At its’ most basic, the series of activities or processes that are used to observe a company’s short and long term financial results are filed under financial performance management. Although this phrase is mostly used in investment management, it can also be used in business functions.
The basic goal of financial performance management is to see whether the forecasts or budget plans of an individual (or a company) is actually in line with the financial returns (or losses) received at the end of a specified time period. The process involves learning and making the necessary adjustments along the way in order to achieve the financial goals that have been set.
In the Investment Industry
In the world of investments, financial performance management deals with the return rate of a given financial portfolio. A financial portfolio is a collection of different kinds of financial instruments, each with varying degrees of risks and return rates. No one can tell the future for sure but statistics can help greatly in providing an idea of how these financial instruments will perform over a given set of time.
Clearly identified guidelines are then enforced as inspired by the forecast and then measured against the actual performance of the financial instruments. Adjustments are made to the financial portfolio, based on the actual results, with the goal of improving the return rate in order to meet the company or individual’s objectives. Adjustments are constantly made as an ongoing process to properly address the volatile conditions and circumstances of the market.
In the Business World
In the more traditional business scenario, financial performance management is directly linked to company profitability. A regular check-up of the profit and expenses incurred by the company allows for a healthy insight into their operations, problems and risks. A traditional financial statement may be similar to it but the two serve different purposes. A financial statement is the summary of the overall financial activity of a company while a financial performance sheet is more customized, made up of a specified report of sales, cash flow, expenses and costs.
The resulting financial values are checked against the forecasts or budgets of the company, which has been created as part of the management’s long-term strategy. The variables in the report are analyzed, according to positive or negative contributions to the company’s financial standing. Decisions impacting the goals of increasing sales and reducing costs are also made based on this analysis of the variables.
A Necessary Requirement
The entire system of reviewing, comparing, analyzing and finally making decisions is done on a regular basis as a necessary requirement of a healthy business management. When a company fails to put these processes into action, it is more likely to undergo financial challenges if it hasn’t already. Many cases of failed businesses due to financial mismanagement could have been solved if only a thorough financial management process was implemented.
To improve your basics on financial performance management, or to simply brush up on the concepts, check out your local university or business college. Find out if they offer it as a course. You may also do self-study and get yourself some books or online resources about the topic. Case studies are an excellent way to learn more about the more personal facets of financial performance management as well.