Definition
Management by Exception is a strategy in business where managers focus on significant or exceptional financial results rather than small details. In this approach, only significant deviations from the budgeted plan, such as large expenditures, are reported or investigated. This allows managers to concentrate their efforts on more critical areas that need immediate attention.
Key Takeaways
- Management by Exception is a style of business management that focuses on identifying and handling cases that deviate from the norm. It allows managers to focus their attention on areas of operation where issues or discrepancies are detected.
- This technique helps in efficient utilization of managerial time and effort as it suggests that management should focus on areas where the performance is not as per the standard or exceptions. It empowers staff to make decisions within their areas of responsibility, promoting delegation of authority and motivation of employees.
- Whilst being effective, Management by Exception also confines certain risks. If exceptions are not clearly defined or the norm is set inaccurately, important issues might be overlooked. Therefore, careful planning and clear communication are key factors for the success of this management approach.
Importance
Management by Exception (MBE) is a fundamental concept in finance and business management, holding significant importance due to its efficiency and impact on decision-making processes. This strategy focuses on identifying and addressing situations that deviate from the standard or expected performance.
Managers only intervene when there’s significant variance, leaving minor discrepancy untouched or for lower management levels to handle. This approach frees up time for higher management to concentrate more on strategic matters, making the business operation more efficient.
Furthermore, MBE helps in quick identification and correction of issues, enhancing the overall performance and profitability of the organization. It provides a clear indication of problem areas, leading to better financial control and minimizing risks.
Explanation
Management by Exception is a style of business management that focuses on identifying and handling cases that deviate from the norm, where special attention is required. Its purpose is to improve efficiency in organizations by giving priority to significant situations that are capable of causing a serious impact.
This principle asserts that trivial issues which are in line with the norms should be ignored, while only the “exceptions” should be brought to the attention of management. The rationale is that management’s attention is a limited resource, and this resource should be focused on areas where it will yield the most significant results.
This approach is primarily used for maximizing business efficiency and effectiveness. By focusing on issues that deviate from the norm, managers are able to make corrective decisions promptly to mitigate any negative effects.
Additionally, by delegating routine decisions and concentrating only on exceptional ones, managers can free up time and resources to work on strategic tasks, which can lead to better performance and growth in the long run. Furthermore, it empowers employees to make decisions within their areas of expertise, fostering a sense of responsibility and satisfaction among them.
Examples of Management by Exception
Management by Exception (MBE) is a management style that focuses on identifying and handling cases that deviate from the norm, based on pre-set measures, objectives, and key performance indicators. Here are three real-world examples:
Sales Performance: If a corporation has set a benchmark that all regional sales teams should meet or exceed $1 million in sales each quarter, and the South Regional Team only achieves $750,000 in sales for Q2, exception management would indicate that the management should examine the south regional team’s performance. The management investigates reasons for this underperformance, be it market dynamics, performance of sales personnel, or product issues, and takes necessary actions only in this specific situation instead of addressing all teams.
Production Cost: A manufacturing company has a standard that the production cost per item should not exceed $
If a monthly report shows that the production cost per item has risen to $12, management by exception would kick in. The management would then start an investigation to understand what caused the increase and then correct the situation, focusing on this particular exception instead of reviewing the entire production process.
Financial Audit: An audit firm is hired to audit the financial statements of a company. Instead of manually checking every single transaction, the auditors use a method called “Sample Testing”. They will check a sample of the transactions, and if an anomaly or exception is found, they will then look deeper into the data. This is another application of management by exception, which allows auditors to work efficiently while still ensuring accurate financial records. If no exceptions are found, auditors assume everything is in order without checking each and every transaction.
FAQs on Management by Exception
What is Management by Exception?
Management by Exception is a type of management style where managers intervene only when their employees fail to meet performance standards. If an employee’s performance meets or exceeds expectations, management will not intervene.
What is the advantage of Management by Exception?
The most significant advantage of Management by Exception is that it allows managers to focus on issues that require their attention, instead of micromanaging every aspect of their employees’ work. It provides employees the freedom to work and solve problems independently.
What’s the disadvantage of Management by Exception?
The major disadvantage of Management by Exception is that it can lead to a toxic work environment if not well managed. If managers only focus on negative performance and not on the positive, it can lead to decreased employee morale and engagement.
Is Management by Exception useful for all businesses?
No, Management by Exception is not suitable for every business. It works best in companies where employees are self-directed and comfortable working with little supervision. For companies that require close collaboration and team work, this style can be counterproductive.
How can a company implement Management by Exception?
To implement Management by Exception, managers should first accurately define performance standards and make sure employees understand these standards. Managers should also be sure to give constructive feedback when employees do not meet these standards, and not simply focus on the negative.
Related Entrepreneurship Terms
- Budget Variance: This refers to the difference between projected and actual budget figures. It is often used in management by exception to identify areas that require attention.
- Performance Metrics: These are standards or measures used to assess the performance of a business, a department, or an individual. When deviations from expected performance are identified, management by exception can be applied.
- Financial Reporting: This involves the communication of financial information, such as balance sheets and income statements. Exceptional figures highlighted in financial reporting may require the application of management by exception.
- Operational Efficiency: This is a measure of the efficiency of a company’s operations. Management by exception may be used to address significant discrepancies in operational efficiency.
- Control Limits: These are the parameters within which a process is considered to function normally. When performance falls outside these limits, management by exception is often invoked to correct the course.
Sources for More Information
- Investopedia: An extensive resource for a variety of finance and investment terms and explanations.
- Accounting Tools: Offers resources and explanations of various financial, managerial, and accounting terms.
- Cengage Learning: A well-respected provider of educational content for higher education, particularly known for its textbooks on business and finance topics.
- Harvard Business Review: Provides articles on key concepts in business management, including management practices like “management by exception”.
