HI5019 Expenditure Cycle and Conversion Cycle of Paradise Industries Assessment Answer
system flow Chart
In this competitive world, it is become very difficult for an organization to stand in the current market. To beat the competitive dimension of an organization a system is developed that is strategic information system. To respond the corporate world and get hold on market this type of system is very helpful. Strategic information system in business compiles business strategy, organizational strategy and information strategy together and become an essential feature in an organization. With the help of strategic information system a company can change their business strategy and structure. Now it can say that strategic information system is a type of system which align information system with the business strategy. It is also helpful to maintain a rapid response and the quality indicator. In an organization, database with data mining capabilities to make the best use of available corporate information for marketing, production, promotion and innovation. This type of system can give a service which is less expensive, varied and focused on particular market dimension. By developing this system, the efficiency and control of an organization are enhanced which is mandatory in the current market. This can develop a new product, different market and a way of doing a market differently. In this report, it is also mentioned the expenditure cycle and the conversion cycle of Paradise Industries. Also discuss the weaknesses which is exist in the internal control system in the expenditure cycle and the risk associated with the conversion cycle of Paradise Industries.
Expenditure cycle of Paradise Industries
In this cycle, the department are divided into 4 components which are mentioned below:
- Firstly, Purchasing department
- Secondly, receiving department
- Thirdly, account payable department
- Lastly, cash disbursement department
In each department the work is done by their respective department clerks. Each department clerks work is rely on the data which is provided by the previous department and the invoice generated (Malicka, 2018). They follow the chain pattern for instance receiving clerk work on the data which is given by purchasing clerk and so on.
Here, in the case of Paradise Industries it is mentioned that the purchasing clerk generates a purchase order copy.
Purchase order copy is sent to receiving department and account payable department.
They perform their work on the data which is provided by previous department.
Now verification is performed, purchase order copy with the invoice generated by the vendor and continue the work of their respective department.
Then finally, account payable department provide data to the cash disbursement department.
Now they make payment to the vendor for the goods which is delivered by them.
System flow chart of expenditure cycle
Image 1 – Flowchart showcasing the expenditure cycle of the current business organization
Conversion cycle of Paradise Industries
In Paradise Industries, the activities are performed on the forecast they do. The organization forecast for 3 months i.e. a quarter perform accordingly (Moser, et al. 2019). In the marketing department present the schedule to the production department for the future period.
The purchasing department select the quality of raw material and collect it in the beginning of quarter which is utilized in the production of machine tool for the next 3 months. If more raw material is required in the midsession then a requisition is generated which is then approved and then more raw material is purchased.
The time that is utilized to convert the investment into its inventory is represent a metric that is known as cash conversion cycle. There are factor through which cash conversion cycle can be derived that are the average time required to pay the suppliers, to convert the raw material into products and lastly to collect receivables customers. This department strengthen the business process and helps in setting up the proper network program from the purchase of the inventory in the system and its conversion to the finished goods in process. This could be managed by the proper cash management program and also sets the undertaken work approach to strengthen the business outcomes.
System flowchart of conversion cycle
Image - Flowchart showcasing the conversion cycle of the current business organization
Internal control weakness in the expenditure cycle of Paradise Industries
An expense system is required in an organization to purchase the goods and services. This system is set by following the steps:
- Raising the purchase requisition
- Receiving the raw material
- Finally, making the payment
All the other business activities is directly or indirectly linked with this particular type of cycle. This cycle is completely based on the money related things so here is strong vulnerability of internal control weaknesses exist. The internal control system must consist of proper checks and control at adequate place to ensure an adequate system.
In the given case of Paradise Industries, a deep research is performed to evaluate the weaknesses in the internal control of expenditure cycle. The weaknesses are mentioned below:
Weaknesses in the purchasing department- In Paradise Industries, the activity of selection of buyer and the quality of raw material is performed by the purchasing department clerk. Upon this activity no reconciliation inspection is performed. Purchasing clerk is solely responsible for finalizing the price of raw material purchased. So here, a possibility is generated that while performing the task purchasing clerk may making some personal benefit out of it. This creates a purchase event which is basis in nature for the company. As this purchasing activity is not monitored by any official. This leads to generate a loophole in the organization and making space for the fraud activity (Coombes, Smit, & MacDonald, 2016). However, the main weakness of the system is related to its increasing business complexities and its impact on the business cost of the process. This risk arises when the rivals of the business come up with the strong completion and uses the advance technology in the system process. However, this risk could be managed by using the proper advance system process and adapting towards the new system and technology program.
Weaknesses in the receiving department- In the given case of Paradise Industries, multiple jobs are performed by the receiving department clerk. This will lead to create error and fraud activity. Receiving department clerk job start with receiving the goods, seeking the material quality, generating manual and computerized record so by performing that much activities may become a hectic task. Due to performing multiple activities by single personnel the risk of errors and frauds are increased. Second thing is that the receiving department clerk works rely on the data provided by the purchasing department clerk. If any mistake or fraud is done in initial level then it cannot be fix in this department. As no reconciliation is performed in purchasing department that will increases the fraud activity. There is need to set up proper credit rating program which helps in evaluating the undertaken work program and also evaluate the process system accompanied with the various activities.
Weaknesses in the payment department- In the case of Paradise Industries, payment department is more vulnerable to fraud because it is directly related to money. For organization success, there are great need of adequate internal control system in this department because all the payment is made in this department only. Specific rules are follow for disbursement of funds. The account payment clerk made payment according to the data which is provided by the purchasing department so here again if any error or misappropriation is generated in previous department then it can not be fix in this department (Akhmetshin, et al. 2019). This could be managed by the proper cash management program and also sets the undertaken work approach to strengthen the business outcomes.
Existence of risk in the conversion cycle and steps taken to reduce the risk
Paradise industries is a business entity which faces different type of risk and take different steps to eliminate or reduce the risk. The risks are mentioned below:
Operational risk- This type of risk is deals with the breakdown of equipment. In the given case of Paradise Industries, the organization work rely on equipment only if any mishappening is happens with the equipment because of any factor then the entire work of an organization will affects. It is more dangerous when an organization is in its initial stage of establishment. This type of risk hinders the whole process system. The operational risk is managed by the undertaken work program and also mitigate the work approaches for the better operating outcomes. However, internal control system is set up to manage the operational risk and strengthen the business process.
After analysis the current case, it is revealed that no security is implemented with the equipment. So first of all, adequate security is implement with the equipment to avoid or reduce this operational risk. There is a strong need to design a plan B in case of disaster for the company. When the risk is reduce that will ultimately reduces the loss of an organization. To reduce the risk outsourcing is another approach. Outsourcer have the capability to reduce or minimize the risk to the possible dimension (Ahmad, et al. 2016). In the current scenario, technology is taking charge and provide support system to the organization. In strategic information system, information strategy is algin with the business strategy and beneficial for an organization to beat the competitive world and get hold on the market
Liquidity risk- in the given case, this type of risk arise when the company arises insufficient funds due to which the company are not able to clear its debt and continue its daily operation. If the company with insufficient amount faces many difficulties and that will ultimately leads to diminish the market. This risk arises when there is higher amount of cash outflow in the process and undertaken work program is managed by managing the liquidity risk in the process. Nonetheless, proper credit rating and arranging the higher amount of cash liquidity in the process lower down this liquidity risk. The higher liquidity risk may also increases the overall financial leverage.
To reduce this type of risk the technique of estimation of cost can be beneficial. In the given case of Paradise Industries, it is mentioned that they planned for entire quarter so they collect raw material and other requirement in the beginning of quarter due to which a huge amount of capital is blocked in the beginning. This enhances liquidity risk and slow down the entire process. The company should obey the tool of economic order quality which can reduce this type of risk and organization continue work without any disturbance.
Developed payroll system to reduce the liquidity risk.
Technological risk- In this evolving world, nothing is permanent specially technology. Technology is changing day by day and become very powerful in the current scenario. As they plan for entire quarter and make plan accordingly and any change in the technology will lead to change in market and market demand and affects the organization. It become very difficult for an organization to stand in the market for long run (Kaya, 2018). This risk arises when the rivals of the business come up with the strong completion and uses the advance technology in the system process. However, this risk could be managed by using the proper advance system process and adapting towards the new system and technology program.
To reduce this type of risk, organization should not overstock because that will lead to failure of organization. So they should handle this risk differently to eliminate it.
Documentation risk- For the success of organization, maintaining the adequate document is essential. Not only making the right documentation is required but also checking of the adequate document is also mandatory. In the given case of Paradise Industries, records are maintain manually basis which delay the process. And the chances of misstatement is also enhanced and also create difficulty in projection of budget. Manual entry take’s several steps in the current case which is also demerit for an organization (Anton, 2018). The documentation risk arises due to the higher complexities in the process and managing the work program. However, the internal control is set up to the take the manual documents online to manage the work program ad reduce the paper work associated with the process system.
To reduce this risk adequate steps should be taken. In this technological world, technology is becoming helping hand for an organization so here also technology can help to minimize this risk. Use of modern software in the business organization will reduce the occurrence of risk. This will enhance the accuracy of accounting data of an organization (Berk, 2016).
Forecasting risk- It is known that adequate forecasting is performed to predict the future market and perform the activities accordingly. In the given case, the forecasting is performed for quarter i.e. 3 month and perform their respective task accordingly. If any mistake in the prediction then it will lead to failure of an organization.
To reduce this type of risk, forecasting is performed by the expertise of this respective field only. In this current case there is forecast made for the complete quarter which creates challenge for the company to vouch for its accuracy. It is greatly needed to generate forecasting budgets for the short period as well (Quon, Zéghal, & Maingot, 2012).
Strategic information system can gives benefit with respect to operational and technological aspects. It gives competitive advantage to the organization to get hold on the market. In the current scenario, technology is taking charge and provide support system to the organization. In strategic information system, information strategy is algin with the business strategy and beneficial for an organization to beat the competitive world and get hold on the market. But a risk is also related with this is that information is available online which can be stolen. So to ensure an adequate system an extensive security is needed. In the given case of Paradise Industries, evaluated the overall weaknesses in the internal control in the current system of expenditure cycle and the risk is associated in the conversion cycle of Paradise Industries and the step to eliminate, reduce or diminish the risk.