What is Financial Performance?

Financial performance has to do with how well a business makes use of the assets at its command. Often, this is measured in terms of how income is generated and received within a given period of time. The idea is to ensure that the cash flow is sufficient to not only cover all costs of operation, but also to produce net income that leads to the realization of a profit. Businesses routinely look for ways to fine-tune their financial performance and thus increase the bottom line.

While a business can be said to be stable if its financial performance consistently yields a profit, subjective measures often determine whether or not that level of performance is considered adequate. For example, if a business is barely making a profit, the performance level is often thought to be low and thus not sufficient. While it is true that the company is honoring all its obligations and managing to earn a little more, chances are the owners and officers of the business will begin to look closely at how various assets are being used. This creates a situation where policies and procedures are evaluated continually, and hopefully provide some ideas on how to maximize the use of those resources.

Should a business not be achieving what is considered a reasonable level of financial performance, managers will often look at three key areas. First, the sales effort will be evaluated, with possible changes in the alignment of sales territories and the staffing in those territories. The business will also likely look at the production process, including the raw materials used in the process. Here, the idea is to reduce costs, which in turn increases the profit on each unit sold. Finally, the company will consider the administrative structure of the company, with an eye to making any type of reorganization that will trim costs and thus increase profitability.

When looking at overall financial performance, many businesses will consider several different streams of revenue. A major source cash flow is any revenue generated by the production of goods and services. For many companies, this is the main source of income. The business will also look at cash flow from any investments held by the company, including any interest income generated on bank accounts. In situations where the company is in the process of paying off debts, this factor will also be essential to determining how well various assets are being used in the ongoing operation.