The use of information technology in the practice of finance
There is no area of financial practice and decision-making that has not been impacted by information technology (IT). This trend is constantly changing the way businesses carry out their sales, operating activities, and record-keeping. The trend is also closely linked with the on-going globalization of product and financial markets. The major impact of the IT revolution on business has been cost reduction. Previous to electronic data exchange companies made many important financial decisions with incomplete and/or inaccurate information data sets and at per unit costs much higher than they are today.
Three main areas in which IT effects are most obvious in:
1. Inventory management
2. Internet sales, marketing
3. Statistical/Financial analysis.
- Inventory management: Prior to the IT revolution, marketing firms would order components and raw materials from suppliers and then pay cash for these components after some period of time. The component parts and raw materials would then be transformed into a finished product that the company would sell. If credit was allowed the cash inflow would occur with a lag. Thus depending upon the firm's accounts payable and accounts receivable policies, cash would be received with a lag. This practice was expensive as it tied up cash in inventory resources. With the ability to collect and analyze massive amounts of data, firms can make more timely and accurate decisions about inventory management. For example, Wal-Mart collects inventory information from its stores daily and automatically routes the necessary re-stocking instructions to its many distribution centers and retail outlets. It does not have to wait for their retail outlets to collect and report sales and re-stocking information before the purchasing and delivery functions can be implemented. A purchase at the Wal-mart check out counter, not the subsequent inventory tally by the manager/retailer, immediately triggers a re-stocking order to Bentonville, Arkansas via the company's orbiting satellite. Other examples of firms that follow the same strategy are Dell Computer and Amazon. Both have negative cash conversion cycles. Because of instant information transference they can operate with zero or negative working capital cash balances. Products purchased with credit card information result in immediate cash inflows to these companies. The cash is received before the products are produced or mailed. Information technology allows these (and many other) firms to use supplier's money to run much of their day-to-day operations. Being able to generate cash from working capital management and Just-in-Time inventory practice are both a direct result of the instant flow of information across the full production chain.
- Internet marketing: Electronic commerce is changing the way firms operate their sales function. Online dollar sales now equal in-store purchases and expectations are that electronic sales will exceed face-to-face purchases in a few years. This is fact for even "big ticket" items like cars and boats. Online shopping is quicker and more convenient. For retailers online sales carry the added cost-reducing benefits of not having to maintain formal retail outlets. Another striking example of internet sales has to do with the delivery of movie and educational content. Electronic technology now allows the direct streaming of first-run movies into the consumer's home. The many universities that now offer online degree programs illustrates how the IT revolution is impacting education sales.
- Statistical and financial analysis: Statistical analysis is concerned with analyzing large amounts of financial data so as to extract key parameter estimates of financial relationships. Accurate parameter estimates can be invaluable to a firm's historical analysis as well as to forecasts related to the future. Due to the large memory demands prior to the adoption of the desktop personal computer, much of this analysis had to be performed by super computers and special consulting firms that had access to both the hardware and software necessary to perform the calculations. With the advent of the desktop PC and extremely sophistical statistical software in the 1990's, much of this analysis can now be done in-house by the firm's own research staff. This allows companies to complete up-to-date, month-to-month analysis of structural and time series changes impacting both sales and costs. In addition the new software allows quick execution of simulation exercises. The research staff can now carry out "what if" analysis using Monte Carlo simulation applied to large multi-equation simultaneous equation systems. The sophistication of this type of research would have been impossible for most companies in the 1980's due to the excessive cost and the fact that much of the software had yet to be written. The effect for the average firm engaged in their own financial analysis is obvious. The IT revolution empowers the research staffs of organizations (or consulting firms doing research) to engage in better and more accurate sales, cost, trend, and simulation analysis than ever before.
External financial data: Some firms find that external financial information outside of the firm's accounting records valuable in to the in-house modeling task. The IT revolution has made this information available. Today all publicly-traded companies post their financials online. Below is a limited listing of some internet sites where all types of financial information can be obtain.
- http://finance.yahoo.com Besides a company's financials and ratios you can also look at a company's insider transactions. The SEC mandates this information must be posted with a three-month lag. Previously this information was not available to the researcher. See www.sec.gov or www.edgar-online.com for a more complete listing of the SEC filings all publicly-traded firms must provide.
- www.money-cnn.com and www.cbs.marketwatch.com provide up-to-date market information, stock quotes, financials, and other links to current company research.
- www.quicken.com and www.marketguide.com provides important information and updates about analysts' earnings estimates. These sites have links where one can estimate the stock's intrinsic value.
- www.smartmoney.com provides useful charts of key accounting variables such as sales, inventory, depreciation and earnings for all publicly-traded companies.
- www.bigcharts.com allows access to a company's history, ratio analysis, and earnings estimates.
For more general financial information pertaining to the economy the following sites are useful:
Keep in mind that some of these sites charge a fee. However, prior to the internet this information was typically not available except to selected analyst insiders.Finally for general macroeconomic information each of the twelve Federal Reserve Banks maintains comprehensive online information data sets. These are paid for with your tax dollars and there are no explicit fees charged for site usage. Try www.dallasfed.com for the Federal Reserve Bank of Dallas' web site.
Ethics and information technology: Some believe that the information technology revolution has invited ethical violations. There are many situations that could be cited. However, stock trading is perhaps the most controversial.Our stock trading philosophy in the U.S. is built on the premise that traders should trade on a "level playing field." This means that all buyers and sellers of stocks should have access to the same information at the same time. There is some evidence that so-called "momentum traders" using sophisticated trading algorithms can gain an inside information advantage by using high-frequency data to carry out "buy-low sell-high" strategies. If true such trading would be based upon inside information and would constitute an ethical violation, one that did not exist prior to the IT revolution. The SEC is currently investigating the matter.
