Appendix DFinancial Information Systems

MANAGEMENT INFORMATION SYSTEMS 8/ERaymond McLeod, Jr. and George Schell

Copyright 2001 Prentice-Hall, Inc.D-1

Users of Financial Users of Financial InformationInformation

Internal usersInternal users– ManagersManagers– NonmanagersNonmanagers

Environmental usersEnvironmental users– Those with direct business relationshipsThose with direct business relationships– Those with no direct relationshipsThose with no direct relationships

D-2

Financial Information Financial Information SystemsSystems

CBIS subsystem that provides information to CBIS subsystem that provides information to persons and groups both inside and outside the persons and groups both inside and outside the firm concerning the firm’s financial mattersfirm concerning the firm’s financial matters

Information typeInformation type– Periodic and special reportsPeriodic and special reports– Results of mathematical simulationsResults of mathematical simulations– Electronic communications Electronic communications – Advice of expert systemsAdvice of expert systems

D-3

Database

Accountinginformation

system

Internal audit

subsystem

Financialintelligencesubsystem

Forecastingsubsystem

Fundsmanagementsubsystem

Controlsubsystem

Internal sources

Environmentalsources

Inputsubsystems

Outputsubsystems

Users

Data Information

A Model of a Financial Information SystemA Model of a Financial Information System

D-4

Prewritten Financial SoftwarePrewritten Financial Software

More prewritten software exists for the More prewritten software exists for the financial area than any otherfinancial area than any other

Most is accounting in natureMost is accounting in nature Both general business and personal Both general business and personal

productivity softwareproductivity software

D-5

Accounting Information Accounting Information SubsystemSubsystem

The foundation upon which all information-The foundation upon which all information-oriented CBIS are built oriented CBIS are built – Who did what?Who did what?– When?When?– Where?Where?– How much?How much?

D-6

Internal Audit SubsystemInternal Audit Subsystem

InternalInternal– Audit committee Audit committee

» Probably includes the CFOProbably includes the CFO

» Director of internal auditingDirector of internal auditing

External auditorsExternal auditors Importance of objectivityImportance of objectivity

D-7

ChiefExecutive

Officer

Director ofInternalAuditing

Internal Auditing

Department

Audit Committee

Board of Directors

Position of Internal Auditing

in a Firm

D-8

Types of Auditing ActivityTypes of Auditing Activity

Financial auditingFinancial auditing Operational auditingOperational auditing

– Adequacy of controlsAdequacy of controls– EfficiencyEfficiency– Compliance with company policyCompliance with company policy

Concurrent auditingConcurrent auditing Internal control systems designInternal control systems design

D-9

Internal Auditor as a Internal Auditor as a Member of the CBIS TeamMember of the CBIS Team

Required knowledge and skills of auditorsRequired knowledge and skills of auditors– Not always accounting-relatedNot always accounting-related

Senior management attitude makes a Senior management attitude makes a differencedifference

D-10

1%1%

10%10%

40%40%

100%100%

500%500%

1200%1200%

4000%4000%

RequirementsRequirements

DesignDesign

DevelopmentDevelopment

Module testingModule testing

Integrated testingIntegrated testing

ImplementationImplementation

Operation/maintenanceOperation/maintenance

ConceptualizationConceptualization

Rel

ativ

e C

ost

of

Rel

ativ

e C

ost

of

Fix

ing

a D

efec

tF

ixin

g a

Def

ect

Escalating Cost of Correcting Design Errors Escalating Cost of Correcting Design Errors as the SDLC Progressesas the SDLC Progresses

D-11

Financial Intelligence Financial Intelligence SubsystemSubsystem

Represents the firm in establishing two-way Represents the firm in establishing two-way links with:links with:

Stockholders or ownersStockholders or owners Stockholder relations departmentStockholder relations department

– Annual meetingsAnnual meetings– Annual reportsAnnual reports– Quarterly reportsQuarterly reports

D-12

Financial Intelligence Financial Intelligence Subsystem [cont.]Subsystem [cont.]

Financial community-Financial community-

Indirect influence from the Indirect influence from the government government

Sources of financial intelligence:Sources of financial intelligence:– Word of mouthWord of mouth– PeriodicalsPeriodicals– Computer databasesComputer databases

Environmental influence on the money flowEnvironmental influence on the money flow

D-13

Forecasting SubsystemForecasting Subsystem

One of the oldest mathematical activities in businessOne of the oldest mathematical activities in business– Rely on past dataRely on past data

– Make semistructured decisionsMake semistructured decisions

– Cannot be perfectCannot be perfect

Short-term forecasts Short-term forecasts – One to three yearsOne to three years

– May be done by marketingMay be done by marketing

Long-term forecasts Long-term forecasts – Usually done by finance, or special planning groupUsually done by finance, or special planning group

D-14

Forecasting MethodsForecasting Methods

Nonquantitative (qualitative)Nonquantitative (qualitative)– Panel consensusPanel consensus– Delphi methodDelphi method

Electronic meeting system (EMS) help Electronic meeting system (EMS) help combine nonquantitative and quantitative combine nonquantitative and quantitative methodsmethods

D-15

Forecasting Methods Forecasting Methods [cont.][cont.]

Quantitative forecasting methodsQuantitative forecasting methods– Regression analysis is dominantRegression analysis is dominant– Related methods are availableRelated methods are available– Many software packages usedMany software packages used

» MinitabMinitab

» IDAIDA

» SASSAS

» SPSSSPSS

D-16

Sales Forecast Using SAS

D-17

Using the Number of Using the Number of Salespersons to Project Salespersons to Project

SalesSales

0

1

2

3

4

5 10 15 20 25 30 35

.. .

.

Sales prediction

Sale

s in

th

ou

san

ds o

f u

nit

s

Number of salespersons

Regress

ion line

D-18

Sales Forecast Produced by SAS

D-19

Sales Forecast DataSales Forecast Data

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 9010 49 10 100

Sales Advertising Price RatioSales Advertising Price RatioYear (Y) (X2) (X3)Year (Y) (X2) (X3)

Historical DataHistorical Data

D-20

Funds Management Funds Management SubsystemSubsystem

Manage to achieveManage to achieve– Revenue flow inflow exceeds expense outflowRevenue flow inflow exceeds expense outflow– Maintain stabilityMaintain stability

Cash flow modelsCash flow models– Performs cash flow analysisPerforms cash flow analysis

D-21

Unbalanced Cash Flow Unbalanced Cash Flow ExampleExample

Dol

lars

(m

illio

ns)

Sales Manufacturing expensesMarketing and administration expenses

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecMonths

D-22

Delaying Supplier Payments Delaying Supplier Payments Eliminates Months of Negative Sales Eliminates Months of Negative Sales

RevenueRevenue

Dol

lars

(m

illio

ns)

Sales Manufacturing expenses Marketing and administration expenses

00.1

0.20.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.11.2

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Months

D-23

Control SubsystemControl Subsystem Operating budget for the fiscal yearOperating budget for the fiscal year Three approachesThree approaches

1.1.Top-downTop-down

2.2.Bottom-upBottom-up

3.3.ParticipativeParticipative

D-24

1.

2.

3.

4.

Final organizationalbudget

5.

The Budgeting Process

Forecasting model

Sales forecast

Topmanagement

Resource planningmodel

Human resourcerequirements

Financerequirements

Manufacturingrequirements

Marketingrequirements

Financemanager

Human resourcemanager

Informationservicesmanager

Manufacturingmanager

Marketingmanager

Requestedfinancebudget

Requestedhumanresourcesbudget

Requested informationservices budget

Requestedmanufacturingbudget

Requestedmarketingbudget

Approved sales forecast

Topmanagement

Information servicesrequirements

D-25

BUDGET REPORTAS 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 0FURNITURE 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+

Example Budget Report

D-26

Performance RatiosPerformance Ratios

current assetsCurrent ratio = current liabilities

cost of goods soldInventory turnover ratio = average inventory value

D-27

Users of Financial Information SystemUsers of Financial Information System

Vice-president of finance X X XOther executives X X XController X X XManager of accounting XManager of financial planning X XDirector of budgets XOther functional managers X X X

Subsystem Funds User Forecasting Management Control

D-28

SummarySummary Financial information systems provide a wide range of Financial information systems provide a wide range of

information for both managers and interested external peopleinformation for both managers and interested external people Uses include:Uses include:

– AuditingAuditing– Financial intelligenceFinancial intelligence– ForecastingForecasting– Funds managementFunds management– BudgetingBudgeting

Financial modeling is one of the oldest uses of mathematical Financial modeling is one of the oldest uses of mathematical simulations in businesssimulations in business

D-29