is a prerequisite for survival and operation in the long term, then why is it necessary to look at other processes? The answer lies in the complexity of management. The growth of income, and therefore of assets, depends on the size of the income in relation to turnover and turnover rate of the working capital. This fact is clearly explained by the DU-PON indicator system, which is not detailed due to space limitations.

It is also necessary to take into account the fact that in many cases, especially in agriculture, in particular in Kazakhstan, many enterprises have the opportunity to exist only through a system of state support, in the form of subsidies or tax preferences for a particular type of activity. This may affect the effectiveness of the corrupt management for the worse if the allocated funds are misused. It is also necessary to take into account the fact that the timing of the funds allocated by the state does not coincide with the operating cycle of agricultural enterprises in other years. The best results are obtained by enterprises with more modern technical equipment and technological support. This allows them to accelerate the turnover of capital and, if necessary, quickly respond to the effects of the external environment, which, as noted above, is in a situation where the stability of processes has been replaced by volatility. In addition, companies that are more advanced in terms of technology have a more professionally trained team, which has a positive effect on corporate management.

The change in cash and cash equivalents can be disconnected from profitability in the short term, i.e. a company can be liquid even if it is at loss and can struggle with financial distress even if it is profitable. It is clear that without an examination of the financial flows, the analysis is incomplete and the picture of financial management is not complex.

Cash flow analysis is a „statement” accepted by both Hungarian and international accounting standards that examines changes in the assets and income of companies and the interrelationships between financial processes. The preparation of a cash flow statement in Hungary is required by Act C of 2000 on Accounting, while in international accounting practice the requirements of IAS 7 are applicable. In the formulation of Dr. Andrea Madarasiné and her colleagues (Dr. Andrea Madarasiné et al: International Accounting; Perfekt Publisher Budapest; 2019), the purpose of preparing a cash flow statement is to provide decision-makers with information about the ability of an entity to generate cash and cash equivalents. The statement highlights cash-flows and the reasons behind them and is structured accordingly. For convenience, cash-flows are presented in three parts.

1. Cash-flow from operating activities;
2. Cash-flow from investing activities;
3. Cash-flow from financing activities.

Cash-flow from operating activities shows how the develop­ment of management activities and the related assets and liabilities has affected the development of cash and cash equivalents. Before describing the analysis in more detail, it is necessary to draw attention to the asset – liability matching known in accounting, which is the basis for the design of most methods of examining profitability and changes in capital structure and for interpreting the results.

At this stage, the statement first examines the amount of the extracted profit and adjusts it for two reasons.

  • The adjustment is made for those items that affect the reported result in a way that does not involve a cash-flow. Examples include changes in amortisation, changes in impairment, changes in accruals, changes in provisions, changes in exchange gains and losses.
  • The other reason for the adjustments is that there are items that appear in the other two segments of the statement and failure to correct them would result in accumulation. An example of this is dividends received on investments, interest received on investments, which adjust the result but are not related to the underlying activity but to investments.

The effects of changes in each factor can also be assessed on the basis of asset-liability matching. Profit is considered as a resource, thus it is clear that profitable management is reflected in an increase in assets. The reverse is also true, of course, with an unprofitable management leading to a reduction in assets. In the case of a closed system, if it is assumed that, with all asset values held constant, only two types of assets can change in value – cash and another asset – then the change in their value is in the opposite direction. In the case where, with all asset values unchanged, the value of cash and the value of a liability change, the direction of change will be opposite. As an example, if the amount owed to suppliers decreases, this means that more of the debts have been paid and there is less cash left. It can be seen that this section analyses the production of income and the associated asset – liability changes.

Cash flow from investing activities examines the result of a business entity’s investments. Items included in the investment of enterprises may include interest and dividends received, income from the sale of fixed assets, and expenditure on the purchase of fixed assets and any expenditure on the acquisition of companies. They are based on actual cash flows and are therefore easy to include in the statement. It should be stressed that they are shown as an adjustment in the scope of the operating cash flow.

The financing cash flow is actually linked to the events of cash supply, its elements are easy to define. This group includes items related to the supply of money, such as credits and repayments, interest and dividends paid.

The above breakdown provides an analysis of changes in cash and cash equivalents by cause. It is noted that a key element of controlling is the examination of variances and cause and effect relationships. Based on the above, it is easy to see that when making long-term financial and management decisions, it is necessary to examine the impact of a particular step and how cash flow will change in the upcoming years. For completeness in the presentation of the analysis of cash flows, the two methods of preparing the statements are presented Cash-flow can be prepared using both direct and indirect methods.

The above description of the statement is based on the elements of the indirect method, which basically used the data from the accounting balance sheet and profit and loss account and the underlying general ledger extracts. The direct method is based on cash flows and is also divided into three parts – operating, investment and financing – and gives the causes of changes in cash and cash equivalents in this breakdown. The net cash flows from operating activities are determined on the basis of the cash flows generated by the founders’ intended activities. The cash flows associated with the core activity are sales, payment of supplier invoices, etc.

The calculation of the investment and financing cash flows is similar to that described above, since the indirect method is also based on the cash flows related to the economic event. Since the direct method is based on cash flows, there is no need to adjust the profit or loss shown in the accounts for operating cash flows, since the static state of profit or loss and assets and liabilities is not shown, only the breakdown of cash flows by purpose is examined.

A comparison is presented between the methods of compiling cash-flow using the following Figure 3. The two methods do not differ from each other for investment and financing cash flow in the items listed above with appropriate interpretation.

Figure 3: Cash-flow

The data required to compile statements on the causes of changes in cash and cash equivalents are available in accounting records and reports, as required by the Accounting Act, so the ex-post analysis is relatively easy to perform.

Of course, starting from the appropriate base data, cash flow plans can be prepared based on production, sales and purchase plans and contracts, and through period by period examinations plan-fact comparisons and detailed analyses can be performed.


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Dr. Karabassov Rassul, Candidate of Sciences in Economics. Associate Professor
Republic of Kazakhstan, S.Seifullin Kazakh Agro Technical University

Dr. Veronika Fenyves, Professor
University of Debrecen, Faculty of Economics and Business

Dr. Imre Túróczi College associate professor,
University of Debrecen

Dr. Róbert Tóth Senior Lecturer,
Institute of Economics and Management
Faculty of Law of the Károli Gáspár University of the Reformed Church in Hungary