Underestimated expenses, overspending, financial mismanagement, and fraud can lead to disaster. A major reason organizations go out of business is their inability to forecast and/or secure sufficient cash flow. Planning is necessary, but not sufficient, and must be supplemented by skillful control. Information systems play an extremely important role in supporting organizational control, including: risk analysis, budgetary control, auditing, financial ratio analysis, and profitability analysis and cost control.
Risk Analysis – Companies must analyze the risk of doing business with other entities and giving credit to customers. The product @RISK for Excel from palisade.com is an effective tool that performs risk analysis in Microsoft Excel spreadsheets using Monte Carlo simulation. You can answer questions like, “What is the probability of profit exceeding $1 million?” or “What are the chances of losing money on this venture?”
Budgetary Control – The annual budget should be divided into monthly allocations to ensure the business has sufficient funds to pay expenses, especially if the business is susceptible to long lapses between paychecks. Managers at various levels should monitor departmental expenditures and compare them against the budget and operational progress of the organization. Numerous software programs can be used to support budgetary control; most of them are combined with budget preparation packages from vendors such as outlooksoft.com, clarifysystems.com, and capterra.com
Auditing – The major purpose of auditing is to ensure the accuracy and condition of the financial health of an organization. Internal auditing is done by the organization’s accounting/finance personnel, who also prepare for external auditing by CPA firms. Internal auditors can use information technology to facilitate auditing. For instance, intelligent systems can uncover fraud by finding transactions that significantly stray from previous balances.
Financial Ratio Analysis – A major task of the accounting/finance department is to watch the financial health of the company by monitoring and evaluating financial ratios. The collection of data for ratio analysis is done by the transaction processing system, and computation of the ratios is done by financial analysis models. The interpretation of the ratios, especially the prediction of their future behavior, requires professional judgment and expertise.
Profitability Analysis and Cost Control – Many companies are concerned with the profitability of individual products or services as well as with the financial health of the entire organization. Profitability analysis software allows accurate computation of profitability and allows allocation of overheads. Oracle Hyperion Profitability and Cost Management provides valuable insights into costs and profitability by uncovering drivers of cost and profitability, empowering users with visibility and improving resource alignment.