Financial Performance Management - Personal Statement Example

It is evident that financial performance is an important aspect in a business environment and hence every business gives specific significance to improving its financial performance. The process of FPM is very helpful not only to analyze the firm’s current performance but also to improve the firm’s performance and growth in the future. Through effective FPM, investors can obtain a clear view of the current state of affairs of the company and thereby make potential investment decisions. Although financial performance management has a number of beneficiaries, this practice primarily intends to meet the interests of shareholders who risk their money in the business for future financial gains. Referring to agency theory, Ignatiuk (2009) notes that managers will act in accordance with their self-interest unless they are monitored constantly (p.3). Evidently, the FPM practice constantly monitors the activities of managers and hence minimizes the chances of business malpractices. In other words, this strategy is effective in ensuring that the business is running in accordance with the interests of its stockholders. Since FPM assists the top management to get a clear understanding of the current business performance, it is possible to introduce or withdraw manager compensations according to the needs of the situation.

Traditionally, a firm’s current net income, total assets, net sales, and return on equity were mainly considered as financial performance measures. According to Ignatiuk (2009), in order to cope with the growing scope of the modern business, today Economic Value Added (EVA) is accepted to be the best financial performance measure; and financial analysts indicate that EVA is very useful to evaluate the financial performance of an organization effectively and thereby to promote the maximization of shareholder values. Although the viability of EVA is challenged by some academic literature, one thing is clear that an effective financial performance management system will certainly assure that managers make decisions that can increase shareholders’ wealth.

Using the FPM system, the top management can understand the company’s strengths and weaknesses and various aspects of its business performance (Murby & Gould, 2005). Similarly, it can easily identify the top-performing and under-performing departments in the organization. Therefore, the management can clearly understand the areas of improvement or what is to be done to achieve further business growth or increase shareholder values. In this regard, financial performance management is extremely a comprehensive management approach to design and implement timely and meaningful business strategies. Although FPM is generally considered as a tool of financial management, researchers like Behn (2003) point out that it can be also used as a means of motivation and control. As Thierauf (2001) states, a well-structured FPM system would assist the firm to compare its current financial performance with that in a particular period in the past (p.344). Such a comparison can be beneficial for the company to identify the rate of growth it has achieved and areas to be improved. Even a thoughtful and systematic strategy development would not benefit a business completely unless the designed strategy is not implemented properly. It is interesting to see that a potential FPM system can significantly contribute to effective strategy execution as well. As FPM regularly evaluates the financial performance of the firm, the top management can easily understand how the implemented strategy influences the overall performance of the organization. Thus, the management can make needed changes to the implementation process if necessary.         

Conclusion

From the above discussion, it is clear that a good financial performance management system can play a notable role in developing a business strategy that in turn can add to shareholder values. Similarly, this system makes managers accountable for their operations and hence assures that the way the business operates hurts the interests of company shareholders. Finally, it can also noticeably contribute to the strategy execution process as this constantly monitors the firm’s financial performance. Hence, FPM is a holistic approach to frame and implement business strategies in the long run.