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MANAGEMENT INFORMATION SYSTEMS 8/E

Raymond McLeod, Jr. and George Schell

Appendix D
Financial Information Systems

Copyright 2001 Prentice-Hall, Inc.

D-1

Users of Financial Information

Internal users
Managers
Nonmanagers

Environmental users
Those with direct business relationships
Those with no direct relationships

D-2

Financial Information Systems


CBIS subsystem that provides information to
persons and groups both inside and outside the
firm concerning the firms 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
Environmental
sources
Financial
intelligence
subsystem

Database

Funds
management
subsystem

Users

Control
subsystem

D-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

Accounting Information Subsystem

The foundation upon which all informationoriented CBIS are built

Who did what?


When?
Where?
How much?

D-6

Internal Audit Subsystem

Internal
Audit committee
Probably includes the CFO
Director of internal auditing

External auditors
Importance of objectivity

D-7

Board of Directors
Audit Committee

Position of
Internal Auditing
in a Firm

Chief
Executive
Officer
Director of
Internal
Auditing
Internal
Auditing
Department
D-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

Relative Cost of
Fixing a Defect

4000%

Implementation

1200%

Integrated testing

500%

Module testing

100%
40%
10%

Development
Conceptualization

Design

Requirements

1%

D-11

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

Financial Intelligence
Subsystem [cont.]

Financial communityIndirect influence from the


government
Sources of financial intelligence:

Word of mouth
Periodicals
Computer databases

Environmental influence on the money flow


D-13

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

Forecasting Methods

Nonquantitative (qualitative)
Panel consensus
Delphi method

Electronic meeting system (EMS) help


combine nonquantitative and quantitative
methods

D-15

Forecasting Methods [cont.]

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

Sales in thousands of units

Using the Number of


Salespersons to Project Sales
4

es
r
g
Re .

3
2
1
0

n
o
i
s

lin

Sales prediction
.
.
.
5

10

15

20

25

Number of salespersons

30

35
D-18

Sales Forecast Produced by SAS

D-19

Sales Forecast Data


Historical Data
Year
1
2
3
4
5
6
7
8
9
10

Sales
(Y)
24
27
31
29
33
38
37
40
45
49

Advertising
(X2)
4
4
5
5
6
7
8
8
9
10

Price Ratio
(X3)
80
80
90
100
100
110
120
100
90
100

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

Dollars (millions)

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Jan

Sales

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Months Marketing and administration

Manufacturing expenses

expenses

Dec
D-22

1.2
1.1

Delaying Supplier Payments Eliminates


Months of Negative Sales Revenue

Dollars (millions)

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Months
Sales

Manufacturing expenses

Marketing and administration


D-23
expenses

Control Subsystem
Operating budget for the fiscal year
Three approaches

1. Top-down
2. Bottom-up
3. Participative

D-24

1.

Forecasting model
Sales forecast

2.

Top
management

The Budgeting
Process

Approved sales
forecast

3.
Finance
requirements

4.

Finance
manager
Requested
finance
budget

Resource planning
model

Human resource Information services


requirements
requirements

Human
resource
manager

Information
services
manager

Requested
information
services budget

Requested
human
resources
budget

5.

Manufacturing
requirements

Manufacturing
manager
Requested
manufacturing
budget

Marketing
requirements

Marketing
manager

Requested
marketing
budget

Top
management

Final organizational
budget

D-25

Example Budget Report


BUDGET REPORT
AS OF JANUARY 31
MIDWEST REGION
CURRENT MONTH
ITEM

BUDGET

ACTUAL

SALARIES
TRAVEL
ENTERTAINMENT
TELEPHONE
RENT
FURNITURE
SUPPLIES
MISC.

$23,500
8,250
1,400
200
535
0
625
400

$22,000
9,000
1,635
85
535
0
410
620

TOTAL

$34,910

$34,285

DOLLARS
$1,500750+
235+
115+
0
0
215220+
625-

YEAR-TO-DATE
BUDGET

ACTUAL

DOLLARS

$59,000
23,500
4,200
600
1,605
420
1,875
1,200

$54,250
28,100
5,100
225
1,605
505
1,320
1,963

$4,7504,600+
900+
375+
0
85+
555765+

$92,400

$93,070

670+

D-26

Performance Ratios
current assets
Current ratio =
current liabilities

cost of goods s
Inventory turnover ratio =

average inventory

D-27

Users of Financial Information System


Subsystem
User
Vice-president of finance
X
Other executives
X
Controller
X
Manager of accounting
Manager of financial planning
Director of budgets
Other functional managers X

Forecasting
X
X
X

Funds
Management
X
X
X
X
X

X
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