Efficiently managing the money a company needs to run its daily operations, known as working capital, is crucial for success. It helps organizations use their resources well and keep cash flowing smoothly.
This connection between good working capital management and how well a company does can be complicated. It’s influenced by factors like complex supply chains, many suppliers, different products, and uncertain technology.
Investment in tech
New research from the University of Notre Dame highlights something important: companies need to invest in technology. This investment helps them make smart decisions about working capital, which improves how well they do overall.
The research looked at 1,054 American manufacturing companies from 2011 to 2013. They studied two types of technology investments: buying equipment and hiring IT staff.
The study showed that these technology investments play important roles. They help companies work faster and more accurately (like automation), and they also help create new insights (called informating). These two aspects of technology work together to affect how well a company manages its working capital and how well the company performs.
“Our results show that IT infrastructure investments have a stronger impact on the positive relationship between working capital management and firm performance than IT labor investments,” the researchers explain. “This is mostly due to the structured and transactional nature of the data underlying working capital processes.”
Positive returns
A company’s success in managing its money depends on three important numbers. First, there’s “days inventory outstanding” (DIO), which tells us how much stuff a company has compared to how fast it’s selling. Then there’s “days payables outstanding” (DPO), which shows how quickly a company pays its suppliers. Lastly, there’s “days sales outstanding” (DSO), which measures how long it takes to get paid after selling something.
To do better in business, companies need to control these numbers wisely. This means keeping DIO and DSO low and extending DPO. However, if a company waits too long to pay suppliers, reduces its inventory too much, or gets paid too quickly, it can cause problems for its operations and hurt its success.
New research tells us that investing in technology (IT) can help companies manage these numbers. Spending money on IT tools can make DPO longer and reduce the negative impact of high DIO and DSO on how well a company does. Also, hiring and training IT staff can improve the benefits of having a longer DPO and decrease the bad effects of higher DIO. Surprisingly, these IT investments don’t change the connection between DSO and how well a company performs.
Technology works really well for processes related to inventory, payments, and receivables because those processes are structured and organized. However, having skilled IT staff also plays an important role in how these money-handling processes affect a company’s success. They help analyze data, understand cash flow, and adapt processes to what the company needs.
“As businesses struggle to figure out how best to manage their working capital, it’s important for managers to get buy-in from their superiors for any new IT investment,” the authors conclude. “Our findings should enable managers looking after working capital-related processes to justify making greater investments in IT and, particularly, in IT infrastructure.”
