Statement of Financial Performance: The Ultimate Guide
Investors are often interested in a company's financial performance to tell the general well-being of the company. They can also see what the future holds for it, and whether its operations and profits are on the right track. Financial performance is a mirror that reflects the job that a company's management is doing.
Here’s What We’ll Cover:
These are all different aspects of financial performance that can help you improve your business. They can also grant you insight on a business that you may want to invest in. Keep reading to find out more!
What is a Statement of Financial Performance?
A statement of financial performance looks at a company's overall financial performance. It uses the three statements above to do so. It details the following:
- A business organization's revenues
- Their expenses
- Their net income
When you look at all of these things, you get a full picture of a business's financial health. It shows how profitable a business is, and if they're worth investing in. It helps with internal functions, as well. It shows the business where it can improve, and where things are going well.
What is Financial Performance?
In the financial world, performance refers to how well a firm is able to use assets for its primary mode of business and generate revenues. It is also used to describe a firm's financial health over time.
Investors and analysts use financial performance to compare similar firms. To be able to compare firms, they both have to be a part of the same industry or sector.
What Is a Financial Performance Analysis?
Financial performance analysis refers to studying and evaluating a company's financial statements. It is a collection of data and figures organized according to accounting principles that grants insight into the company. Your company’s financial performance can be determined by generating financial statements. This can be done with your accounting software.
An analysis of financial performance examines the company at a specific moment, usually a recent quarter or fiscal year.
Financial performance analysis may focus on various areas. An analysis may focus on a firm's:
- Working Capital: The difference between a company’s current assets and current liabilities.
- Financial Structure: A company's mix of debt and equity financing.
- Activity Analysis: The factors that influence the cost and pricing of goods and services.
- Profitability Analysis: The amount the business actually has leftover after expenses and taxes.
What Are Financial Performance Indicators?
Financial performance indicators are sometimes referred to as Key Performance Indicators (KPI). These are quantifiable measurements that indicate the economic health of an organization. Corporate insiders, like management and board members, use these to assess how the company is doing. Outsiders, like research analysts and investors also use them to compare a company to its competitors. They also identify the company's strengths and weaknesses.
The most commonly used financial performance indicators are:
- Gross Profit / Gross Profit Margin: The amount of revenue made after subtracting production costs. The gross profit margin refers to the percentage amount a company earns per dollar of revenue. For instance, the calculation for Target's income statement from selling a T-shirt is ($59,490 minus $39,399) divided by $59,490, which equals 0.337, or 33.7 percent.
- Net Profit / Net Profit Margin: The amount of revenue from sales after deducting all related business expenses and taxes. The net profit margin refers to earnings per dollar of sales ratio.
- Working Capital: Liquid funds, used to finance day-to-day operations.
- Operating Cash Flow: Money generated from normal business operations.
- Current Ratio: Calculated by dividing total assets by total liabilities.
- Debt-to-Equity Ratio: The total liability of a company divided by its shareholder equity
- Quick Ratio: A measure of solvency that calculates the ratio of liquid current assets to total liabilities.
- Inventory Turnover: How much inventory is sold within a given period, and how often is the inventory sold in its entirety.
- Return Inequity: Net income divided by shareholder equity (assets less debts).
What Are the Three Financial Statements?
There are three financial statements that can be used to review the financial position of a company. They are the balance sheet, the income statement, and the cash flow statement. Using these three financial documents, you can determine the financial performance of any company. Below we'll cover what each statement entails.
The balance sheet shows the organization's financial condition at a specific date. It shows how the company manages its assets and liabilities. Analysts can find details about long-term and short-term debt. Furthermore, they can also learn what kinds of assets the company owns. It can also be determined what percentage of assets are financed by liabilities versus shareholders' equity.
Here are some examples of items listed on a balance sheet:
- These are cash and cash equivalents. These may include Treasury bills and certificates of deposit.
- Accounts Receivables. This is the amount of money owed to the company by its customers for the sale of its product and service.
- Debt, inclusive of long-term debt
- Wages payable
- Dividends payable
A company's shareholders' equity is determined by subtracting total assets from total liabilities. In other words, it is the amount of money shareholders will receive if all the company's assets are liquidated, and all its debts are paid off. Retained earnings are part of shareholder's equity. They are the net earnings that were not paid to shareholders as dividends.
The income statement, also known as the profit and loss statement, provides a summary of a company's operations over the course of the year. It begins with sales or revenues and ends with net income. The income statement includes the gross profit margin, cost of goods sold, operating profit margin, and net profit margin. Additionally, it offers an overview of the number of outstanding shares and a comparison with the previous year.
Cash Flow Statement
A cash flow statement combines the income statement and balance sheet data. Also, cash flow statements show the exchange of money between a company and the outside world over time. According to some analysts, the cash flow statement is the most important financial statement. This is because it reconciles net income with cash flow. It can help an analyst determine how much the company spent on operating expenses, dividends, and capital expenditures. The report also outlines the sources and uses of cash flow from operations, investing, and financing.
Operating activities on the cash flow statement encompass all sources and uses of cash. This includes all cash made or spent by running the business and selling its products and services. Rent, interest payments, and cash receipts from the sale of products or services are also included in these transactions.
A company's investment activities include any sources and uses of cash that contribute to its long-term future. This category includes the purchase or sale of assets, and loans to vendors or payments to customers. It also includes payments related to mergers or acquisitions.
Additionally, purchases of fixed assets such as property, plant, and equipment (PPE) are included in this section.
Cash related to financing activities includes cash received from investors or banks, as well as cash paid to shareholders. It also includes loan and dividend payments. The category also includes the issuance of debt, equity, stock repurchases, and debt repayment.
Why Does a Business Need a Statement of Financial Performance?
A statement of financial performance is important to any business. As mentioned previously, it can help with business strategies to make a company more successful. It can also help a company obtain outside funding for business operations. Additionally, a statement of financial performance can improve financial record keeping. This is very important when it comes to be tax time.
How Can I Improve My Financial Performance?
Improved financial performance can be achieved in several ways. The first step is to identify any roadblocks or friction points—and the source of these issues. More strategies include:
- Maintaining better records of income and expenses
- Improving collections of accounts receivable
- Adjusting payment options and prices if necessary
- Selling unwanted or unused assets
- Revamping budgets
- Reducing expenses
- Applying for government grants and loans to merge or refinance current debt
- Assessing financial statements and performance indicators, ideally with the help of a professional
Financial performance is at the heart of any successful business. Being able to improve financial performance is necessary if you want to continue operating. By understanding how to break down financial performance and review it, you can improve your company! If you’re looking for more articles like this, check out our resource hub! We have plenty of information that can help your business succeed. Take a look today!