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Financial performance

We've also remained clear that profit - as important as it is - is not why the Hewlett-Packard Company exists; it exists for more fundamental reasons. John Young, former CEO of HP


The usual way of measuring the performance of an organization is with two financial reports, which should be consistent year by year with no anomalies or surprises.
The Balance Sheet
gives a financial snapshot of the organization at a particular point in time. It defines what the organization owns, what is due to creditors and owners and what it is owed by debtors.
The Profit & Loss Account
(Income & Expenditure Account for non-profit organizations) gives a summary of the financial activity over the previous year. It demonstrates how easy it is for the organization to operate. If income is much greater than expenditure, then there is more latitude for decision-making and the leeway for correcting mistakes is much greater. Virtually all organizations have to produce these two reports or their equivalents. The Balance Sheet shows the current situation, whereas the Profit & Loss Account shows what has happened in the previous financial period.

The use of ratios: In addition to the main financial reports, particular industries use specific ratios to assess how well they are operating. Commercial organizations use profit/sales, assets/liabilities, debtors/sales, overheads/turnover, etc. Local government uses the cost per resident of providing various services, such as education, libraries, or sports and recreation facilities. These can be used to make comparisons with local government in other localities. Charities use the ratio of the money spent on its cause to the money collected.

Financial performance is only part of the picture: 
Although many financial analysts think that they can discover everything of importance about an organization from its financial books, this is not true. The books cannot say if a competitor is about to put them out of business, if the workforce is becoming out-of-date in its skills, or if a reorganization is required because of future legislation. Financial performance could be about keeping the books straight, making a profit for future investment, distribution of dividends to the owners, building up reserves or paying high salaries to the senior executives or partners. Each organization must understand what it means by financial performance and have a strategy for achieving it. >>>