Course Name : M0034 Information and Business Process Year : 2011

The Expenditure Cycle

Session 11-12

Learning outcome
Describe the model of business process Integrate the whole model of business process Outlines the roles of Information Technology in Business Process and Organizational activities to achieve its goals

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Learning objectives
After studying this chapter, student will able to : Describe the key objectives and strategic implications of the expenditure cycle. Describe expenditure cycle data and key expenditure business decisions. Identify and document the primary activities in the expenditure cycle and the data procedured by these activities. Analyse risks and develop control plans pertinent to the primary activities in the expenditure cycle.
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EXPENDITURE CYCLE OVERVIEW AND KEY OBJECTIVES What are the key objectives and strategic implication of the expenditure cycle? The expenditure cycle consists of two phases: the purchasing phase and the account payable phase.

The purchasing phase, where the organization interacts extensively with external suppliers of goods and services.
The objective of purchasing is to procure the right goods for the right amount, and to receive those goods at the right time.
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EXPENDITURE CYCLE OVERVIEW AND KEY OBJECTIVES In order to achieve this outcome, purchases need to be: properly approved and authorised;

goods and services need to be obtained from authorised suppliers;

all purchase commitments and obligations need to be recorded accurately; and

accepted goods and services must meet quality and delivery specifications.

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EXPENDITURE CYCLE OVERVIEW AND KEY OBJECTIVES Following the purchasing phase is the account payable phase, where the objective is to pay the right people the right amount at the right time. The account payable phase ensures that payments are both accurate and timely, while ensuring that they maximise favourable settlement terms. In order to ensure the integrity of financial reporting all account payable liabilities must be recorded accurately and promptly. The expenditure cycle is strategically important to an organization, particulary in terms of the degree of alignment with overall business strategy.
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EXPENDITURE CYCLE OVERVIEW AND KEY OBJECTIVES

The expenditure cycle can provide a competitive advantage by providing high quality products and services, or by acting to contain costs. In terms of the purchasing phase failure to correctly manage purchasing can lead to systemic problems: an unreliable supply of goods and services has the potential to negatively impact revenue, production and inventory management processes. Buying too much, too little or the wrong items creates inventory problems and can lead to increased costs or a decline in revenues.

Arranging and making payments creates an exposure to potentially costly errors and mistakes, whereas poor payment practices can damage cash flow and/or supplier relationships.

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EXPENDITURE CYCLE OVERVIEW AND KEY OBJECTIVES

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EXPENDITURE CYCLE OVERVIEW AND KEY OBJECTIVES

Documents Purchase requisition Description Allows the requisitioning department to place an order for goods or services. The requisitiong departement or the inventory control section prepares the purchase requisition form. The purchase requisition document is shared only within the organization. Acts as evidence of purchase as well as a binding contract between the firm and the vendor. The purchase order is prepared by the purchasing departement. The purchase order document is shared both within the organization and externally. List of authorised vendors that offer quality good and services at reasonable prices. The vendor list is kept as part of the organizational database and is viewed and edited by the business processes in the expenditure cycle.

Purchase order

Vendor list

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EXPENDITURE CYCLE OVERVIEW AND KEY OBJECTIVES

Documents Purchase invoice Goods packing slip Receiving report Description Details the amounts due and payment terms and conditions. This document is prepared by the vendor. Generated by the vendor and attached with the goods sent to the purchasing organization. Provides details of each delivery such as vendor details, shipping weight, corresponding purchase order number and description of delivered goods. The receiving departement generates this report.

Remittance advice Use to notify the payee of the items being paid for. This document may be an invoice or a stub attached to the payers cheque or other notification. The remittance advice can be prepared by both the accounting/finance unit and the vendor (in the case of a stub that the vendor prepares).
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Expenditure cycle business decisions Strategy-level decisions would include creation of policies for areas such as: Whether the organization should consolidate purchases across units to obtain optimal prices involves a trade-off between the flexibility afforded by decentralization and the potential for economic gain provided by centralized purchasing. How IT can be used to improve both the efficiency and the accuracy of the inbound logistics functions the introduction of new technologies such as SCM may require considerable expense and incur high risks. Dependent on product volumes and values of inventory items it may be difficult to cost justify a large technology implementation of this nature.
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DATA AND DECISIONS IN THE EXPENDITURE CYCLE

DATA AND DECISIONS IN THE EXPENDITURE CYCLE Expenditure cycle business decisions Strategy-level decisions would include creation of policies for areas such as (cont): Identifying where inventories and supplies should be held options include onsite warehousing in either a centralized or decentralized format. An alternative solution is to set up just-in-time (JIT) supply chain under which goods are delivered only when they are required.

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DATA AND DECISIONS IN THE EXPENDITURE CYCLE

Expenditure cycle business decisions Typical operational decisions include: Determining the optimal level of inventory and supplies to carry requires knowledge of previous sales and/or some form of analysis of likely future sales, along with supplier data such as the lead time to supply ordered goods. Also need to know current stock levels including number of the stock on hand, stock already promised to customers and stock ordered but not yet delivered.
Deciding which suppliers provide the best quality and service at the best prices oten requires a trade-off between price, quality and service. The weighting attached to each of these dimensions should be determined by refence to the overall business strategy and to the type of product being procured.

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DATA AND DECISIONS IN THE EXPENDITURE CYCLE

Expenditure cycle business decisions Typical operational decisions include: (cont) Identifying if sufficient cash is available to take advantage of any discounts suppliers have offered requires knowledge of cash flow budgets and cash level predictions.
Determining how payment can be made to suppliers in order to maximise cash flow payment should be made when due and not before. Paying to early unnecessarily inhibits cash flow; paying too late may alienate a supplier.
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DATA AND DECISIONS IN THE EXPENDITURE CYCLE Expenditure cycle activities require access to: Inventory Demand Availability Supplier data

Purchase order data

Accounts payable data
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EXPENDITURE CYCLE DOCUMENTATION

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FIGURE 10.3 Expenditure diagrams overview

EXPENDITURE CYCLE DOCUMENTATION

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FIGURE 10.4 Expenditure cycle context diagram

EXPENDITURE CYCLE DOCUMENTATION

FIGURE 10.4 Expenditure cycle level 0 logical diagram

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EXPENDITURE CYCLE ACTIVITIES AND RELATED RISKS AND CONTROLS Expenditure activities: Determining demand for goods Collect requests

Create purchase requisition

The purchase requisition clerk receives requiests for consumables and inventory items from a number of different departments within the organization. The purchase requisition clerk should obtain approval from a more senior staff member before creating the purchase requisition. Once the request is ready to be actioned a purchase requisition is created.

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EXPENDITURE CYCLE ACTIVITIES AND RELATED RISKS AND CONTROLS

Expenditure cycle activities: Order goods Chose the supplier

Create the purchase order

The purchase clerk decides who to order the requisitioned goods from. Once a supplier has been selected the purchase clerk creates a purchase order.

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EXPENDITURE CYCLE ACTIVITIES AND RELATED RISKS AND CONTROLS Expenditure cycle activities: Receive goods Accept the delivery

The goods receiving clerk decides if the goods can be accepted by referring to the purchase order. The goods receiving clerk should carefully check the goods to ensure they are not damaged, and that the quantity of goods being delivered is correct. The goods receiving clerk signs the delivery docket to indicate that the delivery has been accepted.

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EXPENDITURE CYCLE ACTIVITIES AND RELATED RISKS AND CONTROLS Expenditure cycle activities: Pay for goods Approve the payment

Make the payment

The accounts payable clerk checks the invoice for accuracy and compares it to the purchase order and goods received data to make sure that what was ordered was delivery, and that the data matches what has been invoiced. Once the accounts payable clerk has determined that the invoice should be paid the payment is created. On the due date the payment should be automatically processed.

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EXPENDITURE CYCLE ACTIVITIES AND RELATED RISKS AND CONTROLS

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Continued to session 12

Thank you

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