Appendix D Financial Information Systems MANAGEMENT INFORMATION SYSTEMS 8/E Raymond McLeod, Jr. and George Schell Appendix D Financial Information Systems D-1 Copyright 2001 Prentice-Hall, Inc. 1

Users of Financial Information Internal users Managers Nonmanagers Environmental users Those with direct business relationships Those with no direct relationships D-2 2

Financial Information Systems CBIS subsystem that provides information to persons and groups both inside and outside the firm concerning the firm’s financial matters Information type Periodic and special reports Results of mathematical simulations Electronic communications Advice of expert systems D-3

A Model of a Financial Information System Output subsystems Input subsystems Data Information Forecasting subsystem Accounting information system Internal sources Internal audit subsystem Funds management subsystem Users Database Environmental sources Financial intelligence subsystem Control subsystem D-4 4

Prewritten Financial Software More prewritten software exists for the financial area than any other Most is accounting in nature Both general business and personal productivity software D-5 5

Accounting Information Subsystem The foundation upon which all information-oriented CBIS are built Who did what? When? Where? How much? D-6 6

Internal Audit Subsystem Audit committee Probably includes the CFO Director of internal auditing External auditors Importance of objectivity D-7 7

Board of Directors Audit Committee Chief Position of Executive Officer Position of Internal Auditing in a Firm Director of Internal Auditing Internal Auditing Department D-8 8

Types of Auditing Activity Financial auditing Operational auditing Adequacy of controls Efficiency Compliance with company policy Concurrent auditing Internal control systems design D-9

Internal Auditor as a Member of the CBIS Team Required knowledge and skills of auditors Not always accounting-related Senior management attitude makes a difference D-10

Escalating Cost of Correcting Design Errors as the SDLC Progresses Operation/maintenance 4000% Implementation 1200% Integrated testing 500% Relative Cost of Fixing a Defect Module testing 100% Development 40% Conceptualization Design 10% Requirements 1% D-11 12

Financial Intelligence Subsystem Represents the firm in establishing two-way links with: Stockholders or owners Stockholder relations department Annual meetings Annual reports Quarterly reports D-12 13

Financial Intelligence Subsystem [cont.] Financial community- Indirect influence from the government Sources of financial intelligence: Word of mouth Periodicals Computer databases Environmental influence on the money flow D-13 14

Forecasting Subsystem One of the oldest mathematical activities in business Rely on past data Make semistructured decisions Cannot be perfect Short-term forecasts One to three years May be done by marketing Long-term forecasts Usually done by finance, or special planning group D-14 16

Forecasting Methods Nonquantitative (qualitative) Panel consensus Delphi method Electronic meeting system (EMS) help combine nonquantitative and quantitative methods D-15 17

Forecasting Methods [cont.] Quantitative forecasting methods Regression analysis is dominant Related methods are available Many software packages used Minitab IDA SAS SPSS D-16 18

Sales Forecast Using SAS D-17

Using the Number of Salespersons to Project Sales 4 Regression line . 3 Sales in thousands of units Sales prediction 2 . . 1 . 5 10 15 20 25 30 35 Number of salespersons D-18 21

Sales Forecast Produced by SAS

Sales Forecast Data Historical Data Sales Advertising Price Ratio 1 24 4 80 2 27 4 80 3 31 5 90 4 29 5 100 5 33 6 100 6 38 7 110 7 37 8 120 8 40 8 100 9 45 9 90 10 49 10 100 Sales Advertising Price Ratio Year (Y) (X2) (X3) Historical Data D-20

Funds Management Subsystem Manage to achieve Revenue flow inflow exceeds expense outflow Maintain stability Cash flow models Performs cash flow analysis D-21

Unbalanced Cash Flow Example 1.2 1.1 1 0.9 0.8 Dollars (millions) 0.7 0.6 0.5 0.4 0.3 0.2 0.1 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Months Marketing and administration expenses Sales Manufacturing expenses D-22 25

Delaying Supplier Payments Eliminates Months of Negative Sales Revenue 1.2 1.1 1 0.9 0.8 Dollars (millions) 0.7 0.6 0.5 0.4 0.3 0.2 0.1 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Months Marketing and administration expenses Sales Manufacturing expenses D-23 26

Control Subsystem Operating budget for the fiscal year Three approaches 1. Top-down 2. Bottom-up 3. Participative D-24 27

The Budgeting Process 1. 2. 3. 4. 5. D-25 Forecasting model Sales forecast Top management 2. Approved sales forecast Resource planning model 3. Finance requirements Human resource requirements Information services requirements Manufacturing requirements Marketing requirements 4. Human resource manager Finance manager Information services manager Manufacturing manager Marketing manager Requested finance budget Requested human resources budget Requested information services budget Requested manufacturing budget Requested marketing budget Top management 5. Final organizational budget D-25 29

AS OF JANUARY 31 MIDWEST REGION Example Budget Report BUDGET REPORT AS OF JANUARY 31 MIDWEST REGION CURRENT MONTH YEAR-TO-DATE ITEM BUDGET ACTUAL DOLLARS BUDGET ACTUAL DOLLARS SALARIES $23,500 $22,000 $1,500- $59,000 $54,250 $4,750- TRAVEL 8,250 9,000 750+ 23,500 28,100 4,600+ ENTERTAINMENT 1,400 1,635 235+ 4,200 5,100 900+ TELEPHONE 200 85 115+ 600 225 375+ RENT 535 535 0 1,605 1,605 0 FURNITURE 0 0 0 420 505 85+ SUPPLIES 625 410 215- 1,875 1,320 555- MISC. 400 620 220+ 1,200 1,963 765+ TOTAL $34,910 $34,285 625- $92,400 $93,070 670+ D-26 31

Performance Ratios current assets Current ratio = current liabilities cost of goods sold Inventory turnover ratio = average inventory value D-27

Users of Financial Information System Subsystem Funds User Forecasting Management Control Vice-president of finance X X X Other executives X X X Controller X X X Manager of accounting X Manager of financial planning X X Director of budgets X Other functional managers X X X D-28

Summary Financial information systems provide a wide range of information for both managers and interested external people Uses include: Auditing Financial intelligence Forecasting Funds management Budgeting Financial modeling is one of the oldest uses of mathematical simulations in business D-29