CSE1IS Information Systems
Week 6

 

Accounts Payable System
Detailed Analysis Report for Fleet Foot
Management Summary
Frank Pisciotta Consultant

I have completed the detailed analysis of the Accounts Payable (AP) system. This report outlines objectives, findings and recommendations.

System Objectives

How can Fleet Foot speed payments to vendors? Can we accomplish this goal and still lessen the heavy workload in the bookkeeping department?

Findings

1. Processing time of invoices has dropped by 2 days since Mark Stensaas was authorised to sign vendor and payroll checks. Unfortunately this does not save enough time to permit Fleet Foot to take advantage of discounts.
    
2. The monetary loss from not receiving discounts is significant. For the calendar year of 2005, Fleet Foot could have saved $21 450, or approximately $1 800 per month.
    
3. The usual discount offered by vendors is 2% for payments made within 10 days. More than half of your vendors reported in a survey that they would give a 3.3%, 5-day discount. My calculations show that this could boost savings to over $16 000 for 2007.
    
4. The present manual system includes excessive paperwork. Invoices are hand posted to both the ledger card and the stub portion of the check to vendors.
    
5. Fleet Foot generates no reports that could trigger payments automatically. Mark Stensaas depends on his memory to know which to pay when.
    
6. Fleet Foot faces rising costs. Any new franchises will require additional staff. The current pay rate for a clerical position in the accounting department exceeds $2 000 per month. Fleet Foot will need one new person within the next three months, and another at the beginning of 2008.
    
7. Fleet Foot does not adequately identify vendors. They are listed by name only. Invoices are frequently posted to the wrong ledger card and so suffer a finance charge for late payment.

Alternatives

Four possible solutions could eliminate the problems in your AP system and speed up payments. Each offers different costs, savings, and effects on your operation. None of the alternatives takes into account effects of investment-tax credits for equipment or depreciation as a savings. All costs are pretax costs.

Option 1: Do nothing. Leave the system alone

Costs	Loss of potential discounts $21600 to $16000 per year
Savings	None
Effects	The manual AP system can only get worse. Payments to vendors will get slower as business volume grows. Bookkeeping will struggle to keep up and morale will suffer.

 

Option 2: Hire Staff. One additional person now, another at the beginning of next year. Both would work in bookkeeping to maintain the workload at its current level

Costs	Loss of potential discounts - $21600 to $16000 per year Two Employees: 2007 - $22500, 2008 - $60000
Savings	None
Effects	The manual AP system will stabilise although not improve. In 4 years, Fleet Foot will be back to the present situation and problems

 

Option 3: Purchase AP software. Mike Rowe Business Applications sells an acoounts payable system that would fulfill most of Fleet Foot’s needs. This is compatible with the Linux system currently used by Finance. Ten businesses in Australia and forty in the United States use this software.

Costs	Mike Rows Business Applications Accounts Payable System - $15000 Modifications to Accounta Payable System to suit franchises - $10000 Two terminals (one in warehouse and one in bookkeeping) - $8000 Update of Accounts Payable System (per year) - $3000 Installation and training - $4000
Savings	Overtime pay for bookkeeping employees - $8000 per year Discounts from vendors - $16000 per year
Effects	Vendors could be paid within 5- to 10-day discount period. The warehouse and office areas would have to make some changes. The system can be installed and operating within 3 months. Good training manuals come with the software.

 

Option 4: Authorise the design, development, and implementation of Fleet Foot's own AP system. This alternative gives the most flexibility. The new system would accommodate the needs of the franchise operations and reports would be designed specifically for Fleet Foot.

Costs	System Design - $10000 System Development and programming - $17000 Installation and training - $4000 System maintenance - $2000 per year Two terminals (warehouse and bookkeeping) - $8000
Savings	Overtime pay for bookkeeping employees - $8000 per year Discounts from vendors - $16000 per year
Effects	Vendors could be paid within 5- to 10-day discount period. The warehouse and office areas would have to make some changes. The system can be installed and operating within 6 months. All of the problems associated with rising costs, excessive paperwork, work load, and vendor identification will be alleviated.

Notes:

• Options 3 and 4 do not show the cost of computer or printer, since the Finance Department has three printers connected to a Linux computer.
• None of this hardware requires an upgrade for either option, and adding an AP system will not damage performance of any existing applications.
• There is sufficient processor time, printer time and disk-storage space to add accounts payable system to the Linux computer.
• The cost of stationery, such as printer paper, will not increase from that already spent in the manual system.
• The extra cost for maintenance of existing hardware is negligible.

Recommendation

I recommend that Fleet Foot approves Option 4 for the following reasons.

1. The cost of a customised system is not appreciably greater than that of the available software.
2. It will solve all the problems in the current manual system.
3. Mike Rowe Business Applications quoted a very low price for upgrading their system. It may be low because they want our business. Other users have found the cost of upgrades to be at least twice as high as that quoted.
4. The new system would be designed to interact with Fleet Foot's current ledger system. The software from Mike Rowe Business Applications would not.
5. The payback for the new system will begin a little more than a year from authorisation to go ahead with design and development.

Intangible Benefits

Option 4 will also provide Fleet Foot with the following intangible benefits.

1. Vendors will receive better service.
2. Information now available to management can be provided in a monthly report, which will help Fleet Foot make better decisions.
3. Fleet Foot will be able to stay ahead of the competition.
4. Fleet Foot will use their existent computer equipment more fully.