Assessing the AIS Implementation of River Adventures

Category: Accounting

The SME River Adventures (RA) is the sole-trading business of Mr Robin Forsythe and is currently based in Cheddar, Somerset. Mr Forsythe is about to expand his business in two fundamentally significant ways:

By moving into the Corporate Team Building market

By purchasing two new, remote businesses in Northumberland and & Wales.

The information supplied does not indicate whether RA are registered for VAT (which they should be, given their turnover of £152,400) so this is not considered here and a separate report will cover the case for incorporation to limited liability status.

Mr Forsythe is well aware of the limitations of his current information systems. In fact he described them as 'informal' and bases his decisions on having a 'feel' for the business and has said that he runs his business 'by the seat of his pants.'

The new businesses have cost Mr Forsythe £125,000 and represent a 47% increase in the capital of his business. Mitchell, Reid & Terry (1994 and 1996) in their studies of the information needs of businesses after the injection of Venture capital noted the risks of information asymmetry and the need for safeguards. In this instance, Mr Forsyth is acting as his own venture capitalist but the conclusions are still relevant changes in Accounting Information Systems are essential when serious growth ambitions are fuelled by an infusion of external capital.

This report is underwritten by a consideration of Systems Analysis as described by Yeates & Wakefield (2004) and will be considered as appropriate. It is important to note here the Feasibility Study (also known as Stage 0) has already been completed and that this report focuses on implementation.

The Business Case

As well as a management overview, this section of the report matches to Stage 1 (Investigation) of a typical Systems Analysis where the business is considered and data identified for the AIS.

There is no information available on the proposed Corporate events or on the New businesses, but an analysis of the existing courses reveals some significant figures regarding costs and margins.

The fixed costs, including depreciation but excluding drawings, for operating the business are £66, 690.

The income and marginal costs for each of the courses currently offered is as follows:

Beginners Kayaking

Applying a 90% occupancy to a group of 12 guests gives an average of 11 per course. The income for each course is therefore 11x650 = £7,150

Costs (£):

Instructors: 9 x 65 x 2 + 9 x 40 x 2 = 1,890

Lodge Food: 5 x 8.50 x 15 = 637.50

Downstream: 4 x 13.50 x 15 = 810

Total: 3,337.50

Food costs include instructors.

A marginal profit of £3812.50 per course or £76,250 per annum, based on 20 courses

Intermediate Kayaking

Assuming that all intermediate courses are fully booked with six guests, the income for each course is £2,700.

Costs (£):

Instructor: 65 x 5 = 325

Rustic Retreat 5 x 8 x 35 = 1,400

Total: 1,725

Includes instructors' lodgings.

This gives a marginal profit of £975 per course or £11,700 per annum, based on 12 courses

Raft Trips

Assuming that each trip has two full rafts, on average, the income is 12x285 or £3,420 per course.

Costs (£)

Instructors: 3 x 40 x 4 480

Food: 4 x 15 x 13.50 810

Total: 1,290

This gives a marginal profit of £2,130 or £21,300 per annum, based on 10 Courses.

The total operating profit is therefore £109,250 and the net profit is £42,560 based on these typical figures.

This financial summary is offered as a snapshot of the business as it currently operates. In addition, Mr Forsythe has commented that:

Cost of sales on Beginners courses is not being controlled properly with wastage of bulk items

Camping equipment and even cash are suffering from increasing shrinkage

Management information is not sufficient for business analysis. Mr Forsythe cites the marginal cost of an 8 guest Beginners course as an example. In fact, the income (£5,200) is still higher than the marginal costs of £3,419.

Nor does management information allow Mr Forsythe to monitor performance of individual instructors, either for quality purposes or with a view to offering bonuses.

Marketing

Mr Forsythe admits that he may well be losing business through failure to follow up on attendance at Beginners courses with further marketing for Intermediate courses. He actually comments that Beginners "are waiting to be called to be reminded of the good experience they had." Mr Forsythe also comments that he does almost nothing with the list of prior participants.

Expansion

All of the above issues would offer a business case on their own but the two new expansion projects noted at the beginning of the Introduction point to the implementation of an AIS as being a priority.

Summary

Mr Forsythe has a successful business with a high reputation. His vision for the Corporate Team Building shows that he knows his strengths and the key offer of River Adventures. As Peters (2003) says, "Harley-Davidson does not sell motorcycles. Starbucks does not sell coffee. Club Med does not sell vacations. And Guinness does not sell beer." In other words, Mr Forsythe is selling an adventure - a 'good experience' which he is poised to build upon.

Finally, Peters also has a warning about systems - that they should be 'Simple, clear, graceful & beautiful.' It is clear that RA offers experiences which are exactly that. The AIS will struggle to be a thing of beauty, but it should at all costs avoid getting in the way of what RA does best.

Business Process Management

This report is limited to the requirements analysis for the AIS. Its scope does not include an overall management or operational appraisal of the business. However, it will indicate where there are further areas for consideration of how Business Process Management (BPM) could be considered.

Typical advocates of BPM - or reengineering are Hammer & Champy (2004) whose many books and large consultancy business (Hammer & Company) promote Process as a tool for business performance, "We are passionate about creating a new world through process-based innovation."

It might be thought that this would not apply to RA - after all, most of Hammer & Champy's cited success stories are large multi-national corporations (IBM & Deere) but Chong (2007) notes "preliminary evidence seems to suggest that, despite some minor discrepancies in terms of relative importance, the aforementioned characteristics are also largely applicable to the Small and Medium-Sized Enterprises (SMEs) sector."

This will be considered in detail in the Business Process Models below, but there are implications for Users and Stakeholders: it is difficult to see how Mr Forsythe can run his expanded business without taking on additional staff who are involved in the business process.

Users & Stakeholders

Analysis of River Adventures operation identifies the following stakeholders and users:

Robin Forsyth

Is the principal stakeholder. His role and needs have already been discussed as part of the first two sections. With specific focus on the AIS, as owner and manager of RA he has a need to ensure:

Compliance with HMRC requirements

Accurate accounting information to allow him to identify costs and revenue centres accurately

Useable management information for his business

Marketing Information - although this function is in its infancy at RA, its importance to the future of the business should not be underestimated, particularly with respect to:

Potential for expansion - if RA moves into selling equipment as well as courses, the need for an AIS which facilitates this is paramount.

All of the Above must also apply to the two new remote operations.

Customers

Are always the joint most important stakeholder in any business. Their needs from AIS are not obvious and in many ways derive from the needs of other stakeholders identified. However, particular note should be paid to:

Accurate billing. Customer satisfaction surveys have often indicated that inaccurate billing is a key factor in customer dissatisfaction and failure to recommend a business to others.

Suppliers

Good, long term relationships with suppliers are important for all businesses. As stakeholder in RA, the suppliers needs are:

Clear communication of orders from good stockholding reports (in time)

Accurate payment systems for invoices

Minimum disruption from inaccurate application of discounts and credit notes.

Full Time Staff

Included in this are the Administrator, cook and maintenance (the latter two are on seasonal contracts and thus may change from year to year). Their needs can be identified as:

A system which they can use, probably after training

A system which allows them greater understanding of their role in RA and how they contribute to its business

Instructors

May not interact directly with the AIS but have a crucial role to play in the business. Their needs can be summarised as:

Not detracting from their contribution to the experience. They are not accountants or chefs - but their approach to the costs has a direct impact on the profits of RA. Any system must allow them to continue to deliver the RA Experience as outlined above.

Centre Managers

This role does not exist yet. Mr Forsythe has identified that the two new centres in Northumberland and Wales will need centre managers. Cheddar to Morpeth is six hours by road, according to the AA Routeplanner. River Adventures will need to ensure that the AIS is fully integrated with the remote centres and allows the Centre Managers to:

Operate their centres as managers not as administrators (centre turnover will dictate whether to centralise the AIS or have a Network solution).

Receive Management Information to allow them to control their operations

Receive accurate & timely budget information to ensure the profitability of their centres.

Function & Operational Requirements

So far we have considered the broad business needs which an AIS must meet. As we come closer to the detailed requirements, it is worth noting what Hall (2008) says about Transaction Processing, "accounting captures and records the financial effects of the firm's transactions… Second, the accounting function distributes transaction information to operations personnel to coordinate many of their key tasks … including inventory control, cost accounting, payroll, accounts payable, accounts receivable, billing, fixed asset accounting and the general ledger."

It can be seen that this is directly relevant to the needs already outlined and will integrate with the detailed requirements (although it should be noted that Payroll is not considered in this report).

Hall also emphasises the importance of reliability - "information must possess certain attributes - relevance, accuracy, completeness, summarization, and timeliness."

Ensuring these will be a key factor in the implementation of AIS.

We are now mapping against Stages 2 and 3 of Systems Analysis - Business Options and Requirements Specification.

Now that River Adventures' needs, users and stakeholders have been examined, we can move to consider how the particular features of Sage 50 Accounts 2010 can meet these in terms of functions, features and reports. There are three versions of Sage 50 currently available - Standard, Plus and Pro. This report assumes that the Pro version will be implemented.

The purpose of this report is not to say why Sage is the most appropriate solution, or even why Sage 50 is the most appropriate solution, but to look at how its features meet the needs of River Adventures.

The System Requirements have already been mostly specified through the identification of Sage as the preferred solution. It is not the scope of this report to consider the platform requirements in detail except to note that a mid-range desktop PC and Printer will be required.

However, a much more significant problem has already been identified in the question of the remote centres. Although comparatively user-fiendly, Sage is still an accounting system and not appropriate for use by Centre managers. The overall AIS will require an effective means of integrating the sales, purchasing and banking (at least) of the remote centres. Until further information on their turnover and staffing is known, it is not possible to give a detailed specification for this. However, some options would include:

Employing a networked system with administrators working remotely (likely to be expensive)

Employing Electronic Document transfer via a scanner and e-mail

Using other electronic means to pass transaction data to Cheddar

A combination of the above and a centralisation of all accounting functions (invoicing, purchasing) in Cheddar.

Sage 50 is a fully featured double-entry Accounting package with integrated invoicing, VAT and bank reconciliation. es and Lack of Time as the most important factors inhibiting BPM implementation … is the fact that most of the firms in this study were exceptionally small. This precludes them from having a sophisticated capital structure that is flexible enough to accommodate a large outlay on IT-driven BPM tools. It also precludes them from having a pool of permanent employees that is sizable enough to allow the reallocation of a sufficient number of workers to carry out BPM-specific tasks. Doing so without the requisite human capital base will tend to result in disruptions to the fundamental revenue-generating operations of the company."

This should be borne in mind when considering the implementation of Sage 50 for RA. There are clearly considerable training implications for the adminsistrator as well as questions about this person's role within the expanded company. At the very least, for the purposes of this report, we will designate the person in charge of the day to day running of Sage 50 as the Responsible Financial Officer (RFO) to avoid any presumption of who should fill this role.

Introduction

It is worth beginning with a general overview of processing within an AIS, here illustrated from Hall (2008):

Our first task is to identify the External and Internal sources of data.

Much of the conversion from cost to profit takes place on the Courses and the instructors have a key role in this. Mr Forsythe has said that he is concerned about the costs of downstream catering but that he recognises the Instructors and their ability as camp cooks plays a key role in the customer experience. And we should remember Tom Peters: Starbucks do not sell coffee.

Accordingly we present this model as the first draft of a BPM for River Adventures:

This process model covers all of the internal and external sources of data noted in the analysis and allows for key expansion and growth as the remote centres are integrated and the Corporate Team Building courses are developed.

Internal Control and Fraud Prevention

Implicit in much of this report is improved Internal Control for River Adventures. Mr Forsythe's concern with cost of sales was noted and has featured heavily in the Requirements Analysis. It has also been noted that implementing Sage will only be the first step in securing this.

Mention was also made of Mr Forsythe's concern with shrinkage in some areas. While Sage can help with this, it is not an answer on its own. Gupta & Hammond (2005) noted that "small business owners may have procedures and policies in place and may use technologies to counteract the security threat, but this research raised doubts about their effectiveness."

As part of the implementation of Sage, the company should consider the following steps to reduce the risk of fraud and shrinkage:

Change organisational culture to reflect increased focus on cost control

Use the audit trail produced by Sage to check Assets more frequently

Ensure that only the RFO and the Owner have access to Sage and to payments.

Use the audit trail to check payments in and out.