Question

Identify and briefly discuss two of the financial performance indicators from the following list. Why are they important to a company's performance and why did you choose those two to review? If a company is doing poorly on these indicators, what actions should they take?

• Operating profit margin
• Return on total assets
• Current ratio
• Working capital
• Long-term debt-to-capital

Answer 1

FINANCIAL PERFORMANCE INDICATORS

1.Working Capital:

Cash that is immediately available is "working capital". Calculate your Working Capital by subtracting your business's existing liabilities from its existing assets. Cash on hand, accounts receivable, short-term investments are all included, as well as accounts payable, accrued expenses, and loans are all part of this key performance indicators equation.

This especially meaningful performance indicator informs you of the condition of your business in terms of its available operating funds, by showing the extent to which your available assets can cover your short-term financial liabilities.

2.Current Ratio: While the Working Capital PI(performance indicator) discussed above subtracts liabilities from assets, the Current Ratio performance indicator divides total assets by liabilities to give you an understanding the solvency of your business:-i.e., how well your company is positioned to meet its financial obligations consistently on time and to maintain a level of credit rating that is required to order to grow and expand your business.

IMPORTANCE OF PERFORMANCE INDICATORS FOR COMPANY

Interest of various related groups is affected by the financial performance of a firm. Therefore, these groups analyze the financial performance of the firm. The type of analysis varies according to the specific interest of the party involved are as follow:

Trade creditors: interested in the liquidity of the firm.(appraisal of firm’s liquidity)

Bond holders:interested in the cash-flow ability of the firm (appraisal of firm’s capital structure, the major sources and uses of funds, profitability over time, and projection of future profitability)

Investors:interested in present and expected future earnings as well as stability of these earnings (appraisal of firm’s profitability and financial condition)

Management:interested in internal control, better financial condition and better performance (appraisal of firm’s present financial condition, evaluation of opportunities in relation to this current position, return on investment provided by various assets of the company, etc)

POORLY PERFORMING COMPANY SHOULD TAKE FOLLOWING NECESSARY ACTIONS :

1.Lower Your Expenses: One of the best ways to improve your financial situation is to reduce expenses. Take a look at every area of your business and see if you can find cheaper alternatives for supplies, equipment and services. See if you can find better terms for bank accounts and insurance policies.

2.Sell Unused or Unwanted Assets: Items that  no longer need that are just taking up space.Selling them gives you immediate cash. If you’re paying for storage, you also save money on this expense. If you have a large number of such items, consider putting them up for auction. There are auction houses that specialize in business items. Or sell items yourself online with eBay or another online auction or retailer.

3.Lower Your Prices: When it’s feasible, lowering your prices is always a good way to drum up business and improve your business’s financial position. Of course, you have to make sure you’re not losing money. However, in some cases, even a slight markdown helps make your products or services more appealing to customers.

4.Raise Money With Grants or Crowdfunding:Do some research on any grants for which you may be eligible. The Small Business Administration, for example, provides grants and loans for small businesses. Another option worth looking into is crowdfunding, which is especially suitable if you have an innovative new product or service on the horizon.

5.Raise Your Prices:While lowering prices often helps you get more customers, in some cases, the opposite strategy is a better option. Some businesses offer prices that are below market, perhaps because they haven’t adjusted them in a few years. If you can increase your prices without losing too many customers, you may find that this is a good way to improve your financial business position.