The current study deals with the expenditure and conversion cycle adopted by the organisations within the workplace. This study particularly focuses on Paradise industries and the study have analysed the process adopted by the business entity in both the cycles. The process that has been adopted by the business seems to be dealing with the order receiving along with the aspects of accounting and finances. In addition, risk of the conversion cycle along with the weakness of the expenditure cycle have also been analysed in this study. It indicates that in either of the situation, performance is highly affected that results in the improper management of the company’s operations while the accomplishment of the targeted goals.
Table of Contents
Findings and analysis.
System flow chart of the expenditure cycle.
System flow chart of the conversion cycle.
Analysis of physical internal control weaknesses in the expenditure cycle.
Analysis of the risks exist in the conversion cycle and the changes needed to reduce the risks
Information system helps in the analysing the data possessed by the company, ensuring proper functioning and usage of the data at the different operational levels within the organisation. The operations of Paradise industries are being executed through two different cycles, involving expenditure cycle and conversion cycle. In this study, a detailed analysis of the process included within the two mentioned cycles will be analysed concerning the operations of paradise industries. In addition to this, the weakness of internal physical control will also be analysed in this study. Other than that, risk prevailing within the conversion cycle will also be analysed along with the steps of its mitigation.
Expenditure cycle involves all the activities within a company related to the payments in terms of services and goods along with the acquisition within the company. As per the mentions of Maličká (2019), the expenditure cycle also involves the requirements of the selling’s within a company. The cycle of expenditure involves the supply and delivery aspects of the company. Paradise industries operate in the production of a high precision machine that can be used for different functions. Besides, the company also seems to be operating via a centralised system of computing revealing various processes within the operating system. However, in the production of giant eggplant through the process of expenditure cycle and conversion cycle, certain issues are faced by the company.
Figure 1: Expenditure cycle
(Source: Lucid chart, 2020)
The above figure reflects on the expenditure cycle used by Paradise industries in the manufacture of the high precision machine within the domain. As per the above flow chart, the expenditure cycle of the company involves three major sections including control clerk, purchasing clerk and receiving department. As opined by Malicka (2018), the process that is being used in the cycle of expenditure allows the users to manage each of the orders and production effectively. The order that is being placed within the operating section of the company is handled by the control clerk. After receiving the order, the control clerk of paradise industries prints two copies of the order among which one stays with the control clerk and the other is given to the purchasing department. Purchasing department further precedes it to the clerk involved in the purchasing department. As per the mentions of Benito et al. (2017), the purchasing department tends to handle all the order and pave the way to execute the necessary purchasing.
Purchasing clerk further prints three copies of the order, one of those copies is handed over to the suppliers who are in charge of supplying the raw materials ordered by the company. As depicted by Lluberas (2018), raw materials are the most valuable assets as it helps the organisation to produce the desired products and gain the targeted goals. The second copy printed by the purchasing clerk is given to the payable accounts department, whereas the third copy is sent to the receiving department of the company. As per the illustration of Arifin and Purnomowati (2017), the receiving department intends to receive the order from the suppliers on behalf of the company and performs the role of sending it to the operating department.
Receiving department of the company further generates three copy of the order. One of those copies is kept within the store to keep a record of the orders. Another copy is given to the control of inventory that plays an effective role in preceding the order based on the requirements of the company. Lastly, the third copy is given to the payable account that tends to pay the suppliers based on the delivered orders. The payable account further directs the copy to the department of cash for handling the payment. Through the above-mentioned process, the Paradise industries seem to be handling the purchasing of the raw materials from the suppliers. However, from the process it can be analysed that there is a different department within the organisation that deals with a different function. As per the mention of Park et al. (2019), it helps the organisation to deals with the operations and supply in a systematic way. On the other hand, it can also increase complexity within the department further leading to a mess within the operations. Overall, it can be beneficial in managing the operations of the company.
Conversion cycle is a process maintained within the business operations, deals with the financial operations. As per the illustration of Slade et al. (2019), the conversion cycle involves measuring the time that is being used by the organisation in terms of conversion of the investment into inventory. It also helps in tracking the order of the customer along with the proper justification of the process through which the order passes.
Figure 2: Conversion cycle
(Source: Lucid chart, 2020)
The above figure depicts a flow chart in terms of the conversion cycle based on the customer perspective. As per the above figure, the order that is being placed by the customers is received with the help of the terminal. This involves the sales department of the organisation. As per Zitting et al. (2018), the sales department handles all the orders along with creating a proper direction of the order to get fulfilled. Besides, the terminal of the order is sent to the credit checks and edits that are further supported with a credit file to analyse the credit of the orders. This involves the department of customer operation. In the mentions of Suryana and Mulyani (2019), the department of customer order tends to involve all the necessary aspects of the order further channelizing into the proper direction for proper processing of the order. It is being further delivered to the sales order and the update of the program further directing it to the AR file along with the department of the inventory. In addition to this, the order is being classified into three parts depicting sales order 1, 2 and 3 respectively.
The order is further processed to the warehouse of the organisation. It involves picking up the goods and services that are being ordered by the customers from the warehouse. In addition to this, this stage also involves keeping a record of the order so that it can be analysed properly while calculating the finances of the organisation. After that, it is carried to the department of shipping. It involves shipping of the goods and services after picking from the warehouse and delivering it to the customers. As per the analysis of Pierskalla and Sacks (2018), the cycle of conversion is more complex than the cycle of expenditure. Expenditure cycle tends to be including only the aspects of a company's ordering system. On the other hand, the conversion cycle tends to be involving the side of customers within the order. Contrarily, as argued by Castro and Martins (2018), conversion cycle aims at implementing the details in the process of order and supply that can help the organisation along with its operation to execute successfully. In addition to this, as depicted by Zeidan and Shapir (2017), Conversion cycle also involves the revenue of the organisation along with the marketing and financial system.
Figure 3: Conversion cycle
(Source: Pavlis et al. 2018)
Expenditure Cycle (EC) deals with all the financial expenses within the domain of the control and helps in the aspects of controlling. As per the opinion of Pavlis et al. (2018), EC's primary purpose involves the minimization of cost in terms of suppliers and maintenance of other inventories so that the organisation can be effective in deriving the desired profit margin from the market. In addition to this, EC mainly involves the process of ordering the supply and management of the order within the domain. It can be effective in serving the purpose of the company effectively. Other than that, EC also involves keeping a track of the order and hence is considered to be useful for future operations. However, certain weaknesses seem to be underlying in the process of EC.
Paradise Industries seems to be combining the custody function along with recording and authorisation in one department. It further involves the function, receiving, purchasing and control of the inventory. As per the mention of Zakari and Saidu (2016), this includes the breach in terms of duty segregation. This results in too much responsibility on the staff managing the aspects of Inventory control along with receiving and payment. On the other hand, as noticed by Wibisono and Shwageraus (2016), allocating too much responsibility on a particular department and the staff creates the major place of fraudulent activities. It also indicates the structural weakness that is providing the scope of unethical activities within the domain of the organisation. For instance, conflicts among the staff can create opportunities for the suppliers to cheat in the company. Hence, it can be a major weakness that can hamper the activities within the domain.
The weakness of business activities and documentation
EC is also involved with the weakness of improper documentation as the steps within EC involve different types of documentation that can lead to confusion and conflicts among the staff. It is because the imposition of too much responsibility is likely to create conflicts among the staff. EC system of paradise industries seems to be having the weakness of documentation along with the activities of business during the process of ordering. The order process of EC does not involve any confirmation via phone or any other written confirmation to the customers. Hence, it can be effective in creating mis-happenings in order. In addition to this, issues can also be created while receiving the order and installing it in the warehouse of the organisation. It is because, based on the system of Paradise industries, the record system of the company tends to get managed manually. As per the illustration of Linh and Mohanlingam (2018), manual handling receive and order report can be creating hazards in the main operation and it can be subjected to loss at any time.
The weakness of Internal Control (IC)
On the other hand, IC also helps in managing the different factions within the cycle of expenditure. As per the mentions of Oseifuah and Gyekye (2017), IC helps in controlling the various aspects so that the cycle can deliver the possible value to the organisation. However, the weakness of EC related to the IC in terms of Paradise industries involves organisational control, documentation control, control of assets accountability, control of management practices, and control of authorisation.
Figure 4: Weakness of the IC
(Source: Oseifuah and Gyekye, 2017)
However, to manage the existing weakness within the system of EC, the Paradise industries need to implement purchase requisition along with purchase order further process to the aspects of receiving order documents so that the company can be effective in managing all the operations and executing it with proper values.
Risks are considered as an integral part of any type of process within the domain of a business entity. As per the statement of Lin et al. (2016), risks are effective in preventing the company from the achievement of the targeted goals. In addition to this, excessive risk also sabotages the reputation of the company and thus the organisation fails to operate properly. In the current scenario, observing the conversion cycle of Paradise industry it can be depicted that the cycle poses the risk of complexity within it. As opined by Pavlis et al.(2018), implementation of too many steps within the process tends to make it complex further arising various types of complexity within the domain. As a result of this, conflicts are likely to create among the staffs working in the department. In the mention of Castro and Martins (2018), conflicts are likely to affect the level of performance along with creating workplace discrepancies. Poor performance leads to organisational hazards affecting the brand image within the domain. From this analysis, it can be depicted that the common risk that is likely to face in the process adopted by the cycle of conversion in Paradise industries involves the risk of poor performance along with the risk of workplace conflicts, poor brand image, poor workplace culture, high confusion regarding the work process.
Figure 5: Risk in the conversion cycle
(Source: Pierskalla and Sacks, 2018)
Based on the above-identified risk, it can be stated that the implementation of a proper communication system can help in mitigating most of the risk within the domain. As opined by Pierskalla and Sacks (2018), effective communication can help in presenting the objectives of the company to the staffs so that they can provide the desired value within their performance. It is intended to increase the level of performance further mitigating the risk of poor performance. It can also mitigate the conflicts arising among the staff. In addition to this, implementing proper management within the company can also direct the company's operations strategically.
From the above study, it can be analysed that cycles such as expenditure and conversion help in operations of the company. Paradise industry involves the management and production of highly precise machines and has been performing through the expenditure cycle and conversion cycle. However, adopting the two cycles have generated certain issues within the domain. Both the process seems to be involved with the process of ordering, manufacturing, dealing with the suppliers along with the customers of the entity in different ways. Weakness that is prevailing within the cycle of expenditure in terms of internal control involves the control of the authorisation, control of the documentation system and many others., on the other hand, certain risks are also likely to be prevailing among the conversion cycle. It includes the risk of poor performance along with the risk of ineffective organisational management, conflicts and others. The risk can be mitigated with the help of a proper communication system and the system of management within the domain.
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