The financial information system is a special kind of business software used to input, collect, track, and examine financial and accounting data. It accumulates and analyzes financial data used for optimal financial planning along with forecasting decisions and results.
The output produced helps in making good financial management decisions thus helping the managers to run the business effectively. FIS (Financial Information System) is used in combination with a decision-supporting system, and it helps the organization achieve its finance-related objectives.
The FIS can be understood as a financial planner for electronic commerce that can also produce huge amounts of data related to market and finance obtained from financial databases worldwide. FIS is a combination of computer hardware and application software that provides financial data and analytics, general accounting ledger, payroll, etc.
FIS combines a computer system and the user in a networked environment to support the decision-makers. The information system that tracks financial events and summarizes information that supports adequate management reporting, policy decisions, financial responsibilities, and preparation of auditable financial statements is known as FIS. FIS helps us to run an evaluation for the general ledger, accounts receivable, and accounts payable.
The relationships between various financial statements help investors, creditors, and internal company management to understand how well a business is performing and find the areas that require further improvement. FIS is responsible for providing accurate, complete, and consistent information at the right time and right situation.
FIS should provide sufficient management reporting so it supports the preparation of the budget and financial statements. One of the greatest advantages of FIS is that it requires less administrative manpower and is cost-reliable too.
The steps involved in a systematic FIS (Financial Information System) are as follows:
- Collection of data about business events.
- Analysis of business events.
- Recording in the business books.
- Preparation of the Trial Balance.
- Preparation of Financial Statements.
- Communication of information to the users.
Features of FIS (Financial Information System)
A well-organized and structured FIS should have the following features:
- Collect accurate, timely, complete, reliable, and consistent information.
- Provide adequate management reporting.
- Support government-wide and agency policy decisions.
- Support preparation and execution of financial strategies.
- Facilitate financial statement preparation.
- Provide information for central agency budgeting, analysis, and government-wide reporting.
- Provide complete financial audits.
Role of FIS (Financial Information System) in Decision Making Process
The decision-making process requires information – financial and non-financial information as well. The most important financial information needed in the process of business decisions comes from accounting. Therefore, we can say that accounting is a service function to management. It basically, processes or gathers, and studies raw data and converts them into suitable information that requires in the process of managerial decision-making.
The accounting process contains several phases. Basically, it is a process in which input data gets converted into output information. If we focus our attention on the most significant part of the accounting, then we can present the data processing through several phases as shown in the figure.
The data processing phase consists of collecting data about occurring business events. After collecting data on business events, comes the second phase of the accounting process which consists of event analysis. After that, recording in the journal and general ledger is done. At the end of an accounting period, just before preparing basic financial statements, we need to check data accuracy in the books.
After verifying the accuracy of accounting data in books, we prepare a trial balance. It represents the summary of all ledger accounts and financial transactions. After all of the records are coordinated and we find all data accurate, we have the last phase of the accounting process which refers to preparing financial statements.
The most significant financial statements that we should take into account when examining the entire business quality and making decisions for the future are:
- Balance sheet
- Income statement or profit and loss account
- Cash flow statement
- Change in owner’s equity
Organizational Financial Management
Financial management refers to the efficient and effective management of money or (funds) in such a manner as to accomplish the objectives of the organization. It is the specialized function directly associated with the top management.
Organizational financial management is typically applied to an organization or company’s financial strategy, while personal finance or financial life management refers to an individual’s management strategy.
It includes how to raise capital and how to allocate capital, i.e. capital budgeting. Not only for long-term budgeting but also how to allocate short-term resources like current liabilities. It also deals with the dividend policies of the shareholders.
Personal FIS (Financial Information System)
Personal financial management (PFM) refers to software that helps users to manage their money. PFM often lets users categorize their 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. PFM typically shows cash flow, spending trends, financial goals, net worth, debt management chart, monthly EMI, monthly or yearly budgeting, etc. It also allows users some level of customization for managing their money. E.g., Microsoft Money.
A financial calculator or business calculator is an electronic calculator that performs financial functions commonly needed in business and commerce communities. 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. E.g., HP 12C, HP 10B, and TI BA II.
Financial ratio analysis is the process of calculating financial ratios, which are mathematical indicators calculated by comparing key financial information appearing in the financial statements of a business, and analyzing those to find out the reasons behind the business’s current financial position and its recent financial performance, and develop expectation about its future outlook.
Financial ratio analysis is a very useful tool because it simplifies the process of financial comparison of two or more businesses. Direct comparison of financial statements is not efficient due to differences in the size of relevant businesses. So, financial ratio analysis makes the financial statements comparable both among different businesses and across different periods of a single business.
The current ratio is one of the most fundamental liquidity ratios. It measures the ability of a business to repay current liabilities with current assets.
Current assets are those assets that are expected to be converted to cash within the normal operating cycle or one year. Examples of current assets include cash and cash equivalents, marketable securities, short-term investments, accounts receivable, a short-term portion of notes receivable, inventories, and short-term prepayments.
Current liabilities are obligations that require settlement within the normal operating cycle or the next 12 months. Examples of current liabilities include accounts payable, salaries and wages payable, current tax payable, sales tax payable, accrued expenses, etc.
Current Ratio (Formula)
= Current Assets / Current Liabilities
Inventory Turnover Ratio
It is the ratio of the costs of goods sold by a business during an accounting period to the average inventories of the business during the period.
Inventory Turnover Ratio (Formula)
= Cost of Goods Sold / Average Inventories
Days Sales Outstanding (DSO) Ratio
Days sales outstanding is a measure of the average number of days that it takes a company to collect payment after a sale has been made. DSO is often determined on a monthly, quarterly, or annual basis.
Days Sales Outstanding (DSO) (Formula)
= (Accounts Receivable / Credit Sales) * Number of Days
Fixed Assets Turnover Ratio
The fixed assets turnover ratio is an activity ratio that measures how successfully a company is utilizing its fixed assets in generating revenue.
Fixed Assets Turnover Ratio (Formula)
= Net Revenue / Average Fixed Assets
Total Assets Turnover Ratio
The total assets turnover ratio compares the sales of a company to its asset base. The ratio measures the ability of an organization to efficiently produce sales.
Total Assets Turnover Ratio (Formula)
= Net Sales / Total Assets
Profit Margin on Sales Ratio
Profit margin is a profitability ratio calculated as net income divided by revenue, or net profits divided by sales. A 20% profit margin, then, means the company has a net income of $0.20 for each dollar of total revenue earned.
Profit Margin Ratio (Formula)
= Net Income / Net Sales
Basic Earning Power (BEP) Ratio
Basic earning power 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 Earning Before Interest and Taxes (EBIT) by total assets.
Basic Earning Power (BEP) (Formula)
= Earning Before Interest and Taxes (EBIT) / Total Assets
Return on Assets (ROA) Ratio
Return on assets is the ratio of annual net income to the average total assets of a business during a financial year. It measures the efficiency of the business in using its assets to generate net income. It is a profitability ratio.
Return on Assets (ROA) (Formula)
= Annual Net Income / Average Total Assets
Return on Equity (ROE) Ratio
Return on equity or return on capital is the ratio of the net income of a business during a year to its stockholders’ equity during that year. It is a measure of the profitability of stockholders’ investments. It shows net income as a percentage of stockholder equity (shareholder’s equity is equal to a firm’s total assets minus its total liabilities).
Return on Equity (ROE) (Formula)
= Annual Net Income / Average Stockholders’ Equity
Price to Earnings (P/E) Ratio
Price to earnings ratio is the ratio of a company’s share price to its earnings per share. It explains whether the share price of a company is fairly valued, undervalued, or overvalued.
Price to Earnings (P/E) (Formula)
= Current Share Price / Earnings Per Share
Price to Cash Flow (P/CF) Ratio
The price-to-cash flow ratio is a valuation ratio used to assess whether a company is a good investment or not. It is calculated by dividing the stock price of a company by its cash flow per share. The price-to-cash flow ratio of a company is compared with its competitors to find out whether the company’s stock is overpriced or underpriced.
Price to Cash Flow (P/CF) (Formula)
= Current Stock Price / Cash Flow Per Share
Future Value (FV)
The future value is the value of a current asset at a specified date in the future based on an assumed rate of growth over time.
An annuity is a series of payments made at equal intervals. Examples of annuities are regular deposits to a saving account, monthly home mortgage (loan) payments, monthly insurance payments, and pension payments.
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.
An amortized loan is a loan with scheduled periodic payments that consist of both principal and interest. An amortized loan payment pays the relevant interest expense for the period before any principal is paid and reduced.
Measuring Risks of Firm and Risk Comparison
Business risk is the variability that a business firm experiences in its income. Some firms, like utility companies (a company that supplies utilities, such as gas, electricity, phones, etc.), have relatively stable income patterns over time. They can predict what their customers’ utility bills will be within a certain range.
Other types of business firms have more variability in their income over time. Take, for example, automobile manufacturers. Those 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. Automobile manufacturers have more business risk than comparing to utility companies.