Reference no: EM132294965

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Following is my assessment of how changes in the information system could improve the management and operations of Argonaut’s business, with specific examples of how the additional functionality provided by systems such as Perennial Manager would be of benefit.

Budgets and variance analysis Frank White noted that Argonaut does not prepare budgets and perform variance analysis, and Phyllis confirmed that Argonaut needs a budgeting system and variance analysis. The use of budgets and variance analysis would improve planning, performance evaluation and motivation of employees and managers. I recommend that the following budgets be established:

• Cash budget — to plan for cash requirements, which is critical for a seasonal business

• Operating budget — which would allow operations to be monitored on an accrual basis using a normal income statement format

• Capital budget — to plan for longer-term capital expenditures, such as an expansion of internal propagation capacity

These budgets, when combined with regular variance analysis (that is, the comparison of actual results to budgeted results), will provide relevant and timely information. For example, if a monthly cash budget had been prepared for 20X9, you would have been able to foresee the fact that the line of credit would be nearly exhausted by the end of the first quarter. Similarly, variance analysis of the operating budget would have identified the accounting errors relating to prepaid expenses and inventory.

Budgets can be developed based on historical experience or future expectations. To keep the budget from becoming meaningless after a short period of time (a typical problem with annual budgets), a rolling or perpetual budgeting system could be implemented. For example, as every month or quarter passes, the budget could be freshened and extended with the best information available at that time.

The use of flexible budgets, rather than static budgets, would also improve the quality of variance analysis. With a static budget, budgeted variable costs (such as the cost of goods sold) do not change even though actual revenue may vary from the budget. This can lead to anomalous results that are difficult to interpret. For example, if actual revenue were to exceed budget by 10%, cost of goods sold could show an unfavourable variance, regardless of the fact that cost of goods sold measured as a percentage of revenue was on a budget. Flexible budgets eliminate this anomaly by automatically adjusting variable costs for changes in revenue.

The existing GrassRoots software doesn’t have a budget feature or flexible reporting. Although it is still possible to develop less robust budgeting and reporting tools using electronic spreadsheets, these are inherently inefficient and lack the programmed controls available with more integrated alternatives, such as Perennial Manager.

Divisional reporting and responsibility accounting

In establishing budget processes, you may want to employ responsibility accounting for the different departments. For example, you may want to set up a garden center and mail order operations as separate profit centers to help you measure their performance and make decisions about closure or expansion. Similarly, you may want to treat internal propagation as its own profit center or, at least, a cost centre.

You should note that your existing system wasn’t designed with a flexible account structure or to allow allocation between departments. However, this functionality is available with Perennial Manager.

Inventory management and propagation planning

Delphina noted,

When I plan my internal propagation program and place my orders with external growers, I have to guess which plant cultivars will be the most popular. It’s an educated guess, of course — I can remember which things didn’t sell well during the last season. But for the plants that were popular and we ran out of, I have no way of telling the amount of unsatisfied demand. Plus, I have no way of knowing which new cultivars that we don’t sell are attracting the attention of potential customers. It’s all very frustrating and imprecise. Our competitors may be capitalizing on these trends without our knowledge.

She also made this comment about plant quality: “When a customer complains, we can’t tell with any certainty which grower it came from.”

The GrassRoots software doesn’t have the ability to track inventory on a perpetual basis, whereas Perennial Manager does. It also does everything from customer relationship management, including mailing lists, through production and supply chain management.

Although a system change can be costly and disruptive, the benefits of better information can be substantial. For example, better information management over the past 12 months — including maintaining the mailing list in-house — could have prevented more than $1 million of excessive ordering from external growers. A good information system would facilitate planning your propagation program by allowing you to track and report better information with respect to the popularity of various plant cultivars and the quality of plants obtained from external growers.