Financial information system definition

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What is a Financial Information System?

A financial information system is an organized approach to collecting and interpreting information, which is usually computerized. A well-run financial information system is essential to a business, since managers need the resulting information to make decisions about how to run the organization. This system can be used in many ways, including the following:

  • Ensure that there are sufficient funds on hand to pay for obligations as they come due for payment

  • Put excess funds to use in appropriate and reasonably liquid investments

  • Determine which customers, products, product lines and subsidiaries are the most and least profitable

  • Locate the bottleneck areas within the business

  • Determine the maximum amount of funds that can safely be distributed to investors in the form of dividends

  • Determine the maximum debt load that the organization can sustain

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Financial Information System Reporting

There are a number of ways in which to extract information from a financial information system, including structured reports that are run on a regular basis, ratio analyses, cash forecasts, and what-if analyses. A report writer module is used to construct the more commonly-used reports, while less frequently used data is downloaded through a query system.

Example of a Financial Information System

A financial information system (FIS) is used by a large retail chain to manage its financial operations across multiple store locations. The FIS is divided into several integrated modules, each performing specific functions to ensure accurate financial management and real-time reporting - as noted below.

  • Accounting module. The accounting module handles general ledger, accounts payable, accounts receivable, payroll, and inventory accounting. When a customer purchases goods, the sales revenue is recorded automatically, inventory is adjusted, and accounts receivable or cash balances are updated. Supplier invoices are processed, payroll expenses are recorded, and inventory costs are managed seamlessly.

  • Financial reporting module. This module generates real-time financial statements such as the income statement, balance sheet, and cash flow statement. Managers and executives can access daily, weekly, or monthly financial reports by store, region, or company-wide, helping them analyze performance and make informed decisions.

  • Budgeting module. The budgeting module allows the company to prepare, revise, and monitor its annual or quarterly budgets. It compares actual financial performance against budgeted figures, highlighting variances for management to address through cost control or strategic adjustments.

  • Billing module. The billing module manages customer invoicing, collections, and payment tracking. It ensures that customer invoices are generated accurately, tracks outstanding balances, and updates the accounts receivable ledger automatically when payments are received.

  • Risk management module. This module helps identify, assess, and mitigate financial risks. It monitors credit risks related to customer payments, tracks compliance with tax and regulatory requirements, and supports internal controls to prevent fraud or errors. The system also helps in preparing for audits by maintaining accurate and well-organized financial records.

By integrating these modules, the FIS allows the retail company to automate its financial processes, reduce errors, improve decision-making, and maintain strong financial controls across all its locations.