UNDERSTANDING FINANCIAL PERFORMANCE MANAGEMENT
UNDERSTANDING FINANCIAL PERFORMANCE MANAGEMENT
Financial performance management is a series of process used to monitor long term and short term financial results. This term is most commonly applied to investment management but also can be applicable to business operations. The primary purpose of financial performance management is to compare actual results to budgets or forecast and make adjustments to reach specific financial goals.
In the investment industry, financial performance management refers specifically to the rate of return for a financial portfolio. A portfolio is comprised of multiple financial instruments, with a variety of risks and rates of return. Although it is impossible to predict the future, statistics are used to provide a forecast of financial performance of these instruments over a specific period of time.
Specific performance benchmarks are set based on the forecast, and the actual performance is measured against these values. Based on the results, changes are made to the portfolio to increase the rate of return to meet these requirements. There is a constant process of adjustment, which is a necessary response to changing market conditions and circumstances.
In a traditional business setting, financial performance management relates to company profitability. A regular review of revenue and expenses provides valuable insight into business operations, risks and issues. Typical financial statements are not ideal for this purpose, because these reports are a summary of overall activity. Instead, many companies create customized reports of sales, costs, cash flow and fixed expenses.
These, values are compared to budgets or forecasts, which are created as part of a long term management strategy. The positive or negative variances are then analyzed to assist in making decisions. Business decisions about how to increase sales, reduce costs and otherwise manage the financial performance are made and then implemented.
In conclusion, this entire process of review, comparison, analysis and making decisions is repeated on a continuous basis. It is a necessary aspect of business management. Companies that fail to perform these tasks and actually implement business changes tend to experience ongoing financial difficulties. In many situations, businesses that fail could have been rescued if the appropriate changes were made.
