Assessing Corporate Mission Fulfillment: A Study on the Relevance of Financial Performance Measures

Question

How do financial performance measures and targets contribute to evaluating a commercial company's ability to fulfill its corporate mission?

Answer

Introduction

In the corporate world financial performance is defined as a subjective measure of how well a firm is doing in terms of gross and net profitability or loss. It is a measure of the best way firms can make use of their assets and create revenues. Financial performance is reported by firms every year and analysts and investors use these this performance reporting to compare the firm with other firms (Osazefua Imhanzenobe  2020). In order to determine financial performance firms, use some indicators or measures. The financial wellbeing of a company is indicated by indicators like liabilities, assets, revenues, expenses, equity and profitability.

Financial measures are linked with financial performance of a firm and performance determines how well a firm is fulfilling its corporate mission (Kyere, & Ausloos 2021). This essay aims to evaluate the relevance of financial performance measures or metrics and targets in assessing the ability of a commercial company to fulfil its corporate mission. The essay discussion opens with introduction to different financial metrics and their relevance in financial reporting, followed by an introduction to what corporate mission entails thereafter addressing the way financial measures also measures the ability of a company to fulfil its corporate mission. With the help of corporate examples, the discussions answer the essay questions forming reliable conclusions. 

Discussions

At the end of each fiscal year every business, firm, company, corporate entity and even non-profit organisations prepares income statements, balance sheets cashflow statements and annual reports. These actions are taken for two main purposes, first for tax reporting and secondly to determine the financial condition of the firm at the end of the year. These financial statements reveal the status of a company’s 1. assets, 2. liabilities, 3. revenue, 4. expenses, 5. equity, and 6. profitability and these serve as an indicator or that company’s financial health (Cho, Chung, & Young, 2019). Financial performance analysis has four key areas. The first is profitability analysis which is focused by company stakeholders like investors, creditors, owners and managers in order to determine business performance and profit earning capacity of an organisation by calculating profitability ratio. The next is working capital analysis whereby operational efficiency of a firm is studied to ensure that the firm preserve essential amounts of assets to meet its short-term obligations. Analysing the  financial structure of a firm entails the interpretation of the capital structure of a business which is essential for balancing the debt-to-equity proportion of a firm. Lastly, activity analysis of a firm is taken whereby an evaluation of various activities of a firm such as analysis of human capital, production capacity and process, value creation, consumption of time and raw materials is undertaken (Hristov & Chirico 2019). Understanding these for areas primarily gives an evaluation of financial performance of a firm.

The indicators or metrics that establishes a firm’s financial performance by indicating liquidity, liability, profitability, assets and market value includes gross profit margin, net profit margin, return on equity, return or asset, current ratio, quick ratio, working capital, cash flow, debt to asset ratio, debt to equity ratio, total asset turnover, total inventory turnover, account payable and receivable turnover and equity multiplier. The corporate mission statement of a commercial firm or entity defines the culture, values ethics. Fundamental goals and future vision of that entity. The mission statement also defines how these values, goals, culture and ethics applies to each of the organisational stakeholders. Fundamentally, corporate mission statement sets corporate goals that company targets to achieve. However, in order to achieve this financial viability of the entity is of prime importance. While formulating mission statement, organisations must analyse their financial stability so that mission, vision, goals and objective remain relevant and practical (Ekinci & Poyraz, 2019). According to world bank’s global financial development report financial stability in a system ensures efficient allocation of resources, maintaining employment levels and managing unprecedented as well as precedented risks all of which is essential to ascertain relevance of a firm’s corporate mission (World Bank Group 2017). The above-mentioned indicators or measures have different roles to play in assessing the financial stability of a corporate entity.

Determining the profit margins determines the company’s valuation for its investors and creditors. Gross profit margin is the profit before subtracting the operating expenses and net profit margin is the ratio after deduction of all expenses including taxes. The gross and net profit margins are compared with previous financial year’s statements, projected statements and statements of competitors to develop understanding on the current financial status of a firm (Stobierski, 2020). If the current profits statements match the projected statements, then the targets are sufficiently fulfilled with respect to corporate mission. If the margins are better than competitors then the firms are seen as at a status of competitive advantage.  By measuring return on equity, a firm’s ability of generating profit from equity capital is ascertained. Return of assets calculation helps to understand a firm’s ability to utilize its assets to generate profits. If the assets can generate more profits, then arguably financial health of the firm is favourable and practical corporate mission can be established that with identify smart organisational objectives (Stobierski, 2020). Quick ratio and current ratio both are liquidity metrics. Liquidity is defined as the firm’s ability to covert its assets into cash. Using the assets, a firm can either gain cash by selling assets to pay off debtors or to acquire loans that can help further the business when need. The value or the assets needs to be high to indicate that financial condition is favourable. Therefore, the value of the assets is determined by quick and current ratio. While quick ratio determines the ability of a firm to pay of short-term liabilities using cash and cash equivalents, current ratio evaluates the ability to payoff short term liabilities using current assets (Iurieva & Dolzhenkova, 2021). Working capital is the amount held on bank to maintain organisational operations thus it is an overview of a firm’s operational liquidity. To put it simply higher the working capital of the firm better the valuation of the company. If a company has too low working capital, it cannot reach its corporate vision of being a scalable business. Therefore, determining the working capital of a business allows to understand its corporate vision and mission better. While all the above-mentioned metrics have their own relevance in determining financial performance and validates corporate mission, the most prominent metric measuring a firm’s financial performance is the operating cash flow. This cash flow ratio can be positive or negative and determines the ability of a firm to maintain positive cashflow. It is often easy to confuse between working capital and operating cash flow. However, these two metrics have some fine distinctions and separate roles invalidating the ability of a firm. Working capital allows a company to withstand unforeseen market disruption thus indicating the financial status of a company well. Cashflow is the measure of how much cash a business generates over a period of time. Thus, even if cashflow is negative in a particular quarter or fiscal year, an origination can have favourable working capital to withstand market disruptions (Wallstreetmojo 2023). Debt to asset ratio is also a leverage ratio that measures the ability to fulfil short term obligations or goals of firm. Short term obligations are shaped by organisational vision thus understanding this ratio helps in knowing whether company has the ability to fulfil its short-term targets, Debt to equity ratio on the other hand, is liquidity indicator that determines proportion of a firm’s external liability to internal equity. This ration provides insight on business solvency by understanding the ability of shareholder equity to cover all debt in case business in on a downturn. In the event of a downturn unless the company declares itself bankrupt, calculating the debt-to-equity ratio and maintain this ration helps in preparing the owners to keep the company afloat. Calculating these two ratios gives a clear idea on if the corporate mission statement makes achievable promises to the masses or not (Wallstreetmojo 2023). Total asset turnover is the maximum net sales generated by employing all its assets and inventory turnover determines the ability to convert stocks into sales by a firm. The former allows insight onto the level of efficiency for using a company’s assents for generating revenues while the latter is the efficiency ratio detailing the number of times per accounting period accompany has sold off all its inventory. By calculating inventory turnover, a company can understand whether its stocking excessive inventory compared to its sales. This will reduce the cash flow and net profit. Accounts payable turnover determines the ability to pay off creditors and account receivable turnover indicates the ability to recover outstanding credits from the debtors. Both metrics needs to be in favourable condition to keep the company afloat on the events of downturn (Stobierski, 2020). How each of these metrics are calculated meaning the equations are detailed in table 1.

Table 1: List of financial performance measures or metrics with their calculating equations

Source: (Stobierski, 2020)

According to Naranchimeg, and Enkhamgalan, (2020) ensuring financial stability requires taking a complex approach and pay attention to return on investment because it is the basis of growth of equity capital of a firm. This helps in meeting the criteria of funding structure, working capital and solvency. They suggested that financial stability rather than looked at as input and output should be viewed through organisational objectives and implementation of those objectives. In stating so the authors have defined financial stability as organisational priority goal, changes in goal implementation and core management object. Clearly the core management object is fundamental in understanding corporate mission of a firm therefore the relevance of performance metrics in assessing organisational ability of achieving corporate mission is undeniable. According to a Harvard business school review understanding the metrics or the key performance indicators of finance creates knowledge that can be used to shape corporate goals. For instance, corporate mission statement of most modern firms entails creating a sustainable business or create value for all its stakeholders (Stobierski, 2020). Now business sustainability can only be achieved by achieving financial stability. Without these metrics determining financial sustainability of a business cannot be done. At the same time creating value for stakeholders requires business to create profits. The measures of net profit, gross profit debt to asset ration and others determines the overall profitability of a firm thus it helps in providing better knowledge on what creates value for stakeholders and how much value is created for the stakeholders.

With the help of a corporate example, the relevance of these metrics in assessing the financial ability to meet corporate mission could be better understood. Tesco is the largest retail giant and market leader of the United Kingdom. Over the years the company has never fallen short on its target of being the market leader in the food and grocery retail industry of the UK. As reported by Tesco plc at the end of fiscal year 22-23 the net sales were £57,656m, revenue £65,762m, operating profit £2,630m, profit after tax £753m, net debt £10,493m and cash flow £2,133m. compared to previous fiscal year, the net profit after taxes has reduced by 50.6% debt to equity increased by 0.2% and cash flow reduced by 6.3%. however net sales increased by 5.3% and revenue increased by 7.2% (Tesco 2023). Therefore, clearly the organisations operating costs have increased causing dip in net profit and operating free cashflow. Tesco’s corporate mission statement entails “Serving our customers, communities and planet a little better every day.” This means that above all the company focuses on value creation for its stakeholders while realising their responsibilities towards the triple bottom line of sustainability namely people, planet and profit. In order to create value Tesco needs to improve its profits and cashflow. Clearly the performance indicators help in realising Tesco’s current financial position and compares it to its ability to fulfil corporate mission. While the current status clearly details great ability to fulfil Tesco’s corporate promises, results indicate need for improving financial performance in the coming fiscal year to continue its market leadership. Therefore, Tesco like most other companies relies on the various financial performance measures to determine its financial condition, analysing upon which it takes its corporate decisions and sets corporate goals.

A similar example could be of P&G. Proctor and Gamble is a renowned conglomerate and their 2022 fiscal year financial statement reporting reveal that they had financially strong year as reported by them. As per their financial statements their organic sales increased by 7% and EPS grew by 3%. However, their core EPS has grown by 5% and free cash flow was 93% productive. Their ROAs were $19 billion with a 5% increase on dividends. They concluded that not only they met their targets for FY 22-23 but exceeded the expectations by a wide margin (Procter and Gamble 2022). Possibly P&G has achieved such momentum in financial performance by looking deeply into its KPIs defined by the performance metrics and forecasting financial performance based on previous years performance and addressing their capabilities. Unless these measures were analysed carefully, achievable targets could not be set. Their corporate mission statement states “We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers, now and for generations to come.” (Procter and Gamble 2023). This promise of superior quality and value creation can only be met if the firm’s financial performance remains up to the mark. This could be achieved through assessing the performance metrics. The performance metrics assessment has the benefit of creating the ability to take informed decisions by firm. However, it also has a drawback that they need to be looked into objectively to define performance. Therefore, these measures are indeed relevant.

Conclusions and Recommendations

Summarising the key points of this essay, financial performance measures can be defined as the indicators or ratios that provides clarity on a firm’s financial condition in terms of profit, loss, revenue, liquidity, debt, cashflows etc. organisations often use these metrics as key performance indicators and analysts compare the value of these metrics with previous year reporting and reporting of the competitor to determine a firm’s current financial position. Corporate vision of a company generally speaks about the company’s vision and future aspirations. For a company to fulfil its corporate mission it is necessary that the firm has a clear idea about its financial standing and the knowledge is gained through these metrics. This can also be observed from Tesco plc’s example discussed above. Therefore, it suffices to conclude that financial performance measures and targets have great relevance in addressing and assessing a firm’s ability to fulfil its corporate mission

The essay recommends that all organisations irrespective of their size, structure and purpose should analyse and report these metrics through their financial statement reporting to remain better informed regarding their financial condition. Avoiding proper analysis of the key performance indicators will result in company’s not able to withstand unforeseen market disruptions or allow to regain stability after an event of downturn.