UNIT XI: Financial Information System (FIS)

Definition: A Financial Information System is the type of business software used to input,
accumulate and analyze the financial and accounting data.
It produces reports such as accounting reports, cash flow statements and financial statement.
The output produced helps in making good financial management decisions thus helping the
managers run the business effectively.
Features of FIS

1- Management of general accounting procedures:

Financial Management System is software that manages all accounting procedures of the
business such as cash flow management, general ledger, expense, payments, and purchasing.
It efficiently manages all financial administrative processes.
2- Management of expense:
The financial management system of SolutionDots Systems manages the expense of
organization into the form of documentation, it contains all information regarding the
expenditure requirements, necessities, and funds etc.
3- Manage the budget:
It helps in the management of budget controlling. It keeps the record of all financial
statements that help in knowing about the current budget of the organization and also helps
in making decisions to control the budget efficiently.
4- Efficient management of time and work:
Financial management system helps in the management of time and work efficiently. It
allows managing more work in less time efficiently.
5- Advanced reporting:
Financial management system has an ability to generate reports such as profit and loss
statements, balance sheet, and other financial statements rapidly. It allows the user to
customize reports according to their demand and requirement.
6- Ensure data security:
Financial management system developed by SolutionDots System ensures its access to the
only authorized user. We understand that accounts data is important as well as confidential
therefore financial management system keeps it secure from unauthorized person.
7- Reduced the paperwork:
Financial management system maintains and updates all records and invoices automatically,
online record management reduces the paperwork. Now there is no need to update and
maintain manual records.
8- Complete Audit:
Financial management system maintains and updates the accurate and complete audit of the
organization.
9- Data Integrity:
Financial management system ensures data consistency and accuracy in all records updated
by different departments. 
Features of good financial management system
 Keeping all payments and receivables transaction.
 Amortizing prepaid expenses.
 Depreciating assets according to accepted schedules.
 Keeping track of liabilities.
 Maintain income and expenditure statements and balance sheets.
 Keeping all record up to date
 Maintain complete and accurate accounts.
 Minimizing overall paperwork.

Components of Financial information systems

An information system is essentially made up of five components:
1. People
2. Data
3. Procedures
4. Hardware
5. Software
 People
The computer based information system is developed by the people and for the people.
Computer users are people who will use the computer system. The developers are the people,
who will develop the system on basis of requirement.
 Data
Data is a collection of raw facts and figures. There are several ways the organize data e.g.
Database Management System, File Management System. A computer based information
system is used to process data into information.
 Procedures
Procedures are the actions that are used by the people to process the data into information.
Operating procedures are used to operate the computer, Data entry, Maintenance, Back up
and error recovery. Emergency procedures are used to trouble shoot.
 Hardware
Different types of Hardware used for Computer Based Information System. Input hardware
(Keyboard, mouse, etc.), Processing hardware (Processor, Memory, etc), Output hardware
(Monitor, printer, etc) and Storage hardware etc.
 Software
Different types of software used in CBIS. Application software includes Word processing,
electronic spreadsheets, graphical packages and databases. System software includes
operation systems and communication software.

Personnel FIS
The collection of information on itsemployees stored by an organization. At its most basic su
ch information will usually compriseemployees' names and addresses, length of service and a
ttendance, and will be maintained by the personnel management department.
It is common for this information to be kept separatefrom pay records (which are usually mai
ntained by the finance department).
Until the widespreadadoption of computerized databases, many organizations found it difficu
lt to analyze this information for manpower
planning purposes; it was instead used mainly to deal with problems relating to
individual employees.
A sophisticated personnel informationsystem will comprise an extensive database capable of 
retrieval and analysis by all management functions.
 Organizational financial management
Financial management is one of the most important responsibilities of owners and business
managers. They must consider the potential consequences of their management decisions on
profits, cash flow and on the financial condition of the company. The activities of every
aspect of a business have an impact on the company's financial performance and must be
evaluated and controlled by the business owner. Overall financial management in any
organization like planning, organizing, directing and controlling the financial procurement
and deployment of the funds of a venture is called organizational financial management.
FIS and organizational decision making process
Decision making is the process to select a course of action from a number of alternatives.
Like planning, decision making is also all-pervasive and like forecasting, decision-making is
also an important part of planning. For any organization, policy documents help in taking
managerial decisions.
The organizational decision making processes are:
 Understand the Decision You Have to Make
We have to identify and define the type of decision that needs to be made, and how it will
change your work process, or improve a product or service for your customers.
 Collect All the Information
Proper decision-making requires an evaluation of all the information and data that you can
gather. In some instances, the information you need is internal (within your organization),
and in other instances, you will obtain that information from external sources.
 Identify All Alternatives
After you’ve analyzed the information, you must develop several different options regarding
the decision you have to make. we may have to decide on alternatives, such as display ads,
cost-per-thousand ads or re-marketing.
 Evaluate the Pros and Cons
 Select the Best Alternative
 Make the Decision
 Evaluate the Impact of Your Decision

Personal financial management system

Personal financial management (PFM) refers to software that helps users manage their
money. PFM often lets users categorize transactions and add accounts from multiple
institutions into a single view. PFM also typically includes data visualizations such as
spending trends, budgets and net worth.
 PFM allows users to aggregate financial transactions in one place and then use that data to
manage their money. In some cases, these transactions have to be entered manually, but an
increasing percentage of products automate the process. PFM typically shows cash flow,
spending trends, goals, net worth, and debt management. It also allows users some level of
customization for managing their money.

Financial calculator
A financial calculator or business calculator is an electronic calculator that performs
financial functions commonly needed in business and commerce communities’ simple
interest, compound interest, cash flow, amortization, conversion, cost/sell/margin, etc.).
 It has standalone keys for many financial calculations and functions, making such
calculations more direct than on standard calculators.  It may be user programmable,
allowing the user to add functions that the manufacturer has not provided by default.
Examples of financial calculators are the HP 12C, HP-10B and the TI BA II.

Ratio analysis
Ratio analysis is one of the methods of financial statement analysis. It is based upon
accounting information. It is used to measure profit, determined operating efficiency and
financial position of the firm. Ratio can be used to compare a firm's financial performance
with industry averages. It can be categorized as short term, debt management ratios,
profitably ratios and market ratios.
It can be calculated by the following formula:

current Assets
Current Ratio¿ current liabilities
Inventory turnover ratio
The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is
managed by comparing cost of goods sold with average inventory for a period. This
measures how many times average inventory is “turned” or sold during a period.
In other words, it measures how many times a company sold its total average inventory
dollar amount during the year. A company with Rs1000 of average inventory and sales of
Rs10000 effectively sold its 10 times over.
It is calculated as,
Inventory turnover ratio= Cost of goods sold for a period/ average inventory for that period

Days sales outstanding (DSO)

DSO is often determined on a monthly, quarterly or annual basis and can be calculated by
dividing the amount of accounts receivable during a given period by the total value of credit
sales during the same period and multiplying the result by the no. of days in the period
measured.
Definition: DSO is a measure of the average no. of days that it takes a company to collect
payment after a sales has been made.
Formula for DSO is,
DSO =account receivable /total credit sales*no. of days

Fixed assets turnover ratio

The fixed assets turnover ratio is an efficiency ratio that measures a Company’s return on
their investment in property, plant and equipment by comparing net sales with fixed assets.
Management typically doesn’t use this calculation that much because they have insider
information about sales figure, equipment purchase, and other details that aren’t readily
available to external users. They measure the return on their purchases using more detailed
and specific information.
It is calculated by:
Net sales
Fixed assets turnover ratio¿ ¿ assets−accumulated depreciation
Total assets turnover ratio
The total asset turnover ratio compares the sales of a company to its asset base. The ratio
measures the ability of an organization to efficiently product sales and is typically used by
third parties to evaluate the operations of a business. Ideally, a company with a high a high
total asset turnover ratio can operate with fewer assets than a less efficient competitor and so
requires less debt and equity to operate. The result should be a comparatively greater return
to its shareholder.
Formula:
Total asset turnover ratio= net sales/total assets

Profit margin on sales

a.k.a. profit margin ratio/ gross profit ratio/return on sales ratio is a profitability ratio that
measures the amount of net income earned with each dollar of sales generated by comparing
the net income and net sales of a company.
In other words, the profit margin ratio shows what percentage of sales are left over after all
expenses are paid by the business.
The profit margin ratio/ profit margin on sales formula can be calculated by dividing net
income by net sales.
Profit margin sales= total income/ total sales

Basic earning power ratio

Basic earning power (BEP) ratio is a measure that calculates the earning power of a business
before the effect of the business' income taxes and its financial leverage. It is calculated by
dividing earnings before interest and taxes (EBIT) by total assets.
Basic earning power (BEP) ratio is similar to return on assets ratio as both have the same
denominator i.e. total assets. However, unlike return on assets which measures the net
earning power, the basic earning power (BEP) ratio calculated the operating earning power
i.e. their numerators are different.
Formula
      
Basic earning power ratio= earnings before interest and taxes(EBIT)/ total assets
Return on total assets
Return on total assets (ROTA) is a ratio that measures a company's earnings before interest
and taxes (EBIT) relative to its total net assets.
The ratio is considered to be an indicator of how effectively a company is using its assets to
generate earnings. EBIT is used instead of net profit to keep the metric focused on operating
earnings without the influence of tax or financing differences, when compared to similar
companies.
Formula
ROTA = EBIT/ average total assets

Return on common equity

The Return on Common Equity (ROCE) ratio refers to the return that common equity
investors receive on their investment. ROCE is different from Return on Equity (ROE) in
that it isolates the return that the company sees on its common equity, rather than measure
the total returns that the company generated on all of its equity. Capital received from
investors as preferred equity is excluded from this calculation, thus making the ratio more
representatives of common equity investor returns.
Formula
ROCE = total income/ average common equity

Price/earnings ratio
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its
current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also
sometimes known as the price multiple or the earnings multiple.
Formula
P/E ratio = market value for share/ earnings per share
Price/cash flow ratio
The price-to-cash flow (P/CF) ratio is a stock valuation indicator or multiple that measures
the value of a stock’s price relative to its operating cash flow per share. The ratio uses
operating cash flow which adds back non-cash expenses such as depreciation and
amortization to net income. It is especially useful for valuing stocks that have positive cash
flow but are not profitable because of large non-cash charges.
Formula
Price to cash flow = share price/ operating cash flow per share

Future value
Future value (FV) is the value of a current asset at a specified date in the future based on an
assumed rate of growth.
If, based on a guaranteed growth rate, a $10,000 investment made today will be worth
$100,000 in 20 years, and then the FV of the $10,000 investment is $100,000. The FV
equation assumes a constant rate of growth and a single upfront payment left untouched for
the duration of the investment.
Future Value Using Simple Annual Interest
FV = I * [1 + (R * T)]

Annuity
An annuity is a financial product that pays out a fixed stream of payments to an individual,
primarily used as an income stream for retirees. Annuities are created and sold by financial
institutions, which accept and invest funds from individuals and then, upon annuitization,
issue a stream of payments at a later point in time. The period of time when an annuity is
being funded and before payouts begins is referred to as the accumulation phase. Once
payments commence, the contract is in the annuitization phase.
Formula
P=r (PV)/1-(1+r)-n
Where,
P= payment
PV= present value
r= rate of period
n= number of periods
Retirement planning
Retirement planning is the process of determining retirement income goals and the actions
and decisions necessary to achieve those goals. Retirement planning includes identifying
 sources of income, estimating expenses, implementing a savings program and managing
assets. Future cash flows are estimated to determine if the retirement income goal will be
achieved.

Amortized loan
An amortized loan is a loan with scheduled periodic payments that are applied to both
principal and interest. An amortized loan payment first pays off the relevant interest expense
for the period, after which the remainder of the payment reduces the principal. Common
amortized loans include auto loans, home loans and personal loans from a bank for small
projects or debt consolidation.
Amortized loans are generally paid off over an extended period of time by equal amounts
for each payment period, though there is always the option to pay more and thus further
reduce capital.

Measuring riskiness of firm and risk comparison

Business risk is the variability that a business firm experiences over time in its income. Some
firms, like utility companies, have relatively stable income patterns over time. They can
predict what their customer's utility bills will be within a certain range. Other types of
business firms have more variability in their income over time. 
For example, automobile manufacturers. These firms are very much tied to the state of the
economy. If the economy is in a downturn, fewer people buy new cars and the income of
automobile manufacturers drops and vice versa.

Risk is simply defined as the possibility of something dangerous or unfortunate occurring. In

the business world there is a slightly more vague definition. Managers and owners of
companies in the business world define risk as anything that disrupts their ability to
accomplish the mission of the organization.
Possible risks analyzed are:
 Strategic risk
 Compliance risk
Compliance risk is anything related to legal or regulatory costs, such as being sued for
product liability or being fined by government agencies for not following important rules.
 Financial risk
 Operational risk
 Reputational risk
Risk comparison is essential for effective societal and individual decision-making.