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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sales Forecast Using SAS D-17

Using the Number of Salespersons to Project Sales Sales prediction Sales in thousands of units Number of salespersons Regression line D-18

Sales Forecast Produced by SAS D-19

Sales Forecast Data Sales Advertising Price Ratio Sales Advertising Price Ratio Year (Y) (X2) (X3) Historical Data D-20

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

Unbalanced Cash Flow Example Dollars (millions) Sales Manufacturing expenses Marketing and administration expenses JanFebMarAprMayJunJulAugSepOctNovDec Months D-22

Delaying Supplier Payments Eliminates Months of Negative Sales Revenue Dollars (millions) SalesManufacturing expenses Marketing and administration expenses JanFebMarAprMayJunJulAugSepOctNovDec Months D-23

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

Final organizational budget 5. The Budgeting Process Forecasting model Sales forecast Top management Resource planning model Human resource requirements Finance requirements Manufacturing requirements Marketing requirements Finance manager Human resource 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 Approved sales forecast Top management Information services requirements D-25

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, ,500 28,100 4,600+ ENTERTAINMENT 1,400 1, ,200 5, TELEPHONE RENT ,605 1,605 0 FURNITURE SUPPLIES ,875 1, MISC ,200 1, TOTAL $34,910 $34, $92,400 $93, Example Budget Report D-26

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 Vice-president of financeXXX Other executivesXXX ControllerXXX Manager of accountingX Manager of financial planningXX Director of budgetsX Other functional managersXXX Subsystem Funds User Forecasting Management Control D-28

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