What measures are used to assess a firms financial performance?
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Entrepreneurs' objective when establishing a company is obvious, they want to earn money. In order to make money, an enterprise has to perform well. However, this is only possible when required funds are available. Therefore, it is important to keep an eye on a business's financial performance and improve it whenever possible. Financial performance is a subjective measure of how well a company uses assets and generates revenues. It is an evaluation of its financial position regarding variables such as assets, liabilities, equity, expenses and revenues. Financial performance is highly determined by the way finances are managed. Financial managementrelates to applying general management principles to the financial resources of a company. It includes strategic planning, organising, directing and controlling of financial undertakings in a firm. How to improve financial performance?In order to improve financial performance, financial managers should undertake a specific process. The process includes several steps listed below. Financial Performance: Financial objectivesFinancial objectives are the goals or targets related to the financial performance of a business. They are the goals that enterprises set for success and growth. If there are no clearly defined objectives, it is impossible to move further and improve. Setting objectives enables companies to develop and widen their perspectives. However, financial objectives are not related to businesses only. Financial objectives can also be set by individuals. Imagine you want to go on a trip with your friends. You need money to pay for transport, accommodation, food and other expenses during the trip. Moreover, you really like pastries from Greggs and you go there and buy one every day during the lunch break. However, it is more important to you to go on a trip than eat a pastry every single day. For this reason, you change your behaviour and go to Greggs twice a week only. This way, instead of spending most of your money on the pastries, you save money for the trip. As you can see, having financial objectives has an influence on what you do on a daily basis. It determines your behaviour and where and how much money you spend. Following the example, if you did not set the objective and went to Greggs every day like you used to, you would not be able to save money for the trip. The same applies to companies, if they set a specific financial goal, they need to adjust and change the way they behave in order to achieve it. There are several types of financial objectives:
Financial performance analysisFinancial performance analysis is a process of analyzing and evaluating a company's financial position. It focuses on reviewing, assessing and comparing financial statements - a collection of data and figures organized according to recognized accounting principles. The analysis helps to determine whether a company is making a profit or loss. It shows how the company is spending, investing and earning money. Knowing how the company is performing, we are able to make better economic decisions and assess its potential. There are two types of financial statements:
The analysis may also include calculating and analyzing financial ratios:
And analyzing other aspects such as:
Financial Performance: Sources of financeSources of finance are the provision of finance for a business to fulfill its requirement for short-term working capital and fixed assets and other investments in the long term. There are two types of sources of finance:
Financial Performance: Cash flow and profit improvementBoth cash flow and profit determine the financial performance of a company and therefore, they are the key factors to be improved. This is because a business needs cash to keep operating. When it doesn't have the cash it requires to operate, then it will come to a halt or might even have to close. There are the key financial decisions that should be made to improve cash flow and profits:
Non-financial measures of performanceNon-financial measures are metrics that cannot be expressed in monetary units. Non-financial measures are equally important as they fill in the gaps which are not covered by the financial measures. Even though an enterprise makes a profit and the numbers are growing, it does not necessarily mean that it is successful. A 20-year-old company manufactures and sells furniture. It sells all the pieces of furniture it produces and has built customer trust, but its profits are not exceptionally high. Therefore, it decided to raise prices by 20%. Initially, customers continued to buy the furniture but then they realized how overpriced it was and consequently lost their trust in the company. This led to them switching to a different company. As you can see, it is crucial to take non-financial measures into consideration. Neglecting them might not only result in a lack of customer satisfaction but also in financial losses. Examples of non-financial measures:
Financial performance - key takeaways
Frequently Asked Questions about Financial PerformanceFinancial performance in an organisation is measured by reviewing, assessing and comparing financial statements - a collection of data and figures organized according to recognized accounting principles. The analysis helps to determine whether a company is making a profit or loss. It shows how the company is spending, investing and earning money. Financial management includes strategic planning, organising, directing and controlling financial undertakings in a firm. Some examples of financial performance metrics include:
An organisation's financial performance can be monitored by reviewing, assessing and comparing financial statements. There are two types of financial statements:
The analysis to monitor the financial performance also includes calculating and analyzing financial ratios such as:
Non-financial measures such as the following are also important to monitor financial performance:
Financial performance is a subjective measure of how well a company uses assets and generates revenues. It is an evaluation of its financial position regarding variables such as assets, liabilities, equity, expenses and revenues. Financial metrics used to measure financial performance:
Non-financial metrics used to measure financial performance:
Final Financial Performance Quiz
Question List some tips on how to improve financial performance. Show answer Answer
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Question Give a definition of financial objectives. Show answer Answer Financial objectives are the goals or targets related to the financial performance of a business. Show question
Question List all the six types of financial objectives. Show answer Answer Revenue objectives, cost objectives, profit objectives, cash flow objectives, investment objectives and capital structure objectives. Show question
Question What are the three types of revenue objectives? Show answer Answer Revenue growth, sales maximization and market share. Show question
Question Give an example of a cost objective. Show answer Answer Cutting variable costs to £50 per unit. Show question
Question Give an example of an objective rate of profitability. Show answer Answer Achieving an operating profit margin of 15%. Show question
Question What are the ways to improve cash flow? Show answer Answer For example, reducing borrowings and inventory. Show question
Question What are the two types of investment objectives? Show answer Answer Level of capital expenditure and return on investment. Show question
Question How can a capital be structured? Show answer Answer It might consist of equity and/or debts. Show question
Question Which of the objectives are usually used by small businesses and/or start-ups? Show answer Answer Cash flow objectives and capital structure objectives. Show question
Question Give an example of a personal financial objective. Show answer Answer For example, saving for retirement or a trip. Show question
Question Give an example of non-financial objectives. Show answer Answer For example, customer satisfaction and community involvement. Show question
Question List steps of setting financial objectives. Show answer Answer Deciding on what the money is going to be used for, categorizing the financial goals, setting deadlines, prioritizing the goals and knowing how much you have now and how
much you want to have. Show question
Question What are the three types of financial goals regarding a period of time within which they are to be achieved? Show answer Answer Short-term financial goals (six months to five years), mid-term financial goals (five to ten years),
long-term financial goals (more than ten years). Show question
Question Give an example of a benefit of setting financial goals. Show answer Answer Shaping everyday choices, determining how much to save. Show question
Question List two disadvantages of setting financial objectives. Show answer Answer It might prevent you from spending money and make you feel dissapointed when not achieved. Show question
Question What are the two types of influences of financial objectives? Show answer
Question Give an example of internal influences. Show answer
Question Give an example of external influences. Show answer
Question What is financial performance analysis? Show answer Answer It is a process of analyzing a company’s financial position. Show question
Question What is the purpose of analysing financial statements? Show answer Answer Understanding a business model, verifying whether a company is making a profit or loss and then making better economic decisions. Show question
Question What are the two main financial statements showing a company’s financial performance? Show answer Answer Income statement and balance sheet. Show question
Question What are the main elements of the income statement? Show answer Answer Turnover, cost of sales, gross profit, net profit. Show question
Question What are the main elements of the balance sheet? Show answer Answer Current assets, non-current assets, inventory, trade receivables, trade payables, current liabilities, non-current liabilities, shareholders’ funds. Show question
Question What is the main difference between an income statement and balance sheet? Show answer Answer Income statement shows a company’s financial activities over a specific period of time whereas the balance sheet shows its financial
position in a particular moment. Show question
Question What are the four main financial ratios? Show answer Answer Return on capital employed, net profit margin, gross profit margin and current ratio. Show question
Question What are the sections of the financial report? Show answer Answer Company overview, investment, valuation, risk analysis, details and summary. Show question
Answer Cash-flow is a movement of money. Show question
Question What is a basic cash flow formula? Show answer Answer Free cash flow = operating cash flow - capital expenditures Show question
Question What is a cash flow statement? Show answer Answer Likewise, by the income statement, cash flow statements show the profit earned and sustained loss by a business entity over a particular period (usually 12 months) and how this figure is concluded. However, instead of showing revenues and costs, the cash flow statement includes cash inflows and outflows. Show question
Answer Budget is a form of financial planning and forecasting. Show question
Question What are the three types of budgets? Show answer Answer
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Answer A cash budget is an estimation of a business's cash flows over a period of time. Show question
Question What are the advantages of budgets? Show answer Answer
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Question What are the disadvantages of budgets? Show answer Answer
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Question What is break-even analysis? Show answer Answer It is a calculation of how many units a company has to produce and sell to recover its total costs. Show question
Answer Target profit is an expected amount of profit that the shareholders and/or managers of a business expect to achieve by the end of a specified accounting period. Show question
Question What are the advantages of break-even analysis? Show answer Answer
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Question What are the disadvantages of break-even analysis? Show answer Answer
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Question Define sources of finance. Show answer Answer Sources of finance are the provision of finance to an organization to fulfill its requirement for short-term working capital and fixed assets
and other investments in the long-term. Show question
Question Define internal sources of finance. Show answer Answer The internal sources of finance signify the money that comes from inside the organization. Show question
Question Are internal sources of finance the cheapest? Show answer Answer Yes, Internal finance can be considered as the cheapest type of finance, this is because an organization will not have to pay any
interest on the money. Show question
Question Is internal financing the most significant source of finance for startups? Show answer Answer Yes, because the business will not have the assets or trading record which will help to get a bank loan.
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Question Why is the retained profit a desirable form of financing? Show answer Answer This is because there is no interest charge. Show question
Question Define external sources of finance. Show answer Answer External sources of finance signify the money that comes from outside the organization. Show question
Question How can an organization benefit from its retained profit? Show answer Answer The organization can decide to reinvest this profit into the business. This type of source of finance also does not have
interest charges, therefore, it is a desired type of finance. Show question
Question How are family and friends an external source of finance for an organization? Show answer Answer An organization can get a loan or get the money that might not need to be given back or is paid back with low or no
interest from family and friends. Show question
Question What are the types of external sources of finance? Show answer
Question Is equity share a common source of external financing? Show answer Answer It is a common source for established businesses, not all businesses can utilize this form of financing because of regulations.
Show question Discover the right content for your subjectsNo need to cheat if you have everything you need to succeed! Packed into one app!Study PlanBe perfectly prepared on time with an individual plan. QuizzesTest your knowledge with gamified quizzes. FlashcardsCreate and find flashcards in record time. NotesCreate beautiful notes faster than ever before. Study SetsHave all your study materials in one place. DocumentsUpload unlimited documents and save them online. Study AnalyticsIdentify your study strength and weaknesses. Weekly GoalsSet individual study goals and earn points reaching them. Smart RemindersStop procrastinating with our study reminders. RewardsEarn points, unlock badges and level up while studying. Magic MarkerCreate flashcards in notes completely automatically. Smart FormattingCreate the most beautiful study materials using our templates. Sign up to highlight and take notes. It’s 100% free. What is the best measure of a company's financial performance?A company's operating efficiency is key to its financial success. Operating margin is one of the best indicators of efficiency. This metric considers a company's basic operational profit margin after deducting the variable costs of producing and marketing the company's products or services.
What is used to measure the financial performance of a business entity?The Income Statement (referred to in India as the profit and loss statement) reflects the performance of the firm over a period of time. “Income statement is a summary of a firm's business revenues and expenses over a specified period, ending with net income or loss for the period.”
What are the three metrics used to measure financial performance?The most important measurements of performance for a company are typically sales, revenue, and gross and net profit margin. Health in these metrics ensures that the company is making more than it is spending.
What is the most commonly used financial performance measure?Return on investment (ROI) is the most commonly used financial performance measure because it allows managers of one organization to compare performance with that of other organizations. ROI lets managers assess an organization's competitive advantage.
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