Study of Expenditure Cycle and Conversion Cycle of Paradise Industries Assessment Answer
Flow chart analysis
In the modern business world, strategic information system is designed to response business initiatives to provide a competitive advantage. Strategic information system is of key importance to obtain a successful and efficient operation of an organization. It is a form of information system which is integrated with the business strategies and structure. To withstand in this competitive corporate world, strategic information system is develop to support and increase the strength of organization. In present situation, it becomes the backbone of organization. So strategic information system can be any type of information system that implement information technology to help an organization reduce the competition disadvantage, or gain competition advantage or meet other strategic enterprise objectives. In the given case of Paradise Industries, a company which manufacturer a high precision machine tool and located at Adelaide. This report is considering the role of strategic information system and also study the expenditure cycle and conversion cycle of Paradise Industries. This report also analysis of physical internal weaknesses in the expenditure cycle and the risk exists in conversion cycle and the changes needed to reduce the risk.
Expenditure cycle of Paradise Industries
The entire expenditure cycle of Paradise Industries is divided into company’s 4 department. The department is handled by their respective employees. The department are mentioned below:
- Purchasing department
- Receiving department
- Account payable department
- Currency exchange department
Expenditure cycle of Paradise Industries is a part of business activities and data related process is corporate with the purchase of and payment for goods and service.
The expenditure cycle of an organisation is based on three activities which are
- Firstly, ordering of raw material for supplies and services.
- Secondly, receiving the goods, supplies and services.
- Thirdly, paying for the goods, supplies and services.
Each department of expenditure cycle of Paradise Industries is interlinked with each other which means they work on the data that is provided by previous department. The currency exchange department clerk’s work is based on the data given by the account payable department clerk. When a list of stock item falls at the recorder point then in the purchasing department, a purchasing requisition is automatically generated and printed on the terminal (Corpuz, and Barnes, 2010).
Selection of buyers and the quality of raw material is comes under the responsibility of purchasing department clerk of Paradise Industries
After pursuing this comes, he/she generates a purchase order copy.
One copy of purchase order is sent to receiving department and another copy is sent to the supplier.
Now receiving department clerk receives the material from the suppliers and recheck the items with purchase order and the packaging slip.
After this rechecking, clerk generates a hard copy receiving report which is consist of record of quantity and quality of the goods received.
Now one copy is filed in the receiving department only and another copy is sent to the warehouse. Then record it to the digital receiving report file by the clerk (Karnawati, et al. 2009).
The system automatically closes the purchase order.
When warehouse clerk receives the item, he/she updates the list of stock subsidiary ledger through the terminal in the warehouse.
Account payable department
When supplier’s invoice arrives, adds a record to the suppliers invoice file by the account payable clerk which in turn trigger the system to automatically set up a liability in the account payable subsidiary log based on the financial information contained in the invoice.
Currency exchange department
Now the computer system check the account payable subsidiary log every day for items due to the paid and print the cheque. Then one copy of this cheque is the currency exchange department clerk where it is filled and another is sent to the suppliers.
Finally, the system automatically updates the general log account.
Flow chart of expenditure cycle
Image 1 – Flowchart showcasing the expenditure cycle of the current business organization
Conversion cycle of Paradise Industries
Cash conversion cycle is a metric that represents the time, it takes for Paradise Industries to convert its investment in inventory and other resources into cash flows from sales.
It is study that an organization is work upon forecast for the quarter that is 3 months planning which goes to the production planning and control clerk.
- The purchasing department collects the raw material which is required for 3 months product production (Lenssen, et al. 2009).
- The system prepares the digital work order move tickets and material requisition and sends them to the work center supervisor’s terminal on weekly basis.
- The move ticket and two copies of material requisition is distributed to each work center in the production process by the supervisor.
- Staff members send material requisition copies to the warehouse in exchange for the materials.
- The production is completed in each work centre, the staff members send the move ticket to cost accounting to the mark the completion of that phase of the production batch.
- Staff members also record the labour spent time on each batch on the job cards which they send to cost accounting department.
- At the end of each day, cost accounting clerks generates digital journal voucher and posts to general log control account to reflect the status of each day and to record transfers of work in progress to finished good inventory (Achampong, 2010).
Flow chart of conversion cycle
Image 2 – Flowchart showcasing the conversion cycle of the current business organization
Analysis of internal control weaknesses in expenditure cycle
For operating business activities of Paradise Industries which is related to buy goods and services, company needs to design a department that is purchasing system. All the other activities are connected to expenditure cycle directly or indirectly. So weakness in this cycle may affects all the other business activities which ultimately leads to overall business of an organization. It can be say that expenditure cycle is a crucial aspect in the effective and efficient management of the inventory system. Purchasing system is set up after the series of step that is raising the purchase request, receiving the goods and finally paying. There are high chances of weak internal control of an organization as in this cycle money related things exists (Corpuz, and Barnes, 2010). To make sure the proper internal control system in an organization of the company, they must contain appropriate control and control must be provided at the adequate place.
In the current case of Paradise industries today, some weaknesses are still exist in an organization which leads to affect the efficiency of the business (Chan, Huff, Barclay, and Copeland, 2017). After having certain control agreement in an organization, there are still various shortcoming in the current system that increases the risk of weaknesses in the current system of internal control.
After audit analysts research of Paradise Industries, it is evaluated that certain weaknesses are present in the current system of expenditure cycle. These are shown as:
Weakness in the purchasing department- After viewing the activities of Paradise Industries, buying and selection of quality of raw material are falls under the responsibility of purchasing department officer. Finalizing the buyer and the quality of raw material is completely done by purchasing officer. No other additional investigation is implemented in this task of purchasing officer. So there is a chances might arises that while doing the respective activity of purchasing, the officer may making some personal benefit out of this. There is ahigh probability that it will create a naturally biased buying event for the company. This activity is not monitored and increases the loopholes in the organization system that ultimately leads to fraudulent activities.
Weakness in the receiving department- In this case of Paradise Industries, receiving the goods, search for raw material and make manual and computerized report are fall under the responsibility of receiving department officials. Now it is clear that officials have too much work load which may increase the risk of frauds and errors. Performance of various activities by an individual staff create weakness in the system. Secondly, the work of receiving department is depends on the data provided by the purchasing department and on the copy of the invoice distributed by the seller if any error is generated at the initial level it will continue to next department. It cannot investigate the fraud may have been committed at initial level in terms of quality and price (Yaokumah, and Brown, 2014).
Weakness in the account payable department- debt portfolio is very important in creating the market value of the organization. Debt disbursement is vulnerable to the risk of misappropriate and fraud. For the business organization it is essential to create an adequate internal control system and set rules for the disbursement of funds. The internal control system recognizes the weakness in the internal control. Paying all the vender invoice generated to purchase inventory is falls under the responsibility of account payment official (Sledgianowski, and Luftman, 2015). There is no additional official to complete the task of payment agreement made by the official. Secondly, the account payment employee work is solely depends upon the document provided by the purchasing department. There are no external controls to ensure the accuracy of the documents originally produced.
Analysis of existence of risk in the conversion cycle and steps are taken to reduce the risk
In the business cycle of Paradise Industries, they faces various risk at various stages. Some risk the company faces are mentioned below:
Operational risk- This risk is related to the production equipment. An organization must employ the qualified personnel to handle the operating equipment to reduce the operational risk. If the company cannot reduce this type of risk then it will affect the whole business of the organization (Henderson, and Venkatraman, 2019).
Here, in the case of Paradise Industries, has not implement any security system at the time of risk. Company must need to design a plan B in the event of disaster. Risk reduction leads to reduction in the severity of loss. Secondly, outsourcing is another way of reducing the risk up to some extent. Outsourcing agents may have strong capability to reduce or mange the risk until it occurs. In the current scenario, for security issues the company’s management may implement outsource (Ferguson, et al. 2016).
Liquidity risk- When the money provided by the bank is exceeds the customer request then it will lead to arise this type of risk. Inappropriate financing for a company’s normal activities and contraction of market for goods and services are the main type of risk a company faces. In this case, company collects enough money to incur its debt and perform daily activities. For settling this type of risk cost estimation technique is used and necessary precaution is taken by the company.
In the current case of Paradise Industries, liquidity risk is increase as organization’s quarterly production has been pre planned and all the material requirement is met at the beginning of the quarter so because of that large amount of capital is blocked due to acquisition of shares. So because of this organization process is slow down and increases the need of additional resource. To reduce the risk companies must use the correct tools for the volume of economic orders.
Developed payroll system to reduce the liquidity risk.
Documentation risk- Protecting the right document is an important aspect for success in operating the system. Proper implementation of their timeline and clear the evidence is required to be accessible. The current manual installation must be completed in accordance with various procedure. Any type of error or mistake in the system would lead to dynamic loss for Paradise team (Hax, and Majluf, 2014).
To achieve the best appetite, proper steps are taken to minimize this type of threat. In the modern technological world, modern software can reduce this type risk. For instance, by integrate any method with the system software tool, it will show the truth is in the data of accounting (Rothaermel, 2016).
Credibility risk- In this case of Paradise Industries, there are no rules set up for specific payment mode of creditor. This type of risk can be reduce by correct payment mode. In determining the market value of the company, debt portfolio is very important aspect so to maintain that is very necessary. Higher debt cost arise due to wrong debts.
To reduce this type of risk, company should prioritize their budget later to prevent any type of failure. The following graph should be obey to lower down this type of risk.
Technological risk- In this digitally advanced world, nothing is permanent. This type of risk is taken into consideration when the company start a project then it must bring profit in multiple aspect to withstand in the long run. Technology becomes very powerful in the current scenario (Authority, and Bowker, 2019).
In the given case of Paradise Industries, it is mentioned above that they plan for entire quarter so any change in the technology will affects the need of market. Companies should not save too much to operate in the face of changing market needs. To eliminate or reduce the risk each type of risk must be treated differently (Stybel, 2012).
Forecasting risk- To withstand in market adequate prediction is necessary. Company predict the desired target and guide its production department. High level of personnel employee is required to predict the future market appropriately. There is no possibility that this aspect is not important to this organization. In the present case, they forecast for entire quarter which challenges the accuracy of the company. It is important to create prediction for short term so because of that company can achieve the target on time (Jaques, Bygrave, and Lee, 2011).
After considering all the details, it is concluded that by integrating the technology with the business activities can lead to develop a huge profit for the Paradise Industries. Strategic information system helps to obtain information that is relevant to the affected area as quickly as possible. Extensive security is needed to protect the data which is available online for Paradise Industries. It provides the competitive advantage and strengthen the business of an organization.