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Why might it be helpful for you to think of controls as part of a feedback loop
in the P-O-L-C process? Well, if you are the entrepreneur who is writing the business
plan for a completely new business, then you would likely start with the planning
component and work your way to controlling—that is, spell out how you are going to

tell whether the new venture is on track. However, more often, you will be stepping
into an organization that is already operating, and this means that a plan is already in
place. With the plan in place, it may be then up to you to figure out the organizing,
leading, or control challenges facing the organization.
Outcome and Behavioral Controls
Controls also differ depending on what is monitored, outcomes or
behaviors. Outcome controls are generally preferable when just one or two
performance measures (say, return on investment or return on assets) are good gauges
of a business’s health. Outcome controls are effective when there’s little external
interference between managerial decision making on the one hand and business
performance on the other. It also helps if little or no coordination with other business
units exists.
Behavioral controls involve the direct evaluation of managerial and employee
decision making, not of the results of managerial decisions. Behavioral controls tie
rewards to a broader range of criteria, such as those identified in the Balanced
Scorecard. Behavioral controls and commensurate rewards are typically more
appropriate when there are many external and internal factors that can affect the
relationship between a manager’s decisions and organizational performance. They’re
also appropriate when managers must coordinate resources and capabilities across
different business units.
Financial and Nonfinancial Controls
Finally, across the different types of controls in terms of level of proactivity
and outcome versus behavioral, it is important to recognize that controls can take on
one of two predominant forms: financial and nonfinancial
controls. Financial control involves the management of a firm’s costs and expenses to
control them in relation to budgeted amounts. Thus, management determines which
aspects of its financial condition, such as assets, sales, or profitability, are most
important, tries to forecast them through budgets, and then compares actual
performance to budgeted performance. At a strategic level, total sales and indicators
of profitability would be relevant strategic controls.
Without effective financial controls, the firm’s performance can deteriorate.
PSINet, for example, grew rapidly into a global network providing Internet services
to 100,000 business accounts in 27 countries. However, expensive debt instruments
such as junk bonds were used to fuel the firm’s rapid expansion. According to a
member of the firm’s board of directors, PSINet spent most of its borrowed money
[4]
“without the financial controls that should have been in place.” With a capital
structure unable to support its rapidly growing and financially uncontrolled
operations, PSINet and 24 of its U.S. subsidiaries eventually filed for
[5]
bankruptcy. While we often think of financial controls as a form of outcome
control, they can also be used as a behavioral control. For instance, if managers must

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