Financial performance measurement, also called financial statement analysis, uses all the techniques available to show how important items in a company’s financial statements relate to the company’s financial objectives. Persons with a strong interest in measuring a company’s financial performance fall Into two groups:
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 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.
During the planning phase of the management process, managers set the financial performance objectives that will enable them to achieve the company’s goals. All the strategic and operating plans that management formulates to achieve a company’s goals must eventually be stated in terms of financial objectives. A primary objective is to increase the wealth of the company’s stockholders, but this objective must be divided into categories. A complete financial plan should have financial objectives and related performance objectives in all the following categories:
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.
Management must constantly monitor key financial performance measures, determine the cause of any deviations in the measures, and propose corrective actions. Annual measures provide data for long-term trend analysis. For Starbucks, a key performance measure is a growth in revenues and earnings per share, but other measures related to asset management and cost control will be important 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.