accounting reference desktop 2002 phần 7 pptx

If there are too many possible capital investments for the amount of funding able, one can keep increasing the cost of capital that is used to discount the cash flowsfrom each project as

Exhibit 27-1 Weighted Average Cost of Capital

pre-so by obtaining more debt and using it to buy back common stock This would certainlyeliminate some high-cost common stock, but at the price of increasing the size of interestpayments, which in turn would increase the amount of fixed costs, and therefore raise thebreakeven point for the company, which can be risky if it is already operating at close tothe breakeven level Thus, there is an increased risk of business failure for those compa-nies that attempt to reduce their cost of capital by transferring their sources of fundingfrom equity to debt

Though we have just reviewed the calculations for determining a company’s ing cost of capital, this does not necessarily mean that it is the cost that should beapplied to the valuation of all prospective capital projects There are two issues that mayrequire one to use a different cost of capital The first is that the company may have toalter its capital structure in order to obtain any additional funding For example, lendersmay have informed the company that no more debt will be available unless more equity

exist-is added to its capital base In thexist-is instance, the cost of capital to be applied to a newcapital purchase should be the incremental cost of funds that will specifically apply tothe next investment The second issue is that the cost of capital just calculated was forthe existing blend of debt and equity, whose costs may very well have changed on theopen market since the date when it was obtained Debt costs will vary on the open mar-ket, as will investor expectations for returns on stock Consequently, it may be advis-able to periodically recalculate the cost of capital not only to reflect current marketconditions for new funding, but also on an incremental basis, which can then be applied

to a review of new capital investments The only case where these strictures would notapply is when the amount of new capital investments is so small that there is little like-lihood that obtaining funds for them will require a significant change in the existingcapital structure

If there are too many possible capital investments for the amount of funding able, one can keep increasing the cost of capital that is used to discount the cash flowsfrom each project (as noted in the next section) in order to see which projects have thehighest discounted cash flows However, capital investments that are only based on dis-counted cash flow will ignore other issues that should have a bearing on the investmentdecision One such factor is the risk of the project; it will be higher if the investment is in

avail-a new mavail-arket, avail-as opposed to one thavail-at is avail-an extension of avail-an existing mavail-arket Also, if there

is a history of good returns on investment in a particular area, then there is a lower risk ofloss on future investments in the same area Further, the risk of heightened competition insome areas should be factored into the investment decision Consequently, it is better to

use the cost of capital to throw out only those capital investments that are clearly pable of achieving a minimum return, and then further narrow the field of potential invest-ment candidates by carefully reviewing other strategic and tactical factors related to eachproject.

inca-One must also be aware of changes in the cost of capital that may arise in varioussubsidiaries of a conglomerate, where there may be significantly different levels of busi-ness risk in each one One of the reasons why conglomerates are assembled is to combinethe varying levels of business risk in each component business, so that the average level

of risk, as defined by the probability of achieving an even stream of cash flows, is mized The problem with using a blended cost of capital that is based on a multitude ofdisparate businesses is that the rate may be applied to individual businesses whose levels

maxi-of risk would normally involve a much higher cost maxi-of capital, while other businesses ating in mature industries with predictable results may be constrained by the use of a cost

oper-of capital that is too high One way to avoid this problem is to derive a cost oper-of capital that

is based on the debt and equity structure of other companies that are located solely in theindustries within which specific subsidiaries operate This yields a cost of capital for thesubsidiary, which may be a more accurate measure for determining the discounted return

on various capital projects However, there may be some companies within the industrythat have excessively aggressive or conservative capital structures, which may result in arange of possible costs of capital

27-3 CAPITAL PURCHASE EVALUATIONS

When evaluating whether or not one should invest a considerable amount of funds in ital projects, the accountant has a number of tools available, such as the hurdle rate, pay-back period, net present value, and internal rate of return — all of which are covered in thissection

cap-The hurdle rate, with some variations, is a company’s cost of capital, which wecovered in the last section Most capital projects must generate a stream of cash flows that,when discounted at the hurdle rate, will generate a positive cash balance If this were notthe case, then a company would be investing funds at a rate of return less than the cost ofthe capital it would be using to pay for the project However, there are cases where thehurdle rate will diverge from the cost of capital For instance, if a project is perceived tohave an extremely high level of risk (such as investments in unproven technology), thenthe rate may be increased substantially Another example is a government-mandatedenhancement to the air “scrubbers” in a coal-fired electrical generating plant, which must

be installed irrespective of the hurdle rate Thus, there can be justifiable variationsbetween the hurdle rate and the cost of capital

The hurdle rate is used to discount the stream of cash flows spun off by a capitalproject, so that the cash flows are translated into their current-period value To do so, weuse a discounting factor that is listed in the “Compound Interest (Present Value of 1 Due

in N Periods)” table in Appendix C to discount a cash flow estimated to occur in a futureperiod back to the present period, using the hurdle rate as the discount rate For example,

if we have a cash flow of $100,000 occurring in Year Four, and assume a hurdle rate of9%, then we will use a discount rate of 7084 to determine that the current value of this

cash flow is $70,840 In case one’s assumptions fall outside of the table in Appendix C,the formula to use is:

1

(1 + discount rate)number of years

If one is using Microsoft Excel to derive the calculation, then the formula in that tronic spreadsheet is:

elec-=1/((1+[enter the discount rate] ) ^ [enter the number of years] )

Virtually all cash flows caused by a capital project should be subject to cash counting For example, Exhibit 27-2 shows a stream of cash flows for a capital project thatare spread over a five-year period They relate to the initial capital and working capitalcost, ongoing maintenance costs, annual gross margin on sale of products created by thecapital item (net of income taxes), and the sale of equipment and release of working cap-ital at the end of the project Each cash flow is assigned a discounting factor that is based

dis-on the year in which it occurs, based dis-on an assigned hurdle rate of 7%

The exhibit shows a stream of cash flows that results in a slight positive cash flow,and so should be approved A more comprehensive review would also include the positivetax impact of depreciation costs on the cash flows, and any personnel or other overheadcosts associated with the project This summation of all discounted cash flows is calledthe “net present value” method (NPV), and is a commonly used technique for evaluatingcapital investments

Exhibit 27-2 Discounted Cash Flows from a Capital Project

Discount

0 Initial capital purchase – $250,000 1.000 – $250,000

0 Working capital requirement – 175,000 1.000 – 175,000

3 Gross margin on product sales +120,000 8163 +97,956

4 Gross margin on product sales +120,000 7629 +91,548

Another evaluation method that relies on discounting is the “internal rate of return”method (IRR) This approach alters the discount rate until the stream of discounted cashflows equals zero By doing so, one can see if the adjusted discount rate is relatively close

to the standard corporate hurdle rate, and so may require only minor changes to the cashflow estimates to bring them up to or in excess of the hurdle rate It is also useful whenthe management team wants to compare the rates of return on different projects, usuallywhen there is only limited funding available and it wants to invest in those projects withthe highest possible rate of return It is determined manually with a “high-low” approach

of calculating discounted cash flows that gradually brings the accountant to the correctIRR value It is more easily calculated with an electronic spreadsheet, such as MicrosoftExcel If that software is used, the calculation would be:

= ([range of values],[guess as to the value of the IRR] )The NPV and IRR methods are quantitatively valid ways to either justify or cancelproposed capital investments However, they involve estimates of cash flows that may bewell into the future, and calculations using discount rates that may also be subject to somedegree of dispute In cases where these issues make the use of NPV or IRR somewhatquestionable, one can fall back on the old technique of “payback.” Under the paybackapproach, we ignore the time value of money and instead create a simple calculation thatestimates the earliest date on which the initial investment in a capital project is paid back

to the company If the payback period is quite short, then the company’s risk of loss oninvestment is minimal Unfortunately, this technique does not focus on the potential forsubstantial cash flows from a project some years into the future, and may result in invest-ments only in projects with rapid returns, which is not a way to run a business with a long-range view of its prospects

To calculate a project’s payback, one can divide the total investment in it by its age annual cash flows For example, a project with an initial investment of $500,000 andaverage annual returns of $175,000 would have a payback period of 2.86 years($500,000/$175,000) However, this approach may yield flawed results if the cash flowsvary widely from year to year This concept is illustrated in Exhibit 27-3, where we seethat the cash flows resulting from the $500,000 investment are skewed well into thefuture, even though their average annual cash flow is $175,000, resulting in a payback thatdoes not actually occur until 4.0 years have passed Consequently, it is safer to calculatepayback on a year-by-year basis

aver-Exhibit 27-3 Payback Calculation on a Year-By-Year Basis

The accountant is likely to not only evaluate capital proposals with the precedingevaluation methods, but also to handle much of the application paperwork associatedwith them A sample of a capital request form is shown in Exhibit 27-4 This form con-tains the fields needed to conduct a discounted cash flow analysis, for it requires adetailed list of expected cash flows by year, by using a number of key revenue andexpense categories The “type of project” section is also of importance, for it tells thereviewer if a project is subject to a different hurdle rate For example, a project that isbeing implemented to resolve a safety issue will probably be approved, irrespective ofthe hurdle rate or the presence of any positive cash flows at all The bottom section ofthe form is crucial for the approval process It notes the range of approval signatures thatmust be obtained before the proposal will be completed, with the number of approvalsrising with the level of proposed investment in the project This form should be issued tothe sponsors of capital projects with a sample form and instructions, so they can easilysee how it is to be filled out.

After a capital proposal has been approved, the accountant should continue to trackactual cash flows and compare them to budgeted levels, so that the management team cansee if some project sponsors have a history of incorrectly estimating cash flows in order

to obtain project approvals The post-approval review will also spot any control issues thatmay arise with the capital approval process, so that the process can subsequently beenhanced for future capital investments

27-4 BREAKEVEN ANALYSIS

Every accountant should be aware of a company’s breakeven point, for this tells ment what revenue level it must maintain in order to achieve a profit The formula forbreakeven is simple enough — just add up all fixed costs for the period, divide by the grossmargin percentage, and the result will be the total revenue level to be achieved in order toyield a profit of exactly zero For example, a company with fixed costs of $3,700,000 andgross margins of 33% must sell more than $11,212,121 to earn a profit

manage-It can be of use to translate the breakeven formula into a graphical representation,such as the one noted in Exhibit 27-5 This graph contains a horizontal line that representsthe level of fixed costs, such as salaries, rent, and leases, that will be incurred irrespective

of the revenue level The slanted line that connects at the x-intercept with the fixed costline represents variable costs, such as the materials used to manufacture products Theslanted line beginning at the x-y intercept represents the revenue to be recognized at var-ious levels of production volume According to the exhibit, the company will begin togenerate a profit at an approximate capacity utilization level of 40% Above the notedbreakeven point, income taxes will be subtracted from profits, which are shown in theupper right corner of the graph

The breakeven chart shown in Exhibit 27-5 is a very simple one, because it assumesthat there are no changes in costs at any volume level In reality, additional fixed costsmust be incurred as production volumes increase For example, there will come a pointwhere production capacity for one eight-hour shift cannot be expanded; only by hiringadditional supervisors, production planners, maintenance staff, and materials managementpersonnel for the second and third shifts can capacity be increased All of these costs areshown in Exhibit 27-6, where there is a large jump in the level of fixed costs at about thetime when production capacity reaches the 70% level Because of this significant increase,

Capital Investment Proposal Form Name of Pr

Exhibit 27-5 Simplified Breakeven Chart

Reproduced with permission: Bragg, Financial Analysis: A Controller’s Guide, John Wiley & Sons, 2000, p 118.

the exhibit shows that the point at which profits are maximized is just prior to the jump infixed costs The accountant should be aware of the points where costs will step up in thismanner, and advise management of the resulting changes in profits

The breakeven graph is of particular use in determining the inherent risk in a ness forecast A well-designed forecast will contain high, median, and low revenue andcost levels that bracket the full range of expected company performance for the upcom-ing year By adding the full range of these estimates to a breakeven graph, as shown inExhibit 27-7, one can see if there is any risk of loss during the forecasted period In theexhibit, the lowest level of projected revenue will result in a loss; this issue should becommunicated back to management as part of the forecasting process, so that it can alterits budget to avoid the potential loss

busi-Other situations in which the breakeven graph can be used are to determine theimpact of a changed product mix on overall profits, changes in per-unit selling prices, therange of potential profits to be expected, production volumes needed to offset various per-unit prices, and the level of revenue needed to cover the cost of a capital acquisition Thus,breakeven analysis is an essential tool for financial analysis

Fixed Costs

Variable Costs

Income Taxes Net Profit

Exhibit 27-6 Breakeven Chart Including Impact of Step Costing

Reproduced with permission: Bragg, Financial Analysis: A Controller’s Guide, John Wiley & Sons, 2000, p 120.

27-5 RISK ANALYSIS

The preceding forms of analysis all assume that the data being used as input to the ous calculations is accurate If not, then the results of each analysis may be incorrect, andlead to bad business decisions There are several ways to improve the accuracy of dataused, as well as quantify the level of risk associated with it

vari-The primary area in which there is a high risk of inaccuracy is in forecasts of anykind The information used for a forecast is frequently based on the opinions of a smallnumber of people, who may have biases that skew their forecasts away from actual results.The accuracy of forecasts can be improved by a number of means, such as calling uponoutside experts for independent analysis and review, using an internal review board thatdiscusses the data and recommends changes where needed, or calling upon the sales staff(those with the best knowledge of market conditions) for an opinion It is also useful tocompare actual results against forecasts by person, to see who is consistently making thebest (and worst) forecasts

Once all estimates have been received, the accountant should determine their range

of values If they are broadly dispersed, then there is a strong likelihood that using the

Fixed Costs

Variable Costs

Income Taxes

Net Profit

Variable Costs

Revenue

Exhibit 27-7 Risk Analysis of a Business Forecast

Reproduced with permission: Bragg, Financial Analysis: A Controller’s Guide, John Wiley & Sons, 2000, p 125.

median of all estimates as the basis for financial analysis will not include many of the mates, which may be far higher or lower than the median When there is a great deal ofdispersion in the data, it is best to calculate its amount, and report this information along-side any resulting financial analysis, so that the reader can form an opinion regarding thelevel of risk for which the resulting analysis is not accurate Dispersion can be determinedwith the standard deviation calculation This measures the average scatter of data aboutthe mean by arriving at a figure that represents the average distance of every data itemfrom the midpoint A large standard deviation means that the range of data is quite varied

esti-In such cases, one should be wary of any resulting summarization of the data, since thereare many possible outcomes that vary substantially from each other

The standard deviation can be converted into the coefficient of variation by ing the standard deviation by the mean of the data The coefficient of variation is a moreuseful number, because it restates the standard deviation in terms of a percentage Forexample, a standard deviation may be 152.7, but one cannot tell if this is good or bad until

divid-it is converted into the coefficient of variation, where one then finds out that divid-it represents

Income T axes

Fixed Costs

Variable Costs

Income Taxes

Net Profit

Predicted Loss at

Lowest Expected

Sales Level

Predicted Profit at Highest Expected Sales Level

only a 5% standard deviation from the mean, which therefore gives one good reliance onthe underlying data.

There is always a chance that the data used to make financial projections will beincorrect This risk can be related to the reader of a financial report in terms of a quan-tification, such as the coefficient of variation, or in relation to the relative level of inac-curacy that has occurred in projections in the past, or in a narrative format; in this lastcase, it is up to the reader of the report to judge how much risk is included in the presentedinformation

27-6 BUSINESS CYCLE FORECASTING

Business cycles tend to be of very long duration, involving gradual expansions and tractions of the national and international economies They are influenced by an enormousarray of issues — raw material availability, wars, earthquakes, monetary policy, and so on

con-At this level, the typical corporation will rely upon large banks, investment houses, orforecasting specialists to give it information about expected changes in the economy, for

it simply does not have the time, money, expertise, or inclination to undertake such a task

If the accountant becomes involved in business cycle forecasting, there are a ber of forecasting models that may be of use One is the anticipation survey This approachholds that the best determinant of future conditions is to poll the most experienced andknowledgeable people in the industry and summarize their opinions regarding future con-ditions Another approach is to construct a time series model that extends historical trendlines into the future; this approach can be reasonably accurate in the very short term, but

num-is similar to driving a car by peering closely into the rearview mirror A third alternative

is to use econometric models, which are complex formulations that depend upon the action of hundreds of variables; these are too expensive for a single company to maintain,but can be managed by well-funded industry trade groups or more commonly by special-ist forecasting firms A fourth approach is to use leading indicators to forecast economicchanges These are activities that have a history of changing prior to changes in the econ-omy, such as the number of new business formations, unemployment insurance claims,and capacity utilization If a small number of leading indicators are tracked that have aspecific bearing upon the conditions within one’s industry, it is possible to obtain a gen-eral idea of near-term economic conditions

inter-What approach should the accountant use in creating forecasts? One alternative is touse the national forecasts that are published in the major business magazines on a regularbasis However, these apply to the economy as a whole, and may have little applicability

to a specific market niche A more accurate, but more expensive, approach is to hire a casting firm that can develop a forecast for a specific subset of the economy Finally, onecan develop an in-house forecasting capability Under this scenario, it is best to work withthe management team to develop a small set of key variables that they believe has thelargest impact on the business cycle within the company’s industry Then collect data aboutthese variables for as many years in the past as possible, and compare them to actual busi-ness conditions over time to see if they are correlated If so, initiate a system for collectingthe variables on a regular basis, and then develop a simplified spreadsheet model intowhich they can be loaded for forecasting purposes Before sharing the results of this modelwith the management team, be sure to summarize the variables and key assumptions used

fore-in the development of the model, so that management will have a general understandfore-ing ofits formulation Finally, the actual business cycle results should be compared to predictedresults to see if the model works properly, and adjusted as necessary to bring it into closeralignment with actual results This last approach to forecasting is clearly the most time-con-suming one to implement, but can result in the best information, especially if a great deal

of time goes into its creation, data collection, and ongoing maintenance

27-7 SUMMARY

The accountant will be called upon to provide financial analyses on nearly any topicimaginable —whether to buy capital equipment, invest in different types of securities,select a price point for a new product, replace manual labor with automation, and so on.There is no way to prepare the accountant for every possible situation that may arise, sothis chapter has focused solely on those key concepts that are most likely to arise on themost frequent basis These are the cost of capital, capital budgeting, breakeven analysis,risk analysis, and business cycle forecasting The concepts included within them can becombined and built upon to derive financial analyses for more topics than those pre-sented here

28-1 INTRODUCTION

The accountant can no longer be skilled in just the management and technical aspects ofaccounting The continuing need to improve the efficiency and effectiveness of theaccounting function has driven organizations to install the most technologically advancedaccounting software systems, which allows them to automate some functions, pull in datafrom other departments that was not previously available, and issue timely and speciallyformatted reports on an ongoing basis that are of great use in running the modern busi-ness In order to use these systems properly, the accountant must understand how to cre-ate a management information systems strategy, select software, and install and test it.There are other technology-related issued to be aware of as well, such as informationsecurity, automated data collection and storage systems, electronic data interchange, andthe shifting of selected computer functions to suppliers This chapter addresses the keyissues behind each of these topics

28-2 THE MANAGEMENT INFORMATION SYSTEMS STRATEGY

The adoption of new management information systems can be an extraordinarily sive commitment that can channel a great deal of management effort into its installationand away from other projects If the installation is not directly associated with a com-pany’s overall strategic direction, then an excessive amount of both funding and manage-ment time will be redirected away from the organization’s primary focus

28-6 INFORMATION SYSTEM SECURITY 393

28-7 AUTOMATED DATA COLLECTION TOOLS 395 28-8 DATA STORAGE TOOLS 396

28-9 INTEGRATION OF ACCOUNTING SOFTWARE

WITH OTHER SYSTEMS 398 28-10 ELECTRONIC DATA INTERCHANGE 401 28-11 OUTSOURCING MANAGEMENT

INFORMATION SYSTEMS 402 28-12 SUMMARY 407

To keep management information systems closely aligned with overall corporatestrategy, it is very important to determine their place within the overall strategy To do this,one should document all of the technologies currently being used, including the variousmethods of data capture, software applications, and abilities of the staff that runs thosesystems Then compare this information to the data that the company needs to collect, thetypes of software applications needed to collect and manage this data, and the technicalplatform needed to support the software The comparison should reveal several very spe-cific shortfalls that must be corrected in order to align the company’s management infor-mation systems with the overall corporate strategy.

With this list of specific issues in hand, it is then much easier to create a plan forrolling out the changes, which should include a budget for all monetary and humanresources needed to implement the changes

A final issue is that one should create a procedure that calls for the regular review

of the company’s strategic plan to ensure that the revised management information tems are continuing to support it By taking these steps, a company will focus its resourcesmost effectively on the support of its overall strategy, and not channel an excessiveamount of funds and effort into the wrong management information systems

sys-28-3 SOFTWARE EVALUATION AND SELECTION

The accountant is likely to become deeply involved in the evaluation and selection of anaccounting software package at some point during his or her career When this happens,the chief issue to consider during the process is what features are needed for the software

to be acceptable to the buyer The following list of features is grouped by the type ofaccounting module most likely to be found in the software, and covers the most importantaccounting features:

1 Accounts payable This module includes those transactions that require the most

time by accounting clerks, and so should be designed for the highest level ofaccountant efficiency, including “hot keys” to shift quickly between screens, a sim-ple user interface, and an automated three-way matching process The key features

it should contain are:

• 1099 reporting All companies are required to issue 1099 forms following the

end of each calendar year to non-corporate entities for payments made by thecompany to them during the year The software should allow one to flag theseentities for easy identification, as well as to print out the necessary 1099 form.Since the 1099 format can change from year to year, the system should alsoallow for minor adjustments to the format of the report

• Allow for purchasing approval at the receiving dock An advanced feature is to

allow open purchase orders to suppliers to be accessed at a computer terminal atthe receiving dock, so that the receiving staff can check off those purchase orderline items that have been received as soon as they arrive at the dock This is acrucial means for reducing the effort involved in three-way matching

• Automated clearing house (ACH) payments An advanced feature is to transmit

a set of electronic payment requests directly to the company’s bank from thesoftware, requesting the electronic transfer of funds straight to the accounts ofsuppliers This avoids the need for a time-consuming check run

• Bank reconciliation The software should list all checks that have not yet

cleared the bank, so that the person performing the bank reconciliation can checkthem off on the computer, based on their presence in a bank statement The bankreconciliation function may be listed elsewhere in the software, but it is largelybased on this activity

• Cash forecast The software should determine the amounts of cash that will be

required to pay for accounts payable that are already stored in the accountingdatabase, based on the dates when they are due for payment

• Identification of discount payments The software should flag any payments for

which the company will earn a discount if it pays early In addition, there should

be a user-defined field that represents the minimum discount percentage that will

be flagged, on the grounds that a very small discount will not be worth the ciated cost of funds if the associated invoice is paid early

asso-• Linkage to electronic data interchange (EDI) The data entry of supplier

invoices is a very time-consuming and error-prone task that can be avoided if thesoftware contains an EDI interface that will automatically translate incomingelectronic invoices into the proper format and enter them into the accountingdatabase —without any manual intervention

• Pay based on receipt, rather than supplier invoice An advanced feature is to

pay suppliers upon the approval of the receiving personnel, who verify thatincoming goods are noted in company purchase orders This feature entirelyavoids the use of supplier invoices as the basis for payment For it to work appro-priately, the system must include sales tax tables for all of the jurisdictions fromwhich suppliers are sending goods, in order to ensure that sales taxes are paid

An alternative is to calculate use taxes and remit them directly to governmentauthorities, but this will still require the use of tax tables

• Print supplier checks The software should support the printing of check-based

payments to suppliers The software should allow for adjustments to the layout

of the check form, so that any type of form can be used An advanced form ofthis feature is to transmit a file containing all prospective payments to the com-pany’s bank, which will print and mail the checks on its behalf

• Select payments by due date The software should automatically determine

which payments are due as of a date that is manually input by the user, and allowthe user to manually exclude any items that will be paid at a later date

• Simple entry of data from supplier invoices The software should allow one to

set up default information for each supplier, such as a default expense account,payment term, and discount rate, at the time when it is initially entered into thesystem, so that this information will not have to be entered again in the future

• Simplified payments to one-time suppliers The software should allow the user

to avoid the entry of detailed payment information (such as address, defaultaccount number, and 1099 flag) for suppliers who are only paid one time.Instead, a simplified data entry process should be available for these payments

• Three-way matching An advanced feature is for the software to automatically

cross-check the existence of a purchase order, a supplier invoice, and receivinginformation for each item to be paid, and warn the user of any discrepanciesamong these three sources of information This level of automation greatly

reduces the workload of the accounts payable staff, which must otherwise duct this research manually.

con-• Void checks The software should provide for a simple check-off function that

allows one to quickly void a check, so that the related expense account is matically credited and the cash account is debited

auto-2 Accounts receivable This module focuses on two primary functions, which are the

creation of customer billings and the receipt of cash The most essential features ofthis kind of software are:

• Aging reports The software must create a report that itemizes when payments

are due from suppliers The on-line report should also include some degree ofinteractivity, so that clicking on a listed invoice number will switch the user to ascreen that lists the details of each invoice

• Bank reconciliation Part of the bank reconciliation process is to have the

soft-ware present a list of all cash receipts that have been received in the past month,

so that one can check them off as having been received, as per the bank ment The other portion of the bank reconciliation process is checking off cashedchecks, which is noted under the listing of accounts payable functions

state-• Billings by job An advanced function is that the software should summarize the

labor and materials costs charged to a specific job and carry this information ward into an invoice for billing purposes The billing should include defaulthourly rates for each person billed, as well as a default price for each part orproduct billed

for-• Cash application The software should allow one to easily apply cash to either

specific invoices or to expense accounts, as well as allow for partial payments,the use of discounts by customers, and immediate write-offs of remaining bal-ances by the person applying cash through the software

• Cash forecast The software should automatically determine the dates when

cash is expected to be received from each customer, based on the originationdates or due dates of the invoices sent to them, which can then be used as part

of a cash forecasting function A more advanced feature is for the software tomore precisely determine the dates when invoices are most likely to be receivedfrom customers, based on the individual payment history of each customer

• Collection notes The software should allow the collections staff to store their

collection notes on-line, alongside each invoice being collected An advancedfeature is for the system to automatically issue reminders to the collection per-sonnel regarding when they are supposed to contact customers to follow up onpayment issues

• Collection statistics An advanced feature is for the software to automatically

determine the collection statistics for the collections person assigned to eachinvoice, such as the average time required for collection

• Credit hold flag The software must have a feature that allows the collections

staff to flag a customer’s account, indicating that no further shipments will bemade to it until pending credit issues are resolved A key issue is that the soft-ware should not just issue a warning regarding these customers, but must com-

pletely shut down any processing of related orders, so that the company does notwaste time processing orders that may never be shipped.

• Customer statements The software should be capable of creating a periodic

report for customers that itemizes all outstanding invoices, as well as when theyare due for payment A more advanced feature is to render this information into

an e-mail format for automatic delivery to customers, thereby avoiding the cost

of mailing the statements

• Dunning e-mails An advanced feature is for the software to issue warning

e-mails to customers that notify them when payments have not been received on

a timely basis The timing, repetitiveness, and content of these messages should

be controllable by the user

• Dunning letters The software should be able to print out a series of

pre-formatted dunning letters that vary based on the time that has passed since aninvoice became overdue The content of these letters should be adjustable by the user

• Electronic data interchange billings An advanced feature is for the software to

automatically reformat invoices into a standard EDI transaction and send them

to customers This will also require the use of a flag that tells the software whichbillings are to printed and which are to be sent out electronically

• Finance charge processing The software should notify the user of any invoices

that are so overdue that they qualify for an additional billing of finance charges,and create the invoice containing this charge, if so approved by the user

• Multiple bill-to and ship-to addresses The software should at least contain

space for multiple ship-to addresses, and preferably for a number of bill-toaddresses as well This is crucial in some industries, such as retail stores, whoseshipments may be sent to hundreds of different locations Be sure to ascertain themaximum number of addresses allowed by the system, and compare this to theexpected number of addresses per customer

• Web linkage to on-line credit reports An advanced feature is to include an icon

in the software that allows collections personnel to quickly jump from the house accounting software to an external credit reporting service, such as Dun &Bradstreet, so that they can verify credit information about new or existingcustomers

in-3 General ledger This module requires a number of key capabilities, such as

consol-idations, financial reporting, account setup, and drill down for researching tions Here are some of the most crucial capabilities to look for:

transac-• Account format copying The software should allow one to quickly replicate a

pre-determined set of accounts for other uses For example, one should be able

to create a set of accounts for one company, and then copy the codes in theirentirety to another company or subsidiary This can be a great time saver whensetting up the chart of accounts for multiple entities

• Account formatting The software should allow one to create any possible

for-mat for account codes, including coding for companies, departments, productlines, and so on The number of allowable digits in the account code should be

at least a dozen There should also be a feature that allows one to link level accounts to master accounts, so that results reported in the subsidiaryaccounts will roll up into the master accounts.

subsidiary-• Cost allocations If a company expects to charge out costs to various functions

or activities from cost pools, then the accounts designated as cost pools shouldhave a feature that allocates a pre-set percentage of costs to pre-determinedaccounts An advanced feature is for the allocation percentages to be automati-cally changed in each period based on the amount of costs or other activities thathave occurred in other accounts

• Create financial statements The software should contain a boilerplate version

of the financial statements that is already available for use There should also be

a report writer that allows one to make adjustments to the basic layout of thesereports Further, the report writer should allow one to create specialized reportsbased on specific accounts and multiple years of data

• Drill down capability A key feature for research purposes is for the software to

allow the user to access a transaction at a summary level, and then “drill down”through many layers of detail to find the root cause for the transaction For exam-ple, an excessively high cost of goods sold total might require one to access the vari-ance accounts within the cost of goods sold, then scan through the detail for the keyvariance, then access the line item within that variance that caused the problem, andthen go all the way down to the original transaction to determine the root cause ofthe problem This represents an enormous labor savings for the accountant

• Entity consolidations If a company has a number of subsidiaries, then the

soft-ware must be able to consolidate the results of all these entities into a single set

of financial statements, which must include the capability to automatically inate any inter-company transactions

elim-• Multiple budget versions A company may use one budget for calculating

man-ager performance, another to report performance against a different target forshareholder reporting purposes, and perhaps other budgets for other reasons.Accordingly, the software should allow for the entry of multiple budgets that canthen be used during financial reporting to create different comparisons to actualfinancial results

• Recurring journal entries The software should allow one to create a journal

entry and then set it up so that it automatically repeats for a pre-set number offuture accounting periods This eliminates the need for anyone to manually entertransactions that are not expected to change A key feature is that the softwareshould offer the option to update future recurring entries if the accountantdecides to change the entry in the current period, since this eliminates the workassociated with manually updating the transactions in all future periods

• Reversing journal entries The software should be able to automatically reverse

a journal entry in the following accounting period This keeps an accountantfrom having to re-enter the system and manually reverse the journal entry Forexample, a wage accrual must be reversed in the following period, and this can

be completed most easily if the user simply checks off a reversing entry box inthe journal entry screen

• Standard journal entries The software should allow one to devise a series of

standard journal entry formats, with pre-set description fields, that can be called

up for use in each reporting period This makes it easier for the accountant toquickly run through a standard set of transactions in order to close the books.Examples of such transactions are accruals for interest expense or income,wages, and property taxes

• Statistical data fields The general ledger can be used as a data warehouse by

allowing for the entry of non-accounting information in some fields The usershould be able to enter alphanumeric information in them, so that the operating

or statistical data related to a reporting period can be permanently stored side the accounting data for that period

along-• Unbalanced entry warning A very basic function is for the software to warn the

user whenever a journal entry is made that does not contain the same dollar value

of debits and credits (for example, does not sum to zero) Otherwise, the balancesheet will not have a matching amount of debits and credits

4 Inventory/Cost costing The job costing functionality within the accounting

soft-ware tends to be spread across several other modules, rather than concentrated in aseparate module Here are the most essential features to look for:

• Backflushing capability An advanced feature is for the system to skip the use

of all picking transactions for moving inventory out to the shop floor, and instead

to have the user enter the completed amount of production at the end of the duction process, which the system then multiplies by the bill of materials foreach item to determine what inventory was used, and then subtracts this totalfrom the inventory records

pro-• Bill of materials The presence of a bill of materials should be considered a

cru-cial feature for cost accounting purposes, for it is used to define the exact tents of each product, which can then be used as a point of comparison todetermine what should have been used during an accounting period The soft-ware should allow one to include the expected scrap rate for each component, aswell as the use of sub-assemblies that can roll up into a master bill of materials

con-• Comparison to purchase order upon receipt As was also noted under the

accounts payable module, the software should allow the receiving staff to pare the detail on purchase orders to what is actually received, and check offthose items on-line, thereby eliminating much of the three-way matching workperformed by the accounts payable staff

com-• Cycle counting report generation The software should allow the user to enter a

range of inventory locations and print out a report that lists the contents of thosebins This information is then used by a cycle counter to compare actual quanti-ties to what is sitting on the shelf

• Direct and step-down allocation capability If a company likes to allocate costs

to various production functions, then its software should include the capabilitynot only to directly allocate costs from a cost pool, but also to allocate costs from

a service center into a cost pool, and thence to the final costing target

• Inventory disposition tracking It is most useful for a cost accountant to know

how each item of inventory is disposed of that is not consumed through its sion in a product There should be a number of available codes in the system thatusers can enter to describe how they are eliminating various inventory itemsfrom stock, which the cost accountant can later compile and report upon

inclu-• Inventory location tracking The software absolutely must allow for the precise

definition of inventory locations within the warehouse Otherwise, it is ble to determine where items can be found for cycle counting purposes Theideal location format should allow space for row, rack, and bin designations

impossi-• Inventory usage report This report should itemize those units of stock that are

being used most heavily, and should also offer the option of sorting in the reverseorder, so that the warehouse manager can determine which inventory items arebeing used the least

• Labor routings A labor routing is most useful in organizations in which there is

a large labor content in its manufactured goods, or where it can use this mation to schedule labor for upcoming production activities The labor routingcontains the exact types of labor categories and time required to manufacture aproduct

infor-• Linkage to bar code scanning capability The warehouse is one of the primary

areas for efficiency improvements through the use of bar coding technology.Accordingly, the software should allow one to create bar codes for both inven-tory location codes as well as identification codes for each item in stock, as well

as provide an interface for bar code scanning equipment that will send scanneddata back into the accounting system

• Multiple storage location capability An essential item is the capability to store

multiple location codes for a single inventory part number Less expensive ware packages will force one to always store an inventory item in a single pre-set inventory location, while more advanced systems will allow for storage inany location at all

soft-• Multiple types of cost layering The software should at least allow one to create

inventory layers using first-in first-out, last-in first out, and average costing This

is mandatory for external financial reporting purposes

• Multiple units of measure There should be a table in the module that allows one

to set up multiple types of units of measure that are valid for each inventory item.For example, the purchasing staff may buy tape in rolls, and so prefers to meas-ure it in rolls, while the engineering staff prefers to measure it in terms of inchesfor its bills of material This table will itemize the quantities associated with eachtype of measure, so that any designated unit of measure can be used withoutdestroying the integrity of the underlying data

• Obsolete inventory warning report This report should itemize those inventory

items that have not been used within a user-specified time period It is also ful for this report to list the quantity and valuation of inventory on hand for eachitem, so that the purchasing staff can see if there is a possibility of returninginventory items to suppliers for credit

use-• Rework tracking The system should have a field available that identifies any

jobs that are comprised of products that are being reworked The accountantneeds to determine the stage of completion for each of these jobs and determinethe labor and other costs charged to them, in order to calculate the cost ofrework

• Scrap tracking The system should have a disposition code available that can be

used to describe inventory that is thrown away This is a particularly importantfeature if a company wants to use backflushing, since any excess scrap will other-wise not be recorded in the system, and will result in incorrect raw materialinventory balances

• Transfer pricing accumulations Though only an issue for those companies that

transfer goods between subsidiaries, this function is useful for separately piling the variable and fixed costs associated with each product as it movesthrough a series of companies This information is quite useful for determining

com-a product’s minimum com-allowcom-able price, bcom-ased on the cumulcom-ative vcom-aricom-able costsassigned to it Without this costing split, a company would be forced to price itstransferred products based on their total cost, which may include irrelevant allo-cated overhead costs

• Unit cost database at different volume levels An advanced function is to have a

separate database that stores costing data for all component parts that a companyuses, noting specifically how much each one costs if production volumes change

to different levels (that is, typically higher costs if volumes are lower, and thereverse if volumes rise) This information is most valuable for budgeting productcosts for various production levels, as well as for target costing activities in whichthe accountant assists in the determination of expected new product margins

5 Payroll Though many organizations outsource their payroll function to a supplier,

many still use the full functionality of this application within their accounting ware The following functions should still be considered even if outsourcing is cur-rently used, in case a company wants to have the option to switch to an in-housesolution at some later date The key payroll functions are:

soft-• Accepts input from automated time clocks If a company has invested in

auto-mated time clocks, then the pre-formatted time keeping data generated by theseminiature computers should be readily accepted by the accounting software andautomatically converted into payroll records with minimal review needed by astaff person The worst possible software functionality would be to re-key all ofthis data into the payroll software, since it would negate the value having pur-chased the time clocks

• Allows for user formatting of check layout A different type of check format is

generally created through the payroll software than what is normally generatedthrough the accounts payable function This format should include space to iden-tify the gross pay earned, all deductions, net pay, and perhaps a notation regard-ing accrued and unused vacation and sick time Generally, the more informationallowed on the check, the less contact employees will need to have with the pay-roll staff, since they are being presented with all the information they needthrough this document

• Allows for user-defined deduction types There are a large number of potential

deductions that can be taken from a paycheck, such as garnishments, health clubfees, or dental insurance deductions The software should allow for an unlimitednumber of user-defined deductions, which will cover all possible deduction con-tingencies

• Blocks mandatory tax deductions There are a few cases involving the use of

foreign employees where mandatory tax deductions, such as social securitytaxes, do not have to be deducted from their pay If a company has theseemployees, the software must be able to block these deductions from the stan-dard payroll calculation

• Calculates time worked from time cards Rather than forcing a staff person to

manually calculate all hours worked from a time card, the software shouldallow one to enter each employee’s start and ending times for each day, fromwhich it will calculate hours worked Depending upon company pay policy,there may also be a need for the software to round off these times For exam-ple, a person may clock in at 7:55 A.M., but that person’s work shift does notstart until 8:00 A.M.; accordingly, the software can automatically round the starttime up to 8:00 A.M Further, it may be necessary for the software to automati-cally deduct the standard time period allowed for lunch or other types of breaks

It is also useful for the software to generate a report that itemizes those ees who have punched in but not out, or vice versa, so that the payroll staff canresolve these discrepancies

employ-• Linkage to direct deposit function If the company provides direct deposit of

payroll funds to employee bank accounts, then the software should provideeither a tape of these transactions to the company bank for direct deposit pro-cessing, or else generate an electronic transmittal containing this information

• Payment reversal function There are times when paychecks must be backed out

of the system This can be a painful process, involving the reversal of the tude of possible accounts that are used to distribute expenses on a paycheck Thesoftware can ease this process by providing a simple check-off field that willautomatically reverse the function

multi-• Records different types of hours worked There should be fields available that

will describe every type of time that a company uses For example, employeesmay categorize their time as sick time, vacation time, jury duty, military leave,overtime, or regular hours

• Records time worked by job In many industries, billings to customers are

pri-marily based on jobs completed, rather than products shipped If so, the softwaremust allow for the creation of job numbers and the subsequent application ofhours worked against those jobs The software should also allow one to splithours worked between multiple jobs and transfer time worked from one job toanother, and allow for the closure of jobs, so that no additional time can becharged to them

• Regularly updates tax tables The software provider should issue tax tables as

part of the maintenance agreement that updates the software Any problem inthis area can result in significant potential liability to a company, and so should

be grounds for the immediate transfer of the payroll function to some other ware or to an outsourcing firm.

soft-• Transfers existing employees among departments Employees will sometimes

change the departments in which they work If so, the software should track thischange, keeping a record of both the old department and the new one It is notacceptable to store just a single department in the software, since this means thatall payroll costs for an employee for all dates prior to the transfer will also showthe employee as working in the new department, which will unfairly record theperson’s pay in the new department for as far back in time as the payroll systemstores payroll data

• W-2 form preparation The software should automatically generate W-2 tax

reporting forms for all employees, as well as allow for changes in the W-2 reportformat, so that it can easily be matched to any changes in the form that the fed-eral government may make from year to year

6 Purchasing Though the purchasing function is generally considered to be separate

from the most common accounting activities, a purchasing package that is closelymeshed with the accounting software results in significant efficiencies in the pro-cessing of accounts payable Here are the key functions to look for in a purchasingsoftware package:

• Automated requisition processing Employees should be able to log onto an

electronic requisition form and enter the items they need This information isimmediately transferred to the screens of the purchasing staff, who use it tocreate purchase orders

• On-line supplies catalog An advanced feature is to have an on-line supplies

catalog available to employees They can scan through the various items forwhich the purchasing staff has already negotiated bulk purchasing deals withsuppliers, enter their ship-to addresses, and the system will automatically bypassthe purchasing department and issue orders directly to suppliers, who in turn willsend the supplies straight to the ordering employees

• Blanket purchase order tracking The system should automatically compile a

list of all receipts that were ordered under a blanket purchase order, so that thepurchasing staff can see how much of an ordering commitment it has stillremaining under the blanket order

• Commodity volume tracking The system should categorize each item purchased

by commodity code, and regularly summarize the quantity of commodities chased, both in terms of units and dollars ordered This is most useful for re-shuffling the workload of the purchasing staff, each of whom is usually assigned

pur-a specific commodity code for purchpur-asing pur-activities

• Electronic data interchange transactions The software should allow one to

issue an EDI transaction to a supplier The software should automatically vert a purchase order into EDI format and transmit the transaction to the sup-plier This may call for a custom interface to a separate EDI transmissionpackage

con-• Linkage to material requirements planning (MRP) system The purchasing staff

can plan for purchases much more easily if the purchasing software is linked to

an MRP system An MRP system determines the exact amount and timing of allpurchases related to the upcoming production plan, based on material quantitieslisted in the bill of materials and on-hand raw material inventories A high-endMRP system will even create purchase orders for review by the purchasing staff,

or bypass the manual review stage and place orders directly with suppliers

• Purchase order transfer to three-way match processing The purchasing

soft-ware should be linked to the accounts payable softsoft-ware, so that the accountspayable system can automatically reference issued purchase orders during thethree-way matching process in order to ensure that received items were properlyordered by the company

• Supplier performance tracking An advanced feature is for the software to

auto-matically compile performance statistics on each supplier This may include thetime variance between when items are supposed to be delivered and when theyare actually received, or the percentage of items that are rejected based on poorquality The system can even compile reports and automatically issue them as aperiodic “report card” to suppliers

• Track receipts against due dates The software should notify the purchasing

staff when there are shipment due dates coming up in the near term that may callfor a verification phone call to the supplier to ensure that the shipment is indeed

on its way Alternatively, the software can warn the purchasing staff whenexpected receipts have already passed their expected due dates

7 Report Writer Though the report writer is not usually treated as a separate module

within an accounting system, it is an extremely important part of the overall system,for it allows one to group and summarize data in ways that cannot be anticipated bythe pre-formatted reports that were created by the software supplier Here are keyfunctions to look for:

• Download to multiple formats Any report format created should download with

minimal keystrokes into any of several popular formats, such as *.wks, *.wk1,

*.doc, or ASCII The main point is that the downloadable format availableshould be the one most used by the company— there should be no need to con-vert all other electronic spreadsheets, databases, and word processing packagesthroughout the organization to the format used by the accounting software

• Linkages to multiple tables There are dozens of different data tables in which

accounting information is stored The most primitive type of report writer willonly allow reports to be created from a single table, which greatly restricts thetypes of reports that can be created A much better approach is for the reportwriter to link a number of tables together, so that data can be pulled togetherfrom multiple sources

• Pre-formatted reports There should be a formatting template integrated into the

report writer that allows the user to specify different margin and header settings,

as well as the proper formatting of rows, columns, subtotals, and totals

• Conversion of reports to HTML The report writer should allow the user to

con-vert a completed report into hypertext markup language with a single keystrokeand then paste the resulting report into a Web page, so that the report can beviewed by anyone with access to the company intranet site

• Automatic report content updating If the preceding HTML conversion

capabil-ity is available, the report writer should also have the capabilcapabil-ity to automaticallyupdate the data on the report, so that users can view data in real time, rather than

as of the date when the original report was created

• Query capability Beyond the basic capabilities of the report writer lies the

query language This is a search engine that should allow a user to input a shortstring of characters related to a search for data that is sufficiently precise for thecomputer system to return the desired information The query language can be

in free-form text, or in a more rigid format with specific data entry fields Thefirst format is more powerful but more difficult to learn, while the latter formathas the reverse attributes

8 General The following issues should also be considered when purchasing

account-ing software, but cross over the functionality of any saccount-ingle software module

• Hot keys for rapid screen switching An expert user will not want to work her

way through a series of windows to reach the required one, but would ratherenter a few keystrokes that are specifically related to the screen in question.These “hot keys” may either be pre-set by the software designer or designated

by the user

• Linkage to Internet help site A useful feature is for the software provider to

maintain a web site that lists crucial responses to problems that other users havediscovered with the software This may include patches to bugs, lists of fre-quently asked questions (FAQs), or a complete index of help files Such sites can

be much more informative than the help screen typically provided with the ware, and is certainly more up-to-date This feature works best when there is anaccess button on the screen that takes the user straight to the Web site

soft-• On-line help screens The software should always have a complete set of help

screens that itemize the various accounting functions and how they are to beused This should include a table of contents or index that allows the user to enterthe first few letters of the topic about which help is needed, which will bring up

a list of close matches

• On-line software tutorial Though the accounting staff may be sent off to

train-ing classes prior to ustrain-ing a new accounttrain-ing system, refresher traintrain-ing is stillrequired for those functions that are rarely used, as well as new training foremployees who are hired after the initial training took place A good solution tothese issues is computer-based training (CBT) The software provider shouldhave training modules available for all aspects of its software, preferably includ-ing module quizzes that can be used to test the comprehension of the staff

• Pull-down menu options Though this may seem obvious, some older

character-based software does not contain any pull-down menu system that allows newusers to more easily navigate their way through the maze of screens Instead,

they must work their way up and down through a hierarchy of screens to reach

a small number of master lists of screens; this is much less efficient than down menus

pull-• Security at multiple levels The type of security needed for the computer system

will vary with the structure of the business using the accounting software Forexample, a single computer that houses the entire accounting system will onlyneed security to access the entire computer, since only one person will be usingthe machine — all others are locked out However, multi-user systems willrequire more specific types of security The most common security system is toset up a permissions profile for each user that allows him or her access to spe-cific applications within the accounting system More detailed (but less com-mon) security systems can also restrict access to specific screens or fields withinscreens It is also possible to specially format screens that only reveal certainfields, which is an alternative approach for providing field-specific security

• Windowing capability There are a few instances when the accountant may need

to flip rapidly between screens of information, or at least set up screen tion side-by-side on the computer terminal If so, it can be useful to have a win-dowing capability that allows one to maintain multiple windows on thecomputer screen at the same time

informa-In addition to the items just noted, one should investigate the level of customer port provided by the software supplier Some of this information can be obtained simply

sup-by visiting the supplier’s web site, since it is increasingly common for them to maintainextensive on-line help files In addition, it may be possible to obtain copies of their doc-umentation, to see how complete it is Also, the supplier should offer a complete set ofcourses designed to educate users in the basics of operating the software, as well asadvanced topical areas, such as report writer usage and the construction of queries.Further, one can see if there are any active user groups for the software in the local area,and contact their members to obtain unbiased commentary regarding the level of supportprovided by the supplier The importance of this topic will increase with the price of thesoftware, since a software package that cost a great deal, but that no one can use, will notenhance the rest of a company’s opinion of the accounting department

One should also determine the size and location of the supplier’s support staff If it

is too small, it may not be able to handle large incoming call volumes, nor provideanswers at any time of the day or night If it is concentrated in a central location, it is likely

to only be accessible during the business hours of the time zone in which it is located.Another issue is its financial condition; any organization without sufficient funding

is unlikely to invest enough resources in the continual upgrading of its software, while itscustomers are also at risk of losing key customer support services if the supplier goes intobankruptcy

Yet another factor is the number of other customers that are using the supplier’s ware If there are few customers, this will impact the amount of maintenance fees col-lected by the supplier, and therefore its financial condition Also, a small number ofcustomers does not give a company much of a selection when making reference calls dur-ing the software selection process If there are few customers, it may mean that the soft-ware has only just been rolled out, which may indicate the presence of an excessivequantity of software bugs that have not yet been found by customers A final issue for

soft-more advanced computer systems is that the supplier should be able to test one’s softwarethrough the use of remote diagnostics, so that its customer service personnel can seeexactly what problems are occurring.

Another issue related to software selection is its cost There are several factors toconsider besides the initial purchase price There will usually be a maintenance feecharged each year that can be as high as 18% of the original purchase price If the pur-chase price was heavily discounted, the supplier will probably calculate the maintenancefee as a percentage of the original price, rather than the discounted price Also, the sup-plier may offer on-site training classes, though the company must pay for the travel cost

of the trainer This is usually a less expensive option than sending employees to the plier’s location if there are so many employees to be trained that their travel cost willexceed that of the trainer Also, it is generally not acceptable to use a “train the trainer”approach, since there will be a loss of knowledge when the supplier only trains a few peo-ple and then relies on these employees to turn around and train other staff

sup-Another cost issue is the programming related to adjustments that the companymakes to the software If this programming is conducted by the supplier, the time requiredmay be somewhat less than if other programmers are used, since they have a better knowl-edge of the underlying software code However, the entire concept of modifying softwareshould be discouraged, since it prevents a company from taking advantage of futureupgrades to the software package that are routinely issued by the supplier, since anupgrade would wipe out custom programming that had previously been added to the soft-ware

Of all the preceding factors to consider when purchasing new software, the ant will probably feel that only a small proportion are truly essential to company opera-tions If so, these key items should be used to judge the worth of each software packageunder consideration It may be useful to assign a priority weighting to each factor, so that

account-a numeric score caccount-an be constructed for eaccount-ach paccount-ackaccount-age, with the winning paccount-ackaccount-age being theone with the highest score

Even though a software package may have received a high score, this does not matically qualify it for purchase The buying company should also make reference calls

auto-to other current users of the software, using a standard checklist of its own devising thatfocuses on the issues that are most important to it It is quite important to call customers

of the supplier that have not been recommended by it, in order to gain access to customerswho may have had problems with the software To obtain the names of these customers,one can go to local support group meetings, or call the customers recommended by thesoftware supplier and ask them if they know of other customers who are not on the sup-plier’s official reference list

It is also useful to have the supplier conduct an on-site demonstration of the ware If this is done, the company’s evaluation team should construct a set of questions toask prior to the demonstration that focus on the most crucial functions Otherwise, thesalesperson demonstrating the software will tend to channel the discussion toward thenifty “bells and whistles” that make the software look good

soft-A final way to review the software is to conduct site visits that take the company’sreview team to the locations of other companies that have previously installed the soft-ware It is important to only visit sites where the software has been completely installed,

since the point of the visit is to determine the level of implementation difficulty for all

software modules, as well as how it has been integrated into the manual systems that round the software Once again, the team should construct a standard list of questions to

sur-ask before making any site visits, so that the responses to a standard set of questions can

be compared, as well as to ensure that all key issues are addressed during the visits.Once the software has been selected based on the preceding reviews, it must beinstalled, as is described in the next section

28-4 SOFTWARE INSTALLATION

Only under the most limited circumstances can one simply buy an accounting softwarepackage over the phone, shove the resulting CD delivery into the computer’s CD drive,and install the software in a few minutes This is not possible if there are many computersthat must access the software, since a more complex installation must be made throughthe central file server It is even more difficult to install if the software has been designedfor very high transaction volumes and large numbers of users, for these are installed oncomplex systems that may require weeks or even months of customized installation effort

It is also a problem when there is a pre-existing system in place, since the data from theold system must be converted over to the format used by the new system, and checked toensure that it is correct If there is a need to run portions of both systems at the same timewhile the conversion takes place, then a team of programmers must construct interfacesbetween the old and new systems for use during the transition period, so that data can beexchanged between the two systems For these reasons, it is important to plan carefullyfor the installation of accounting software

On the assumption that the system installation will be a complex one, the ant should be prepared to develop a comprehensive infrastructure to deal with it The firststep is to obtain approval of the funding for the software and all accompanying installa-tion costs (which can be as much as five times the cost of the software itself) from the sen-ior management group However, this is not the last action taken by senior management,for someone from this group must also agree to be the champion for the project Since themore complex installations can require several years of effort and the active assistance ofvirtually all departments, this person must be willing to support the installation effort evenover the objections of some parts of the company

account-Once this groundwork has been laid, a competent manager must be re-assigned tothe full-time task of managing the installation This person will in turn obtain the full-timeservices of an experienced project team The words “full time” recur in this discussion,because the people being shifted to this project already have full-time jobs doing some-thing else, and will likely continue to spend much of their time on those other activities,

to the detriment of the software installation Accordingly, they must be loaned to theinstallation project full time and for the duration of the installation, with no work obliga-tions to their original departments

Though this group may be highly experienced in the inner workings of the company,they may have little experience in the area of software installation Accordingly, it may beuseful to hire a small group of consultants whose experience is centered on the properinstallation of the specific type of software that the company has purchased Though con-sultants are very expensive, their advice can greatly reduce the time period required tocomplete a successful installation, as well as help to avoid unnecessary expenditures onsystem modifications

With the proper team in place, the next step is to develop a work plan This ment should itemize the milestones, due dates, and resources required for each of the hun-

docu-dreds of steps involved in a proper software installation Particular attention should bepaid to the interrelationships of the various modules that comprise the accounting soft-ware, since it is very likely that they can only be installed in a certain order, or in specificgroups, due to the interactive nature of the data that they use If some modules will beinstalled without other supporting modules, then the plan must also allow sufficient time

to design, program, and test interfaces between the new modules and the old software thatwill eventually be replaced The planning process can be so complex that a full-time plan-ner is needed just to maintain the work plan

Management tools will be needed to assist the planner This should certainly include

a computerized project tracking tool, such as Microsoft Project, and be supported by acomplete set of status reports from each team leader There should also be an issues logthat lists all problems that have arisen during the installation process These issues should

be brought to the attention of the project team at daily meetings, with responsibilitieshanded out for the fixing of each item It is also important to maintain a log of softwarechange requests, which should include an estimate of the time and resources required tocomplete each one This is a valuable tool in identifying the specific changes that willcause due dates to slip and budgeted costs to be exceeded

The project team must also analyze the risks associated with the installation Thesewill vary greatly by company, but here are some of the most common that should beaddressed:

• Software failure If the software has been installed in few locations, is a new

release, or has not be installed on the hardware platform that the company intends

to use it on, then there is considerable risk that the software will not function asplanned Though one way to resolve the issue is not to buy the software, the instal-lation team may have been presented with a signed purchasing agreement and have

no input into the issue If so, there are several ways to mitigate this risk If the risk

is related to the type of hardware platform used, then part of the project plan can

be to conduct a test installation on the hardware and run a series of transactionsthrough it to see if there are problems If there are, then the team can request aswitch to a more acceptable type of hardware early in the project before too manyresources have been committed, or at least arrange to have the software supplierdirectly assist in the installation If the software itself runs a high risk of contain-ing bugs that may halt the processing of key transactions, then the software should

be tested early on with a series of sample transactions, so that the bugs can be tified and evaluated

iden-• Employee resistance The installation of new software involves a number of

departments, and is likely to cause changes in the work routines of some ees in each department If so, it is quite common to meet with resistance from someemployees Given past experiences with the staff, it is possible to identify whothese employees are likely to be, so that the project team can arrange to have thempersonally review the software and suggest some changes that may increase theirfeeling of buy-in to the installation If this does not work, then the team shouldmake arrangements early in the project to have these employees removed from anypositions in which they can influence the installation in a negative way

employ-• Lack of management support A key item is that the team may lose its key sponsor

within the management team This issue is crucial, and so should be mitigated

con-tinually by working with the current project sponsor to increase the number of agement supporters, as well as to identify any back-up sponsors in the event of themain sponsor’s departure from that position.

man-• Lack of funding A major software installation can require several years of effort,

and so is subject to the vagaries of company finances and the need for funding bycompeting projects To reduce this risk, the team should schedule the least neces-sary software installations or custom programming work toward the end of theproject, so that the key functions will be covered by the current budget

Even though the purchased software may have been tested extensively by the plier, and already be installed in hundreds of other locations, there are still good reasons

sup-to test it One is that cussup-tom interfaces may have been created between the packaged ware and other legacy systems maintained by the company— these should certainly betested Another reason is that the hardware platform or network configuration may be aunique one for which the software was not originally created — this too must be tested Yetanother reason is that the volume and type of transactions may be unique, and so shouldalso be tested Without proper testing, the result may be a software installation that istheoretically installed, but which is barely operational This topic is covered in more detail

soft-in the next section

As just noted, there may be a need for interfaces between the packaged software andother programs For example, there may be a custom-designed inventory tracking data-base in place that should be connected to the accounting software, so that inventory valu-ations can be compiled from it Similarly, there may be an electronic data interchangesystem that must be linked to the accounting package in order to automate the transfer oftransactions through the EDI system Further, it is quite common to install packaged soft-ware in a series of discrete steps, so that only one module at a time will become opera-tional When this approach is used, a custom interface must be written between themodule to be installed and the other software that it must access, so that the module func-tions properly For example, if the fixed assets module is installed without anyaccompanying modules, then an interface must be written between it and the pre-existingaccounts payable module, so that newly purchased assets can be entered once into theaccounts payable module and then transferred automatically to the fixed assets module.The design, programming, and testing of interfaces can be a major activity for larger soft-ware installations

For all but the smallest organizations, there will be a large accounting databasealready in existence that must be entered into the new accounting system This can bedone manually, but is not recommended for several reasons First, the incidence of key-stroke errors will almost certainly result in a considerable number of inaccuracies thatmust later be reconciled Second, the time period required to re-enter information is solong that the conversion to the new system may require months of concentrated effort.Third, the amount of labor required to convert the data will result in a considerableexpense For these reasons, it is better to work with the programming staff to create pro-grams that will automatically convert the old formats used to store data in the old system

to the revised formats used for the new system The resulting programs should be fully tested to ensure that data will be transferred in a reliable manner There cannot beenough testing in this area, since an improperly handled data conversion will immediatelyshut down a newly installed accounting system

care-The operation of any new software will probably vary in some respects from thesoftware that it is replacing If so, this may call for different procedures within theaccounting department, not only for using the software, but also for any manual proce-dures that are linked in some way to it, and that must therefore be altered to reflect thechanges in the software The project team should review the need for procedural changes

as early as possible, in order to estimate the probable extent of work required in this area

If the required changes are extensive, a separate team should be assigned to work onchanges in the process flow, while an experienced procedure-writing team updates anyexisting manuals or creates new ones

The accounting staff will require training in the use of the new system Though thiscan be provided either by the software supplier or a local training provider, it is alsoimportant to develop in-house training for those transactions considered to be critical tocompany operations, so that a carefully defined training class can be offered to newemployees on an as-needed basis Some software suppliers also offer computer-basedtraining that is available either on compact disk or via the Internet

A key training issue is its timing People receiving training will rapidly lose theirnewly acquired knowledge if they cannot put it to use immediately Consequently, train-ing should be scheduled for a period within just a few days of the cut-over to the newsoftware

The project team must also plan for the cut-over from any existing accounting tems to the new software This includes not just the time period when many of the just-described activities are taking place, but also the first month of operations on the newsystem, since this is the period when software glitches and additional training issues aremost likely to arise The cut-over phase should include a great deal of fine-tuning of sys-tem performance, to ensure that response times fall within previously defined parameters.Planning during this period should certainly include the use of a greatly enlarged helpdesk, staffed by senior team personnel, that can quickly address problems as soon as theyarise Careful planning in this area is crucial to the successful installation and acceptance

sys-of a new accounting system

It is evident from the previous discussion that a great deal of coordinated work bymany specialists is required to ensure that a software installation is successful One cantherefore equate the presence of a properly supported, fully staffed project team with thesuccess of any new accounting software

28-5 SOFTWARE TESTING

The type of software testing required for new accounting software will vary greatly,depending upon the type of software, the amount of required customization, the type ofsoftware rollout used to replace the existing software, the transaction volumes that arelikely to be run through it, the type of hardware and network platform upon which it willrun, and the set of manual procedures with which it is expected to mesh For example, asoftware package that has already been installed thousands of times by other companies

on all kinds of hardware and network platforms will probably not require much testing ofany kind However, if a number of changes must be made to it to fit it into the existingenvironment, then all changes must be carefully tested Also, if the software will only berolled out in pieces, with software interfaces being used to connect each newly installedpiece to existing software, then each interface will require heavy testing Further, a soft-

ware package that is to be installed on a hardware platform on which it has never beeninstalled before will certainly require testing to see if it will function properly in that envi-ronment In addition, if very large transaction volumes are expected, then these volumesshould certainly be run through the new system in a test environment to ensure that it canhandle the load And if the software is completely custom-designed, then nearly everypossible type of test must be conducted on it to ensure that it is fully functional and meetsuser requirements.

There are many types of software tests, which can be mixed and matched to fit theneeds of any type of software Here are some of the most common ones:

• Delivered package test This is a comparison of the functionality within a

soft-ware package to the requirements defined by prospective softsoft-ware users Theresult is a list of missing functionality that must be custom designed and added tothe software

• Acceptance test The eventual users of a software package (or custom-built

soft-ware) are asked to test the new software to ensure that it meets their needs To avoid

an excessively lengthy testing period, the testing should be restricted to only themost critical functions

• Unit test When software has been modified, this test is used to check its

func-tionality within the specific software module within which the change was made

• Volume test A large quantity of test transactions can be run through the software

to see how response times will be reduced This is very useful for “tuning” the tem to ensure that maximum permissible response times are not exceeded

sys-• Integration test After software changes have been made to specific software

mod-ules and have passed a unit test, an integration test should be completed to ensurethat the modified software module will still interact properly with other softwaremodules

• Installation test This test ensures that the software works in a production

envi-ronment, which simulates the actual computing environment of the company Thisreview is a comprehensive one that includes the use of data that have been con-verted from the old system that the new one is replacing If the company isinstalling the software in many locations throughout the company, and there is amix of hardware platforms on which it is to be installed, then the installation testshould be conducted separately for each of the platforms

Software testing can involve a number of personnel over a long period of time, andwill probably result in a number of possible changes Due to the investment in time andpersonnel at this stage of a software installation, it is important to have a control system

in place that will efficiently deal with the flow of resources for each test, to ensure thattests are conducted efficiently, and that software-related problems are addressed in amethodical manner

The software testing plan should begin with an overview of the entire process, followed

by an itemization of the entire set of resources needed to conduct the tests: people, hardware,software, and testing facilities All remaining portions of the plan should be referenced back

to this resources section, so that all testing objectives are supported by a sufficient amount ofresources Here are the remaining subjects that should be addressed by the plan: