Financial Management of Information Systems - Case Study Example

Part Financial Processing In Commercial Information Systems - An Overview An information system is an organized combination of people, hardware, software, communication networks, and data resources that collects, transforms and disseminates information in an organization. People rely on information systems to communicate with each other, using a variety of physical devices i.e. hardware, information processing instructions and procedures i.e. software, communication channels i.e. networks, and stored data i.e. data resources. Today's internetworked information systems play a vital role in the success of an enterprise. Information technology is transforming the way business is carried on. Customer service, operations, product and marketing strategies, and distribution are heavily, sometimes even entirely, dependent on IT. For example, the internet and intranets, and external inter-organizational networks, called extranets can provide the information infrastructure that a business needs, to make it more efficient and effective. Information systems perform three vital roles in any type of organization. They support business operations, guide managerial decision-making, and provide strategic and competitive advantage to the organization (ICFAI Center for Management Research, 2003). The hierarchical classification of an organization comprises three levels - operational, tactical, and strategic. The nature of decisions made at each level is different. Therefore, the information requirements at different levels are also different. At the operational level, a large quantity of data needs to be processed. This data is usually generated by business transactions with customers, suppliers etc. At the tactical level, the concern shifts from day-to-day decisions that have a short-term focus, to those which have a medium-term impact on the organization. Consolidated reports on the performance of various business units would be required to compare plans with actual, and to take remedial measures for any deviations. At the strategic level, in addition to the internal information, the decision-makers need information from the external environment as decisions at this level are taken in situations marked by uncertainty. The objective of using information technology in business is to determine business processes, which are relevant for applications, which will improve business performance. This may involve improvements in the efficiency of operations, in the quality of the management processes and even in the way; the business is conducted or organized. When it is targeted at operational efficiency, transaction processing becomes important. Transaction processing is a fundamental activity of every organization. Although an information system has a very important role to play in supporting management, ensuring control, and undertaking other knowledge work, such an emphasis should in no way, obscure its importance in transaction processing. Without transaction processing, normal functioning of an organization would be impossible, and the data for management information would not be available. Beyond such operational level, processing of data, information systems have specific applications in the various functions of an organization, like accounting etc. Information technology can benefit businesses in many ways. It helps businesses in performing various functions, solving business problems and pursuing business opportunities. Since organizations are goal-oriented, there should be a clear understanding of the type of information to be collected, stored and analyzed. Management can be categorized into top, middle and lower management. Due to the difference in the nature of decisions taken at different levels of management, their information needs also vary. This information should also be consistent with the requirement of the organizational level at which it is targeted. Accounting information systems are the oldest, and perhaps the most widely used information systems and business. These information systems are responsible for recording and reporting business transactions and other economic events in an organization. Accounting information systems are based on the double entry bookkeeping concept. More recent concepts as responsibility accounting and activity based costing are also considered. Computer-based accounting systems record and report the fun-flow in an organization, on a chronological basis and produce important financial statements such as the balance sheets and income statements. Such systems also generate forecasts of future conditions such as projected financial statements and financial budgets. Many accounting software packages are available to enable the implementation of such systems. Generally, these systems include transaction-processing systems such as order processing and inventory control. The most widely used accounting information systems are shown in the below table. Cash Management This module helps organizations forecast cash flows in any currency and in multiple periods, streamli8ne the reconciliation process, monitor exceptions and fraud and manage the cash cycle efficiently and with control. Receivables This module helps organizations bill customers automatically from any sales channel, streamline accounts receivables processing and automate the invoicing process. Payables This module helps organizations reduce procurement cycle times by up to 25%, pay invoices automatically upon receipt, reduce transaction-processing costs and improve cash management (ICFAI Center for Management Research ICMR, 2004). General Ledger (GL) This module helps organizations leverage the GL processing speeds available, streamline accounting processes and reduce the period-end close cycle. Assets This module helps organizations streamline tracking, depreciation and maintenance scheduling of assets improve productivity with easier access to critical information, derive maximum tax benefits and minimize risk of loss or damage to capital assets. Financial information systems assist managers to take decisions relating to some of the following aspects: 1. The financing of a business, and 2. The allocation and control of financial resources within a business Financial information systems can be categorized as cash management, investment management, capital budgeting and financial planning information systems. Cash Management This helps in the collection of information on all cash receipts and disbursements within a company on either real-time or periodic basis. Once this information is available it can help managers decide whether to invest or deposit the excess funds quickly. This will result in an increase in the income generated by deposited or invested funds. The daily, weekly or monthly forecasts of cash receipts are also generated in order to predict future cash deficits or surpluses (ICFAI Center for Management Research ICMR, 2004). Investment Management A company's portfolio is managed by collecting all information relating to investment and security trading. There are several portfolio management software packages that manage the portfolio for the company ((ICMR), 2003). Capital Budgeting The process of capital budgeting involves the evaluation of profitability and the financial impact of proposed capital expenditures. The capital budgeting application involves the use of spreadsheet models that incorporate present value analysis of expected cash flows and probability analysis of risk in order to arrive at the optimum mix of capital projects for a business. Financial Planning Both the present and the projected financial performance of a business can be evaluated using electronic spreadsheets and other financial planning software. They can also be used to determine various financing needs and alternative methods of financing. Financial models can be built and manipulated using electronic spreadsheet packages, DSS software and Web-based groupware. Part 2: Financial Planning, control and reporting In a small business firm, the owner-manager can monitor business activities largely based on visual and personal contact. As the size of business grows and the complexity of operations increases, managers have to rely more and more on formal information and reporting system (The ICFAI University Press, 2004). Indeed, in a large firm manufacturing several products, with plants in different locations, with several levels of managers, and which confronts a wide array of alternatives, managers depend almost completely on the information communicated to them through formal channels. Hence, the formal management information and reporting system has a significant bearing on the effectiveness of managerial performance. 'Management Information System' (MIS) provides managers insights into activities that aid in the decision-making process and thereby improve the efficiency and effectiveness of the activities managed by them (ICFAI Center for Management Research, 2003). These are the computer-based systems that meet the information needs of the organization. However, the scope of MIS is wider, though it makes use of computer-based systems for converting data into information. The scope and complexity of management information systems is dependent on several factors such as the type of the business organization, the size in terms of annual turnover, and the nature of its operations. Features of MIS To make and MIS effective, the following conditions should be ensured. MIS should be linked to all the responsibility centres Since the manager in charge of a responsibility centre has to work within the broad policies and objectives established by the top management, an MIS should be linked to all the responsibility centres. Both financial and non-financial information should be provided MIS should provide financial as well as non-financial information. It should focus on the performance evaluation of each responsibility centre based on identifiable resources, which are within the control of the manager of the responsibility centre. MIS should highlight critical Indicators The MIS should focus on the critical indicators in order to draw the attention of the managers of the responsibility centres. The critical indicators are decided by the company. In case of a dairy plant, the critical indicators are capacity utilization; transport cost per litre of milk produced, and average daily procurement. The process of highlighting the critical indicators prompts the managers to be cautious about these aspects. Reporting frequency should be decided by user's needs Reporting frequency depends on the user's needs. Information about the critical factors is reported more frequently. However, it must be ensured that the right information reaches the right manager at the right time. Database must be upgraded constantly The database must be upgraded so that the managers of the responsibility centres can have the latest information. Necessary efforts should be made to improve the clarity of the messages. Kinds of Reports MIS is designed in such a way that management receives two kinds of reports, namely control reports and information reports. Control reports focus on the comparison of actual performance with the standard performance. Information reports give information about the continuous, periodic state of affairs. The purpose of these reports is to provide the latest information. If something significant is noted in the reports, the matter can be further investigated. In designing, MIS, the designer should consider the entire organization as a system and the manager must be clear about the exact nature of the activities being undertaken by its sub-systems or sub-units. MIS should be linked to all the responsibility centres and all the managers in-charge of the responsibility centres should be trained well so that they can use it more efficiently. The designer should provide relevant information, and should have a reasonable degree of precision, in a concise form, without ambiguity to the various levels of management. MIS has an important role in finance and accounting. Finance MIS deals with activities such as financial management, ratio analysis, working capital management, cost analysis etc. The decision support activities of finance MIS deal with identification and evaluation of alternative ways of financing, alternate means for raising capital, evaluation of the impact of fluctuations in currency exchange rates, budget preparations, calculating the key financial ratios etc. The figure below represents a model finance MIS report. GRAPH OF SALES & NET INCOME Types of Information Systems Different types of systems are used for different purposes. External Information Systems, Continuing Information Systems (CIS), Systematic Information Systems, and Social Information Systems are some of the information systems that are currently in use. They are discussed in detail in the following paragraphs. External Information Systems The external environment often causes disturbances within the organization. An appropriate mechanism has to be designed to counteract external threats. The management should systematically scan the environment to identify threats and opportunities. A market intelligence system provides information about changing patterns of consumer preference, performance of various competing brands in terms of market share, and so on. The information that is collected from the external environment should be passed on to the person concerned. For example, information about the changes in the preferences of consumers should be sent to the procurement manager. External Information Systems are very important in making strategic decisions. Sometimes, the task of information collection and maintenance of external information systems are given to an outside agency that has enough expertise. Continuing Information Systems (CIS) While implementing a development program, the managers may be interested in knowing the changes resulted by the programs. Similarly, managers of artificial insemination and crossbreeding programs may be interested in progeny testing. Here, the information is collected scientifically and systematically on a continuing basis over a sufficiently long period. Such information systems are termed as Continuing Information Systems (CIS). Systematic Information Systems Systematic Information Systems (SIS) is used to appraise the decisions made by the managers. The views of the managers are tested under the assumptions that he made the decisions. These are used by the managers before making decision and this system attempts to guard the manager against inappropriate assumptions. There is also a dialectical approach to SIS, which involves a set of arguments as thesis. Anti-thesis is made based on counter - arguments followed by a structural - debate. A better set of assumptions can be made through synthesis of thesis and anti-thesis. The figure below represents the dialectical approach to Systematic Information Systems (SIS). Social Information Systems These systems are typically based on social indicators, which indicate social conditions. For example, the government initiates a program to uplift a target population above the poverty line. The design of this program is based on an important social indicator - the people living below the poverty line. To formulate a comprehensive plan, the decision makers need a variety of information about the nature of the economic activities that could uplift the rural people. Other information systems are also needed to evaluate them on other parameters such as education, family-planning health etc. Finally, social information system comes out with a report of aggregated information of all the reports. However, these systems suffer from the inherent defects of aggregated information. There might be a chance of hiding the information. So crosschecking, cross-referencing should be done to verify the validity of the data. MIS as a 'Variety' Reduction Technique The entire organization system operates in a complex information environment. Variety of information is used in the organization. MIS is used as a tool to ensure better insights into the complex of information, and reduce the complexity. The number of distinguishable elements of information used in MIS is defined as variety of information. It is represented as a numeric value. As it is not possible for a manager to handle a large variety of information, categorization of information is important. This way the 'variety' will not increase, and the additional information is also easily understood. Thus, MIS is used as a variety-reducing device so that managers can handle the complex information effectively. The aggregation of data and highlighting of critical indicators facilitate this. To make the information easy to understand, a standardized information system is maintained which highlights the significant variances and this helps the managers to take effective decisions, even if the information is very complex. Bibliography (ICMR), I. C. (2003). Financial Management for Managers. Hyderabad: ICFAI Center for Management Research. ICFAI Center for Management Research ICMR. (2004). Financial Accounting & Financial Statement Analysis. Hyderabad: ICFAI Center for Management Research. ICFAI Center for Management Research. (2003). Information Technology and Systems, Ref no. ITS - 082K3 19. Hyderabad: ICFAI Center for Management Research. ICFAI Center for Management Research. (2003). Management Control Systems, Ref no. MCS 062K317. Hyderabad: ICFAI Center for Management Research. Internal Revenue Service. (2008, May 3). Financial Management Information System (FMIS). Retrieved July 7, 2008, from Internal Revenue Service: http://www.irs.gov/privacy/article/0,,id=131570,00.html Lawrence, B. (2006, March 23). NEW FINANCIAL MANAGEMENT INFORMATION SYSTEM. Retrieved July 7, 2008, from JNCC SUPPORT CO.: http://www.jncc.gov.uk/pdf/board_06P03.pdf The ICFAI University Press. (2004). Introduction to Management Accounting. Hyderabad: The ICFAI University Press. University of Hawaii. (2000, April 3). Financial Management Information System. Retrieved July 6, 2008, from University of Hawaii: http://www.fmo.hawaii.edu/fmis/ Read More