In the past,
financial information systems merely consisted of electronic ledger
sheets. They did basic accounting and transaction control. Their primary
benefits were:
- Keeping management informed of where they were on a financial basis
(present financial status, making profit)
- Keeping records to satisfy the IRS
Today’s systems serve a much wider and more beneficial function.
They can provide both operating and strategic information to help the
entire company run more efficiently and effectively. In fact, they can
make a significant contribution to increased profitability.
A TIA is an analysis of your current organization and will help you
determine how technology can effect your bottom line. The TIA will help
you evaluate changes in the technology, inclusive of both hardware and
software from an investment point of view. How much should you spend?
Where would you receive the greatest financial benefit? What is your
expected ROI? What is the probability of actually realizing the your
projected benefits?
If you are like the majority of people considering a new system, the
catalyst for investigating was some change in your business practices
that make your current system inadequate. Perhaps you need to open a
second warehouse and your existing system can not handle multiple warehousing
or perhaps your current system is not based on a new operating system
that your company has adopted. Regardless of the reason, you might want
to consider how a new system might impact your company in ways beyond
the catalyst that initially generated the interest. A TIA will help
you do just that.
A TIA will also help you determine your maximum budget and compare
the ROI and profit potential of various systems and proposals.
Using a TIA to determine the maximum budget:
- Many companies determine their budget for a new system before they
analyze the potential benefit flow and ROI. Usually this approach
stems from a perspective of financial accounting systems as a necessary
expense that should be held to a minimum instead of an investment
whose return should be maximized. A better approach is to use a TIA
to understand the potential benefit flow of a new system, then apply
your desired rate of return to that flow. Next, discount the benefit
flow by your level of confidence that a new system could in fact deliver
the benefit flow. The TIA will then give you the maximum you could
invest and still receive your target ROI.
Using a TIA to evaluate proposals:
- You have two proposals in front of you whose functionality you can
live with. One costs $75,000 and the other $125,000. Which should
you choose? The TIA can help you answer this question. Simply fill
out 2 TIAs. One with the $75,000 option and one with the $125,000
option. Does the $125,000 option offer a reduction in the amount of
capital tied-up in inventory over the $75,000 option? What is your
confidence in each option’s ability to deliver the benefits?
- Compare the two options. If the $125,000 has more than a $50,000
increase in present value*, then you should choose it. If the increase
in present value is less than $50,000, choose the lower priced option.
- The TIA’s present value also is calculated so that you receive
your ROI PLUS you get your investment back in the 5 years. If your
desired ROI is 10% and you invest $25,000, you’d get a 10% compounded
return and have your $25,000 back at the end of 5 years.
- All this is weighted by your confidence level in the system’s
ability to deliver the benefits. The higher your confidence level
the higher the present value. A lower confidence level decreases the
present value.
Who should participate:
- To maximize the benefit of the TIA it is important to interview
the personnel who actually perform the functions that reap the financial
rewards. When exploring how the system might increase inventory turns
and reduce the capital tied up in inventory, interview your buyers,
warehouse supervisors and shippers, sales people and perhaps even
your customers. They might have some ideas on reports and software
functionality that company executives have never thought about. When
exploring how to reduce bad debt, speak with the personnel in your
receivables department. This process will help insure that you only
attempt to implement practical solutions that will work for your company;
another benefit is that it will get your employees to buy into the
changes.
Next Step - Needs Analyses/System Profile
- We offer this service to allow organizations to make better decisions,
bringing you over 17 years of experience in technology, business processes,
accounting, and software. Give us a call to schedule a meeting or
send us an email at mhambleton@ais-web.com
and we’ll get back to you promptly. We look forward to speaking
with you.
*While we will discuss this in more detail latter,
the TIAs present value is the projected flow of benefits over 5 years
discounted by your targeted rate of return. The higher the desired ROI,
the lower a benefit flow’s present value.
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