Information Technology in Financial Management

Sunethra De Silva

Information Technology (IT) is the catalyst for change. When Information Technology is well implemented it can be used to improve significantly the factors of quality, teamwork, communication and responsiveness.

Industrialisation can be fully exploited only through a well managed business strategy and within that the information technology strategy will be a vital component.

Information technology can give a company sustainable competitive advantage.

The great growth in the industry has taken place because of three very obvious technological breakthroughs; Where costs have fallen dramatically in communication, computer storage and computer power. The efficient use of a company's resources is essential to its growth.

The key objective of financial management is to maximize the value of the company in order to achieve its objective. As any action by the company can and probably will affect the firm's profitability, its liquidity and its financial position.

Economic Growth

Developing countries are facing an economic crisis of major proportions. The terms of trade for most of their commodity exports have substantially declined in the past few years. Economic growth in the developing world cannot be sustained without appropriate and necessary actions by the developing countries. These actions include the formulation and effective implementation of sound macro economic policies, efforts to improve educational systems, the acquisition of appropriate technologies, the development of a sense of national identity bridging sub national ethnic or religious groupings. There is the continued vitality of the Asian region although growth has slowed down in Japan, the countries of East and South Asia and China are expanding rapidly and there is no expectation of major reversal in the near future.

Sri Lanka can benefit from the positive impulses coming from the Asian region particularly in areas of direct foreign investment and technology.

There is a likelihood of South Asia becoming the third wave of development in Asia.

Sri Lanka could benefit from all this, but it needs more than an open and liberated economic policy.

It needs vastly to improve on infrastructure and the development of its skills. Future development should be knowledge intensive.

The benefit of growth should be distributed equally. It is important that the rate of inflation be kept down and unemployment be reduced.

The possibility of Sri Lanka emerging as the financial hub of South Asia stares in our face.

Of late at public fora, persons involved in diverse financial disciplines have voiced opinion of the possibility of the island nation being a finance centre.

No nation can exist in a vacuum. The Sri Lankan economy should maintain its growth performance in the years ahead.

An accelerated rate of growth is necessary for industrialization for bearing the attributes of a newly industrialized country.

Information Technology

Computers are increasingly easing the pressure on humans by taking on mundane and complicated tasks, but experts worry over ambitious automation which may jeopardize safety. Computers now operate on flight decks, manage nuclear power stations and run train signaling. They control high tech medical diagnostic equipment. The safety record has been impressive.

The subject of information technology is vital to our society and is going to be of immense importance in the future.

Year after year the value of the market for information technology grows and the overall trend is clear. The Japanese share of the market is a remarkable achievement when you consider their position a few years ago.

There are signs however that they are having great difficulty in making major inroads into the market except in certain specialist areas such as semiconductors and peripherals. In the field of new applications and software technology they have yet to make their mark in the world market. The Japanese US and European information technology industries are mutually dependent, with European information technology companies relying on USA and Japan for the design and supply of basic electronic components and for operating systems. The UK is the third largest information technology market in the world but it is dwarfed by both the USA and Japan. The information technology market in the European community is likely to suffer radical changes because of the force of Japanese and US competition.

Many of the recent disappointments with information technology have arisen not because the technology failed to work in the manner expected but because there are no obvious effects on organizational performance. Underlying this problem has been an inability to ask the right questions early enough. Management has seldom asked the fundamental questions of what goes on in their organizations and why certain things happen, before analyzing the potential benefits of computerization. Here the old adage rings; If you automate a mess, all you get is an automated mess in which things go wrong faster. Building effective information technology applications is a slow process. Developing the applications necessary for the single market is a process few organizations have not yet begun to tackle in detail. One approach that has been successful in the handling of change in information technology environments is that proposed by Levitt. The diamond comprises of organization, task/function, people and technology. The essence of a Levitt diamond is that change in any single component leads to an imbalance of the forces operating elsewhere in the organization. If an equilibrium is to be regained change must take place in the other three parts. This shows why technology focused changes alone are insufficient to improve organizational performance.

Financial Management

Financial management includes; Management information, Budget activity formulation, monitoring evaluation of budgets, investment appraisal, working capital management, performance evaluation of profit and investment centres and assessment of accounting operational controls.

Management information-One thing that any computer system can provide is information. One of the most important areas is the primary need for managers to understand and use the information in order to improve their decision making capability. The computer is the means of providing managers with the information necessary for them to make the best possible use of the resources for which they are responsible. The basis of management information is accounting information because in a business in the final analysis it is economic performance that matters.

The business records maintained today on a computer may constitute virtual 'information assets' of the organization. In the absence of a steady flow of information, management could be powerless to do anything. A larger part of management's information needs are satisfied within the structures of the organization itself. Economists for example provide information on contemplated economic conditions. The information provided by accounting is essentially financial in nature. Information management has emerged as a discipline for arranging not only the data needed to support the activities of an organization but also for planning the use of information for competitive advantage.

The aim of information resource management is, to develop a complete corporate information architecture. This architecture defines the structure of a company?s data and the global processes that use data. It defines a data and process model for the entire enterprise. Information systems are primarily part of the service sector of the economy. Information systems provide a service which facilitates the running of other organizational functions.

Budgetary Control: Budgetary control involves preparing a plan for the business in financial terms. The plan usually starts with a forecast of sales or sales budget, which is then converted into a production budget which in turn is broken down into the estimated expenditure necessary for labour , material and other expenses in order to meet the production target.

These various steps in the preparation of budgets eventually lead to the compilation of a budgeted profit and loss account. To monitor the actual results of business operations the budgeted figures are compared with actual s and the difference is called the variance. The more detailed the budget and the analysis of the actual results, the more valuable is the information to managers as an instrument of control. It will facilitate to prevent adverse variances or to exploit favorable variances.

The difficulties experienced in introducing budgetary control procedures have been associated with the amount of data involved. To introduce sophisticated control procedures without using a computer in some form is inconceivable in this day and age. The computer overcomes the difficulties of manipulating large volumes of data for control reports quickly, accurately and economically and in a level of detail that is impracticable by other methods. For this reason computers are being used increasingly not only by large organizations but also by small businesses to open up new approaches to control information rather than merely to speed up and improve the accuracy and detail of financial systems. Flow of Money: Computer based systems can assist in the control of the flow of money. It will deal with the cash flow under two headings; cash receipts and cash payments. In the event of cash receipts computerized systems can assist the control of receivables.

The objective being to collect all outstanding debts quickly and to minimize cost of collection, commensurate with the annual amounts of bad debts to be written off against profits. As far as cash payments are concerned the cash flow objective is to make outgoing payments at the optimum time. The overall cash flow management policy has to be considered when making liquidity changes as affected by stock, debtors, cash at bank and creditors. The way a computer system can be developed is the capability of joining together the total company situation which depends on the answers of the aspects of feasibility of any large computer system.

Ratio Analysis: To continue business a company must generate reasonable profits to evaluate whether profits are high enough for this the use of probability ratios are necessary. The four main types of ratios measure liquidity, activity leverage and profitability. Liquidity ratios measure a firm's short term bill paying ability. It evaluates a firm's ability to satisfy its creditors in the near term and the current ratio is one of the most widely used. that is current assets over current liabilities. The return on sales is calculated by dividing the net income by sales. To measure performance the return on total assets is computed by dividing net income by total assets. Generally these ratios are compared with industry norms. Thus the correct identification of a firm could be found. Financial statements are the primary sources of financial information.

Investment appraisal: Investment appraisal is the process of determining which capital investment will be undertaken. In investment appraisal it is necessary to find how a present sum of money ,accrue to a future capital sum for a given rate of interest. To appreciate such a valuation we require to understand the time value of money. The cost of savings or investment is the sacrifice of consumption in the short term. This discounting technique in capital budgeting can be worked out by the use of computers.

Financial Control: Relatively few organizations have sufficient internal controls to reliably prevent or detect acts of computer fraud and embezzlement. The opportunity of a computer fraud that should cause greater concern is the programmers ability to manipulate the computer as if it was a puppet. Control consists of establishing standards for performance, measuring the performance and taking corrective action to bring the performance in line with the standard. If a company loses financial control permitting costs to get significantly beyond budget, the best management can do is to bring the costs back to standard.