Financial perspective
| Financial perspective |
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Financial perspective depict the economic results of the company. It is used to assess the success of the company in the long term and the factors by which this success will be achieved. Indicators are selected due to the company's goal and they are grouped in a string of cause and effect, which should bring improved financial results.
Objectives
Objectives for this perspective also shall be selected in accordance with other perspectives. Objectives can vary: from the rate of return on capital (ROE) to the sales dynamic. Selected objectives can vary due to the presence of different phases in the product life cycle within the company and should be subject to periodic verification. At least once a year managers should determine whether adopted strategy is right and change it do reflect changes in environment. In addition, many companies in this perspective takes into account the size of the risk occurring in the adopted strategy. The result of the financial perspective combines results of all other perspectives.
Formulation
Managers who formulate financial perspective base their action on three assumptions:
- Achieve the required increase in revenues.
- Reduce the costs and improve performance.
- Increase the use of assets and efficiency of investment.
Selecting goals in the financial perspective should not be based solely on these three assumption but also take into account the phase of life cycle of company. In the growth phase the financial objective is the growth rate of revenues and increases in sales in target market segments. In the maintenance phase, most companies set financial goals relating to profitability. In maturity stage the main goal is to maximize cash flow. General financial goals during operational phase relate to cash flow and the reduction in working capital.
Examples of Financial perspective
- Profitability: This perspective focuses on the company’s ability to generate a positive return on its investments and operations. This includes measures such as Return on Investment (ROI), Return on Equity (ROE), and Gross Profit Margin.
- Cash flow: This perspective focuses on the ability of the company to generate cash from operations. It includes measures such as cash flow from operations, net cash flow, and free cash flow.
- Liquidity: This perspective focuses on the ability of the company to access short-term financing as well as its ability to pay short-term liabilities. It includes measures such as current ratio, quick ratio, and cash conversion cycle.
- Financial leverage: This perspective focuses on the ability of the company to use debt financing to increase its return on equity. It includes measures such as debt to equity ratio, debt to assets ratio, and interest coverage ratio.
- Market value: This perspective focuses on the market value of the company’s stock. It includes measures such as market capitalization and price to earnings ratio.
Advantages of Financial perspective
- Financial perspective provides a clear understanding of the company’s financial performance, enabling it to identify areas of improvement and areas where financial resources should be allocated.
- Through the financial perspective, companies can identify and address potential risks that could lead to financial losses.
- Financial perspective can be used to set financial goals, track progress, and measure results.
- Financial perspective can help companies make informed decisions about their investments, budgeting, and other financial matters.
- Financial perspective provides a comprehensive picture of the company’s financial performance, enabling it to make decisions based on long-term financial objectives.
- Financial perspective can be used to assess the company’s ability to withstand economic downturns and changes in the market.
Limitations of Financial perspective
- Financial perspective only measures financial performance, which is only one aspect of company success. It does not measure customer satisfaction, employee morale, or other non-financial aspects of business performance.
- Financial perspective only looks at the past performance, not the future potential of the company. It does not take into account the potential of new markets or products.
- Financial perspective can be easily manipulated. Companies can use accounting tricks to artificially inflate their financial performance and make it look better than it really is.
- Financial perspective can be difficult to interpret without significant knowledge of financial statements and accounting. It is not always clear what the numbers mean and how they should be interpreted.
- Financial perspective does not take into account external factors that can affect a company’s performance such as economic conditions, industry trends, or changes in consumer behavior.
- Strategic Perspective: This approach evaluates the company’s strategy and how it affects the long-term success of the organization. This includes analyzing the company’s vision, mission, objectives, and strategies and how they are implemented.
- Market Perspective: This approach looks at the competition of the company and how it affects the company’s performance in the market. It also takes into account the customer needs, preferences and trends.
- Operational Perspective: This approach evaluates the company’s operations and processes and how they contribute to the company’s success. It looks at the efficiency, effectiveness and cost of operations.
- Risk Management Perspective: This approach evaluates the company’s risk management practices. It looks at the company’s ability to identify and manage risks and how they affect the company’s performance.
In conclusion, Financial perspective is one of the approaches that organizations use to evaluate their performance and assess their long-term success. Other approaches such as Strategic Perspective, Market Perspective, Operational Perspective, and Risk Management Perspective are also used to understand how the company’s strategies, operations, and risk management practices are affecting the company’s performance.
References
- Töpfer, A., Lindstädt, G., & Förster, K. (2002). Balanced Score Card. Controlling, 14(2), 79-84.
