What is Financial Performance Measurement?

Financial Performance Measurement

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.

Financial Performance Measurement

Planning

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.

Performing or Execution

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.

Evaluating [Control and Evaluation]

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.

Financial Performance Measurement is a dynamic process that requires constant monitoring of both external and internal conditions of the organisation. These external conditions include changes in the financial markets, technology, the availability of resources, political climates, and so on. Internal conditions are factors like competition, customer perception, and employee retention. It is necessary for the organisation to monitor these internal conditions if they are going to achieve its objectives of the organisation. So, financial performance measurement should be understood as the continuous cycle of planning, executing, and controlling the company’s activities.

Communicating

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.

Conclusion

Financial Performance Measurement (FPM) is the process of quantifying the financial performance of the organisation with the purpose of assessing whether the strategies and activities that the organisation is undertaking are likely to achieve the desired objectives. The process is an important one and can be broken into 3 phases. The first step in Financial Performance Measurement is the Planning Process in which a business or organization sets up its own strategy for its growth and this should be done in such a way as to maximize the chances of successful achievement of the objectives. The second phase is the Execution Process in which the organization must carry out its strategies, plans, and projects. Financial Performance Measurement is a dynamic process and can be implemented in conjunction with the Business Plan. The last stage is the Control and Monitoring Process. This involves measurement of the indicators at the end of the process of planning, executing, and controlling.

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