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
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.
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
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.
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business, if the workforce is becoming out-of-date in its skills, or if a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. >>>