The financial performance of a business can affect not only its owners and shareholders but also many other stakeholders. These stakeholders may include managers, suppliers, and employees. Let's take a look at what financial performance and stakeholders mean for a business and how one influences the other.
What is financial performance and who are the stakeholders?
Financial performance and stakeholders are highly interrelated. To understand this relation, it is important to understand what financial performance means and who stakeholders are.
Financial performance
Financial performance is a measure of how well a company uses its assets and generates revenue. It is an evaluation of financial position in regard to variables such as assets, liabilities, equity, expenses, and revenues.
Simply put, the financial performance of a business reflects how well a company is prospering in terms of its finances.
Financial performance analysis allows us to verify whether the company is making a profit or a loss, i.e. if it is making or losing money. It allows us to see how a business is spending, investing, and earning money. A regular analysis allows us to determine whether the business is growing, stagnant, or collapsing.
The financial performance of a business can be analysed by:
Stakeholders
Stakeholders are parties that have an interest in a business. They can either be affected by or affect the business.
Although the financial performance of a business typically has the biggest impact on its owners and shareholders, it can also affect other stakeholders.
Fig. 1 - Stakeholders
A group of stakeholders may include:
owners
shareholders
employees
government
customers
local community
suppliers
Fig. 2 - London Stock Exchange
Investors are particularly interested in the financial performance of a business, since the more a company earns, the more the investors earn.
How can financial performance affect different stakeholders?
Financial performance can affect all the stakeholders of a business. Below are some examples of stakeholders and how they can be affected by a business.
Financial Performance and Stakeholders: Owners and shareholders
Both owners and shareholders are parties that gain profit from the operations of a business.
For this reason, all parties involved want a business to be as profitable as possible. To this end, it should operate most effectively and efficiently.
When a business grows and brings profit, owners and shareholders receive a financial reward called a dividend.
A dividend is a financial reward received by the shareholders of a business every year. The dividend received depends on the amount of profit the company has made and the number of shares the shareholder has.
Both owners and shareholders tend to look at the income statement. The income statement allows them to see the levels of sales achieved, the costs of business operations, and the amount of profit or loss made.
They might also want to look at the balance sheet. The balance sheet allows them to see whether the value of a business has increased or decreased.
To learn more about the components of financial statements, take a look at our explanations on the Balance Sheet and Income Statement.
Looking at financial statements, owners and shareholders hope for the business to grow. They look for the level of sales, the amount of profit, and the value of a business to increase.
Owners and shareholders might also want to compare the financial performance of a company with its competitors. This is particularly important for shareholders who are deciding on what firm to invest in. They look for the company with the best financial performance.
Financial performance is also valuable to owners who benchmark, i.e. compare the financial performance of their business to other companies. Based on the reports, owners can get either encouraged by or discouraged from making further investments in the business.
Benchmarking refers to a company's comparing business performance to other companies in the same industry.
Financial Performance and Stakeholders: Managers
The financial performance of a business can influence decisions made by managers.
By looking at the income statement, managers can see the amount of profit or loss made by the business. On the balance sheet, they can also see its current and non-current assets and liabilities. They can also calculate financial ratios - especially net profit margin - that allow them to compare a business’s net profit with the revenue.
The amount of profit or loss and current and non-current assets and liabilities allows managers to make better decisions in terms of spending and investing money. Seeing the value of these variables, they can assess what a business can afford and what it cannot. It also allows them to assess whether or not their financial decisions have been effective. Seeing the impact of their decisions, they can draw conclusions to make better financial decisions in the future.
Financial Performance and Stakeholders: Suppliers
Suppliers have an interest in the financial performance of a business, as they want to sell as much as possible and gain profits from products they sell to the business.
They can look into a company’s income statement to see whether it is making a profit or loss. Suppliers can also look at its balance sheet to see what assets and liabilities it possesses.
A business that is very profitable and has a lot of assets will definitely be attractive to suppliers. This is because it has money to pay for suppliers of raw materials and components. It is simply able to pay for the products it purchased from a supplier.
However, a firm that is making a loss and does not have many assets, but rather liabilities, will be seen by suppliers as a risky customer who might not be able to pay for the products purchased.
Financial Performance and Stakeholders: Employees
Employees have an interest in the financial performance of a business because it allows them to earn their living and get their salaries and wages paid.
Employees can be particularly interested in the amount of profit or loss found on the income statement. This is because profits or losses may have an influence on their salaries. If a business earns money, it is more likely to pay good salaries to its employees than a business that is making a loss. Having said that, people are less likely to start working for a company that is making losses.
Employees might also want to compare income statements from different years. Looking at income statements from several years, they would hope for the profits to increase. If a company is becoming more and more profitable, its salaries are more likely to increase over time.
To sum up, the financial performance of a business can influence different stakeholders in various ways. Even though financial performance typically has the biggest impact on owners and shareholders, it can also affect managers, suppliers, and employees.
Financial Performance and Stakeholders - Key takeaways
- Financial performance and stakeholders influence each other.
- Financial performance is a measure of how well a company uses its assets and generates revenues.
- Stakeholders are parties that have an interest in a business.
- Although the financial performance of a business typically has the biggest impact on its owners and shareholders, it can also affect other stakeholders.
- Because owners and shareholders gain profit from the operations of a business, they want that business to be as profitable as possible.
- The financial performance of a business can influence decisions made by managers.
- Suppliers have an interest in the financial performance of a business because they want to gain profits from the products they sell to the business.
- Employees have an interest in the financial performance of a business because it allows them to earn their living.
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