1.1 This report has been prepared for the management of Luedo Software Systems.

1.2 In addition, this report is intended to cover the requirements of Unit 10, Managing Systems and People in the Accounting Environment, of the Diploma stage of the Association of Accounting Technicians qualification.

Two: EXECUTIVE SUMMARY

2.1 Luedo Software Systems is a company that produces educational software for all ages. Their main customers are educational establishments, and they intend to begin targeting the private training sector as well as schools and colleges.

2.2 The business is incurring cash flow problems and recently the bank agreed to meet the monthly wages bill on the proviso that the overdraft be reduced by £20,000 quarter for the next three quarters.

2.3 This report has been written in order to analyse the accounting systems within Luedo Software Systems. The methodology of this report has included a SWOT analysis, which has analysed the various strengths, weaknesses, opportunities and threats of the various systems within the accounting function. Following the SWOT analysis, recommendations were made that are meant to improve the efficiency of the business and an effort to resolve the cash flow problems of the business and thereby make it a more profitable enterprise.

2.4 The payroll system is set up so that all staff are paid monthly by cheque, and the function of writing and dispatching those cheques to employees could be made more efficient and secure by switching to an electronic transfer system of paying employees.

2.5 All sales are made on a credit basis and invoices are prepared on the day the goods are despatched. There are no formal policies and procedures in place for the granting of credit and debt collection procedures because the assumption is that because the target market is educational establishments, they can be relied upon to pay their bills. This may be an incorrect assumption because educational establishments have the same business concerns as other establishments and can have budgetary restrictions that may make it difficult for them to pay the debts they have accrued. Because the business could use a more organised and proactive means of chasing debt, the money that the business is owed is not working as efficiently as it could, such as earning interest. Although the outstanding debt is considered to be an asset of the business, because the company is experiencing cash flow difficulties, it needs to actively recover the debt to ensure its financial interests are secured. If need be, the company can use the debt to obtain a loan if liquidation of the asset is essential for survival of the business.

2.6 The computer terminals are over seven years old and are based on the Windows 98 operating system and are loaded with Microsoft Office (1999 version), which is used purely for letters and invoicing. The accounting package used is Tass Books (version 2), purchased in 1989. The computer system crashes frequently and maintenance personnel are often called to the site to correct the problem. In addition to the disruption caused by the system crashes, additional expense is also incurred when maintenance staff are called to the premises. In order for the company to move into the 21st century, it is important that the computer system is upgraded. More current software packages need to be employed and staff need to be given training on these packages. One solution to the company’s immediate software needs is rather than invest large amounts of money to purchase completely new software and hardware, the business could rent an on-line office suite from an application service provider. This process, known as cloud computing, may very well have the effect of reducing the company’s ICT costs to a manageable monthly fee.

2.7 At present there is no formal system of purchasing, so the business may not be taking advantage of any discounts that may be available from suppliers for ordering in bulk or operating on a preferred supplier basis.

2.8 The petty cash and cheques coming into the business are not safe because they are not stored in a secure location on the premises and the cheques are not banked daily. Because of the insecure nature of monies that are kept on the premises and the threat of theft is evident, it is important that the business develop a secure procedure for managing petty cash and the banking.

Three: INTRODUCTION

3.1 Luedo Software Systems was formed in 1989 by Clive Luedo and his wife, who has since retired from the business. The company manufactures educational software as learning aides and markets these to educational establishments. Including Mr Luedo, there are ten people in the company, seven working in the office and three comprising the sales force.

3.2 The current computer system is over seven years old and is based on the Windows 98 operating system and is loaded with the Microsoft (1999), which is used purely for letters and invoicing. The accounting package used is Tass books (version 2), which was purchased in 1989, and the company that supplies the software no longer provides training on that package. As a result, there exists a training deficiency in this area because no one person understands the software package in its entirety.

Four: INFORMATION AND ANALYSIS

4.1 Background Information

4.1.1 Luedo Software Systems was formed by Clive Luedo and his wife in 1989 when he took early retirement from the teaching profession. The company was started because Mr Luedo recognised a need for educational software as learning aids. Although originally marketing his products for the 5 to 7 age range, the company has grown and it now offers software for all ages.

4.1.2 Over the years the company has purchased stand alone desk top computers for use of the office staff, which are now over seven years old and are based on the Windows 98 operating system and are loaded with Microsoft Office (1999 version), which is used purely for letters and invoicing. The accounting package the company uses is Tass Books (version 2), originally purchased in 1989. The accounting package does not produce invoices and the statements are difficult to read. An attempt to network the computers together in a wireless network has been made, but the wireless connection does not always work and can cause the system to crash. The hardware and software the company uses have not kept pace with the advances in technology and this has made the management and administration of the business less efficient.

4.1.3 There is not an established procedure for the purchasing of products for the business, as the purchase ledger clerk orders whatever anyone asks for, endeavouring to source the cheapest supplies individually. As a result, he is not taking advantage of any discounts he may receive by ordering items in bulk or selecting companies on a preferred supplier basis.

4.1.4 The company makes all sales on a credit basis, but does not have any formal policies on the granting of credit or debt collection. The reason for a lack of credit control procedures is because the customers are educational establishments, and the assumption is that those businesses should be in a position to pay their debts.

4.2 SWOT Analysis

A SWOT analysis was performed to appraise Luedo Software Systems’ strengths and weaknesses internally and its opportunities and threats externally. The purpose of the SWOT analysis is to outline the company’s present position in the market place (Kaplan, 2009).

4.3 The petty cash system

4.3.1 Strengths

The receptionist, who looks after the petty cash, is personable and ambitious and would like to have a career in administration linked to a financial role. She often tops up the imprest on her lunch hour, which is presumed to be on her own time.

4.3.2 Weaknesses

There are several weaknesses on how the petty cash system is administered. The imprest is too high for a company of that size and it is not adequately controlled. The petty cash is not kept in a secure container in a secure location and all of the staff have access to it. The petty cash is often used to fund the sales team’s expenses because they often forget to complete their expense forms and consequently run out of cash.

4.3.3 Opportunities

Because there are not written procedures in place on how the petty cash system is to be administered, this would be an ideal time to establish procedures that would place a tighter control and accountability of this system.

4.3.4 Threats

Because the petty cash is not kept in a secure container in a secure location, the threat of theft is rife. It would be possible for anyone working in the business to either take money out of the petty cash tin or to steal the entire tin itself. There is also the potential for fraud to develop from within the company because the petty cash is used to fund the sales team’s expenses when they forget to complete their expense forms. Members of the sales team could, in theory, take money from the petty cash to be reimbursed for expenses that are not legitimate business expenses.

4.4 The payroll system

4.4.1 Strengths

The person who manages the payroll system does so in a confident manner, is punctual, and is always willing to help out when the need arises.

4.4.2 Weaknesses

The person who manages the payroll system has no formal qualifications in that area of the business, having had to give it up for personal reasons. Although she would like to begin studying for the payroll qualification again, she has difficulty studying. Because the staff are paid by cheque, this can be rather time consuming and more laborious than if personnel were paid electronically.

4.4.3 Opportunities

The payroll system would operate more efficiently if the paying of staff was converted to an electronic format.

4.4.4 Threats

Because all staff are paid by cheque, this could present a threat to the business of theft, as there is the likelihood that cheques could be stolen or lost.

4.5 The banking system

4.5.1 Strengths

The company appears to have a good relationship with its bank, as Mr Luedo is able to speak to them to negotiate much-needed funds to keep the business afloat.

4.5.3 Weaknesses

Because the company is experiencing cash flow problems, the bank has reduced its overdraft by £20,000 per quarter for the next three quarters. The bank is not in a good geographical location to the business, being on the other side of town with no parking available. The money on the premises is insecure because there is no safe on the site. The cheques are stored in the sales ledger clerk’s desk and are only banked once a fortnight because Mr Luedo does not want to pay for taxis to and from the bank.

4.5.3 Opportunities

The opportunity exists for the company to move to a bank that is in a more convenient location and may be able to give better terms of business. The company also has the opportunity to establish a more secure system of storing the cheques that are received into the business daily. It can purchase a safe to store the unbanked cheques and petty cash, thereby decreasing the risks associated with keeping cash and cheques on the premises. If the company banks the cheques daily then the risk of them being stolen or lost will decrease.

4.5.4 Threats

Because the company is experiencing cash flow difficulties, there is the possibility that the bank could demand payment on any existing loans and refuse to extend any more overdraft facilities. Because the cheques coming into the premises are not stored in a secure location and are not banked daily, the threat that cheques could be lost or stolen is always present.

4.6 The purchasing system

4.6.1 Strengths

The purchase ledger clerk is very intellectual and will attempt to source the cheapest supplies for every order.

4.6.2 Weaknesses

There is no system for purchasing and the purchase ledger clerk orders whatever anyone asks for. He orders items individually and does not appear to take advantage of discounting for bulk purchases or preferred suppliers.

4.6.3 Opportunities

There is an opportunity for suppliers to tender for contracts with the company, which would potentially result in increased savings and a decreased cost of sales in the company’s profit and loss account.

4.6.4 Because there are no established procedures in place, the threat of the company not saving money on the cost of sales prevails. Because the company does not appear to have any preferred suppliers, they are not utilising any potential savings.

4.7 Sales and Credit Control

4.7.1 Strengths

The sales ledger clerk has a lot of good ideas on how he can improve the accounting function and is knowledgeable of a number of different accounting software packages. The sales invoices are prepared on the day the goods are despatched.

4.7.2 Weaknesses

Because there are no formal policies for granting credit or debt collection, the company is not making the best use of its available assets. Rather than targeting the companies that owe the most money and companies whose debts have been outstanding for the longest time. Although the receivables are shown as an asset in the balance sheet, the debtor days will be greater then need be and this could very well affect their ability to acquire debt or equity capital for the business.

4.7.3 Opportunities

The company has an opportunity to convert their trade and other receivables into cash and cash equivalents by taking a proactive stance in clawing back the monies owed to them from their debtors. If the company receives cash immediately, it can sell its debt to a factoring company that would be potentially be able to provide up to 85% of the debt immediately. This debt would effectively be a good cash advance that costs slightly more than bank borrowing rates (Kaplan, 2006). The company also has the opportunity to obtain credit protection through a factoring company. If the factoring agreement is “without recourse” then the factor bears the risk of any debtors that do not pay money owing to them. If the agreement is “with recourse” then the company would be obliged to repay the factor any monies advanced for a bad debt (Kaplan, 2006).

4.7.4 Threats

Because there are no formal policies in place for the granting of credit and debt collection, the company is at risk of acquiring bad debts that it needn’t have acquired if it had made the appropriate credit checks before the granting of credit. Because the company does not appear to be very proactive in recovering debt, it is not making the best use of its assets. Although the debtors are considered to be assets of the company, the fact that the money isn’t being recovered means the company is not able to use the money or repay their overdraft, and the cost of capital is consequently higher than it needs to be. In addition, the company is putting itself in a position where its bank could very well refuse to grant it any more credit.

4.8 The expense system

4.8.1 Strengths

The expenses are reimbursed only if receipts are produced through the monthly expense claim form and are meant to cover hotel bills, reasonable food and accommodation costs, but not alcoholic drinks.

4.8.2 Weaknesses

The expense system does not appear to be adequately controlled because some members of staff have been known to claim unauthorised items on their expense forms.

4.8.3 Opportunities

The opportunity exists for the company to develop written procedures on claiming expenses. With procedures in place, it will alleviate any uncertainties about what one should be able to legitimately claim.

4.8.4 Threats

Because some members of staff have claimed unauthorised items on their expense form, the company is spending more money on expenses then it should, and this will have the effect of increasing the company’s cost of sales and reducing its profits.

4.9 ICT

4.9.1 Strengths

Each member of staff is assigned his own computer to work with and the ICT support company is very helpful whenever the computer system crashes.

4.9.2 The current computer system was instilled in 1999 and needs to be modernised because it crashes quite often. The accounting package is almost 20 years old and does not produce invoices, and the statements are difficult to read. In addition, the company that sold the software no longer provides training, and as a result no one knows how to use the system in its entirety.

4.9.3 Opportunities

The opportunity exists for the company to upgrade to new technology that may be a more cost effective alternative. Some technologies, such as cloud computing, where companies work on-line and store their data off site, and this enables the company to reduce what may very well be exorbitant ICT costs to a manageable monthly expense. In addition, the staff will have an opportunity to receive training on the software packages they work on.

4.9.4 Threats

Because the ICT system within the business is old and crashes quite frequently, there is the possibility the computer system could crash and the company may very well lose valuable data if the system isn’t backed up properly. Because there are no written procedures in place for ICT usage, members of staff are not given clear guidelines regarding what is and is not acceptable usage. As a result, the company would be vicariously liable for any offences that members of staff may commit.

4.9.4 The weakest individual part

Because Luedo Software Systems is experiencing cash flow problems, the part of the accounting function that is the weakest part of the whole is the sales and credit control function. Once this aspect of the business is improved, the company will hopefully have more cash to use to either modernise the business or build up their reserves.

Five: RECOMMENDATIONS AND CONCLUSION

5.1 The petty cash system

5.1.1 The petty cash system needs to be revised and procedures need to be written on the correct management of this system. Cash being held on the business is obviously a security risk and therefore the petty cash box needs to be locked and held in a safe. Only the person responsible for petty cash should have access to the petty cash box.

5.1.2 The imprest system should be reduced from £1,000 a months to £250 a week and the payment of petty cash should be accompanied by a petty cash voucher in addition to the receipt for purchase. This petty cash voucher must be authorised by the office manager of Mr Luedo.

5.1.3 In order to correctly manage the petty cash system, the receptionist needs to be given basic accounting training because the petty cash system is part of the accounting function.

5.2 The payroll system

Because it is very time consuming and laborious, the policy of paying employees by cheques need to be replaced with the much easier and physically secure method of paying wages by bank giro credit.

5.3 The banking system

5.3.1 Because there is a risk of theft, the company should purchase a safe so that all of the unbanked cheques and petty cash box should be stored in.

5.3.2 Once the cheques have been received into the business, they should be recorded in the remittance list, checked for accuracy, and then paid into the bank as soon as possible. Therefore, the cheques should be banked daily instead of every fortnight.

5.3.3 On of the criticisms Mr Luedo had for not banking the cheques each day is that the bank is located on the other side of town and there is no parking available. One solution to this problem could be for the company to switch to a bank that is in a more convenient location.

5.4 The purchasing system

The business should endeavour to conduct business with companies that are willing to offer trade, bulk, or settlement discounts, and this will help the company to save money on the cost of sales, thereby ultimately increasing their profit margin.

5.5 Sales and credit control

The business would be wise to employ a factoring company to take over the administration of the sales ledger and credit control functions of the business. The employment of a factoring company would be beneficial because the company is sufficiently large enough to need to devote attention to its debtors but not large enough to warrant employment of a full time credit manager. The factoring company would take over all operations on the credit side of the business from credit approval to collecting cash. The business would only be required to raise invoices and clear queries because the factoring company would effectively run the sales ledger. Because the factoring company would be administering the sales ledger and credit control side of the business, Luedo Software Systems would not need to purchase a sophisticated software system to manage its debtors. The cost to the business to employ a factoring company would be from .75% to 3% of its turnover. The cash flow advantages to employing a factoring company would be that the business would have a regular predetermined cash inflow, and this should have the effect of reducing its finance charges, or cost of capital. One of the disadvantages of employing a factoring company may be that control of the debtors would be surrendered to the factoring company, and this may displease some of Luedo Software Systems customers and give them the impression that the business has liquidity problems. (Kaplan, 2006).

5.6 The expense system

Because of the potential for employee fraud, it is highly advised that the business implement written procedures on employee expense reporting. Written procedures will clarify what an employee can legitimately claim as an expense and how he can claim it. It is important that employees are aware that it is their responsibility to complete their expense reports accurately and in full compliance with the written procedures. It is also important that the business appoint an authorised signatory who will be responsible to ensure the expenses claimed are accompanied by supporting documentation and are within the company’s acceptable parameters. The expense reports should be audited to ensure they satisfy the general policies of the company, paying particular attention for the appropriate levels of approval and the authorised signatory, adequate supporting documentation, entertainment expenses so as to ensure they comply with company policy, and compliance with the written procedures.

5.7 ICT

5.7.1 Because the business would be vicariously liable for any unlawful computer usage by its members of staff, it is important that the business develops an acceptable use of ICT system policy. Employees who use the ICT system are responsible to avoid:- loss of vital technical or commercial data, negligent virus transmission, which can be time consuming and difficult to resolve, inadvertently entering into a contractual agreement during email exchange, breach of trust and confidence in the organisation, loss of client trust and confidence, physical loss or damage to systems, copyright infringement, and breach of the law.

5.7.2 It is strongly recommended that the business upgrade its ICT system to one that is supportable. One alternative to the company purchasing completely new software would be to employ the concept of cloud computing, which is the term used for accessing data and processing power over the internet. All major IT vendors, such as Microsoft, IBM, Hewitt-Packard and Google offer services to companies, including email, computer storage and management software (Accounting Technician, 2009). The need for an application service provider (ASP) has evolved from the increasing costs of specialised software have far exceeded the price range of small to medium sized businesses and the growing complexities of software have led to huge costs in distributing the software to end users. Through ASP’s the cost and complexities of the software used can be decreased. The issues concerning upgrading software packages have been eliminated by the end user because the onus of maintaining the software, providing 24 hour support, and security is placed on the ASP.

5.8 Cost-benefit analysis

A cost-benefit analysis was performed on the recommended upgrade of the ICT system from an in-house system to it being maintained by a cloud computing application service provider.

5.8.1 Costs

5.8.1.1 The costs of using the services of a cloud computing application service provider would potentially be halved. A medium sized non-IT business with a small data centre room with 10 racks and 100 servers would be expected to spend £223,000 per annum on their ICT system. When the client migrates to a cloud computing platform, they would receive the latest high performance servers and storage solutions, to include power, housing, capital and full management costs of the servers. The cost of the conversion would be expected to be £96,000 per annum or £8,000 per month, resulting in a savings of £127,000 per annum or 57% (Memset, 2010).

5.8.1.2 The application service provider owns and operates the servers, so there are no upfront costs or capital expenditures. The company would only be obliged to pay a monthly fee.

5.8.1.3 All servers are provided on a short monthly contract with no fixed overheads payable. The billing is itemised so the customer receives total cost transparency.

5.8.2 Benefits

5.8.2.1 Savings resulting from the old system no longer operating optimally.

5.8.2.2 Greater efficiency because a new system will process data more efficiently and reduce response times.

5.8.2.3 More informed decision making.

5.8.2.4 Improved customer service.

5.8.2.5 Improved reliability because the service provider would be obliged to offer 100% network uptime guarantee and a hardware replacement guarantee.

5.8.2.6 The service provider is able to spot problems and resolve them before the customer is aware there is one. The customer isn’t expected to wait for an engineer to arrive on site to correct a problem.

Six: REFERENCES

Accounting Technician (September/October 2009). Expect the Unexpected, Accounting Technician, Think Publishing: London, England

The Financial Training Company (2004). Units 1,2 & 3: Recording and Evaluating Costs and Revenues, FTC Foulks Lynch Ltd: Wokingham, England

Kaplan (2009). Unit 10: Managing Systems and People in the Accounting Environment, Kaplan Publishing: Wokingham, England

Kaplan (2006). Unit 15: Receipts, Cash Management and Credit Control, Kaplan Publishing: Wokingham, England

Memset (2010). Cloud computing / Infrastructure as a service CLAAS URL: http://www.memset.com [25 April 2010]

Seven: APPENDIX

7.1 Listing of acronyms

	
	
Application Service Provider	ASP
Information Communication Technology	ICT
Strengths, Weaknesses, Opportunities and Threats	SWOT