Lars Östman towards a general theory of financial control

Dimensioning and orientation of separate organisations 

 

The growth of an organisation is dependent on the nature of the horizontal flow and how the 

vertical process is connected to this flow.  

For pay-driven and transfer-driven organisations, possible in- and outflows, their time 

pattern, uncertainty and risk are key variables. Growth is essential in several respects. For 

purely pay-driven and transfer-driven units, share value-in-exchange is significant. Growth 

in cash flows that are available for dividends has a strong impact on this value. In turn, such 

growth requires that activities are expanded and rearranged. Consequently, the development 

of existing business areas and the search for areas and new geographical markets are strong 

driving forces. Selection and pricing are two powerful mechanisms; prospects in terms of 

revenues and costs set limits for future development. Expansion is organic or is built on 

mergers and acquisitions – financial control concepts and processes in the decades around 

the year 2000 tended to support market transactions. For pay-driven organisations, financial 

capacity is based on previous values-in-exchange for input and output, surpluses in 

horizontal processes and attraction on vertical principals and lenders through expected 

surpluses. Exceptions are possible.     

For purely function-driven organisations, a specific horizontal process is the starting point 

and aim. At each point of time, needs and demands to satisfy have a certain scope. If groups 

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of users increase naturally, growth may be required too, as is the case with schools and 

health care when the population increases. In addition, function-driven organisations may 

make efforts to reach new groups in new ways. Or they may try to utilize their competence 

in other contexts by developing new horizontal processes on pay-driven grounds. For 

function-driven organisations, cost targets are relative easy to determine for output in cases 

where technology and volume are the main determinants of costs. Targets are much less 

well-founded for other tasks that are difficult to define, especially general functions for an 

organisation as such. In those cases, targets will have the form of discretionary limits, period 

by period.  

Focusing on output, piece by piece, was not the classical way to dimension function-

driven units. Rather, the approach was to identify an activity that had some external 

functions outside the unit and determine what resources were needed. With such an 

approach, the value of some vague functions for somebody has to be judged, as well as the 

resources needed and the possibility and willingness to allocate such funds. Ventures into 

something new may be problematic for function-driven units with narrow cost limits, unless 

they involve rationalization or income opportunities. At the development stage, costs are 

incurred. After that, operations will also mean higher costs than before.