Financial performance measurement, also known as financial statement analysis, employs all available tools to demonstrate how essential things in a company’s financial statements are related to the company’s financial objectives.
Individuals that have a significant interest in measuring a company’s financial success fall into this category. Separated into two categories:
1. A company’s top managers, who set and strive to achieve financial performance objectives; middle-level managers of business processes; and lower-level employees who own stock in the company
2. Creditors and investors, as well as customers who have a cooperative agreement with the company
Financial Performance Evaluation and the Management Process As shown in Figure I, financial performance evaluation plays a key role In all phases of the management process.
In the planning phase of the management process, managers establish financial performance targets that will allow them to meet the company’s objectives while staying under budget. All of the strategic and operational strategies that management develops in order to fulfil a company’s objectives must finally be expressed in terms of financial goals and objectives.
While it is the basic goal of the firm to enhance the wealth of its owners, it is necessary to break this goal down into other areas. A thorough financial plan should include financial objectives and associated performance objectives in each of the following categories: financial objectives, financial performance objectives, and related performance objectives.
During the performing phase, management’s main responsibility is to carry out the plans for achieving the financial performance objectives. For example, Starbucks’ management will need to focus on increasing revenues and improving profitability by expanding the business, investing in technology, managing assets, and controlling costs.
Key financial performance measurements must be monitored on a continuous basis by management, who must also discover the root cause of any deviations from the measures and provide recommendations for remedial action.
Annual measurements give information that may be used to analyse long-term trends. Starbucks will use revenue growth and profits per share growth as major performance indicators, but other metrics such as asset management and cost control will be considered as well.
Management develops monthly, quarterly, and annual reports that compare actual performance with planned performance in achieving the key business objectives of liquidity, profitability, long-term solvency, cash flow adequacy, and market strength. Reports at Starbucks will focus on financial performance measures that relate to the company’s specific long-term strategies, such as cash flow and return on assets.