Chapter 16

Measuring Financial Performance


There is a saying ‘Revenue is vanity, profit is sanity, but cash is king!’ In this chapter we are going to consider some of the key financial ratios used both internally and externally to measure business performance. However, before doing that we will give an overview of the importance of measuring financial performance.

The financial results of a business are the outcome of all the business activities over the last year and a reflection of many decisions taken in previous years. Retrospective they may be, but end of year results are important. Most businesses exist to make a return for their shareholders who have a keen interest in the performance of the companies in which they are investing. Financial analysts’ and investors’ views of the business will influence availability of funding. They will also influence the actions of customers and suppliers and they will even have an impact on personal bonuses, which in some organisations are substantial. Therefore, businesses take great care to manage the messages about their end of year results.

Given the importance of, and the focus on, financial results it is not surprising that, on occasions, the results are achieved through massaging. It is quite simple to cut out expenditure that falls this year but will not provide a return until next year, be it staff training, new product development, refurbishment of premises or advertising close to the year end. However, all of ...

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