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Financial Performance and Stakeholders

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Financial Performance and Stakeholders

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.

Stakeholders, StudySmarterStakeholders

A group of stakeholders may include:

  • owners

  • shareholders

  • employees

  • government

  • customers

  • local community

  • suppliers

London Stock Exchange, StudySmarterLondon 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.

Frequently Asked Questions about Financial Performance and Stakeholders

Financial stakeholders are all people interested in business operations. They can either affect or be affected by the business. Stakeholders may include owners, shareholders, employees, government, customers, local communities, and suppliers. 

Business owners and shareholders invest time and effort in the business. As a result, how the business performs financially can have a direct impact on them. Employees earn a living by working for businesses whereas customers can benefit from better goods and services as the business thrives. Suppliers also generate more sales if the business is doing well. 

Financial performance is a measure of how well a company is able to generate revenue from its operations. 

Many factors can influence the financial performance of a business, including productivity, ownership, amount of investment, managers' investing decisions, etc. 

Stakeholders such as owners, shareholders, customers, and suppliers are all greatly affected by the business's financial performance. Typically, these groups gain more the company thrives financially. 

Final Financial Performance and Stakeholders Quiz

Question

Define financial performance.

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Answer

Financial performance is a measure of how well a company uses assets and generates revenue. It is an evaluation of its financial position regarding variables such as assets, liabilities, equity, expenses, and revenues.


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Question

What are the two things stakeholders can use to analyse the financial performance of a business?

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Answer

  • Financial statements 
  • Financial ratios


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Define stakeholders.


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Answer

Stakeholders are parties that have an interest in a business. They can either be affected by or affect the business.


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Question

Give two examples of stakeholders.


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Answer

Any two of:

  • owners
  • shareholders
  • employees
  • government 
  • customers
  • local community
  • suppliers


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What do we call a financial reward received by owners and shareholders?


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Answer

Dividend

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Owners and shareholders want a business to be as _____ as possible.


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profitable

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Who would owners and shareholders want to compare the financial performance of a company with?


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Answer

Competitors

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How can financial performance influence managers?


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Answer

It can influence their decisions.


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Why do suppliers want to work with companies that are profitable and have a lot of assets?


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Answer

Because such companies have money to pay for suppliers of raw materials and components. They are simply able to pay for the products purchased from a supplier.


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Why can employees be interested in the financial performance of a business?


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Answer

Because it allows them to earn their living.

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When it comes to employees, what can the financial performance of a company have an impact on?


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Answer

Their salaries

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Where do we find information about the assets and liabilities in a business?


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Answer

Balance sheet

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Where do we find information about the level of sales in a business?


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Answer

Income statement

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Where do we find information about the amount of profit or loss of a business?


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Answer

Income statement

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What does the net profit margin allow one to compare?


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Answer

It allows one to compare a business’s net profit with its revenue.

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___ are parties that have an interest in a business.

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Answer

Stakeholders

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Stakeholders...

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can either be affected by or affect the business.

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All shareholders are also stakeholders.

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True

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___ is a financial reward received by the shareholders of a business every year.

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A dividend

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___ refers to a company's comparing business performance to other companies in the same industry.

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Answer

Benchmarking

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Which of these parties can be stakeholders?

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Answer

All the answers are correct.

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The dividend received depends on... 

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Answer

the amount of profit the company has made and the number of shares the shareholder has.

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The more a company earns, the more the investors earn. 


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Answer

True

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Question

The income statement...


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Answer

shows the levels of sales achieved, the costs of business operations, and the amount of profit or loss made. 

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The balance sheet...

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Answer

shows whether the value of a business has increased or decreased.

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Question

Seeing the impact of their decisions, ___ can draw conclusions to make better financial decisions in the future. 

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Answer

managers

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Question

They 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. Who it is?

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Answer

Suppliers

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They 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. Who is it?

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Answer

Employees

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Question

Based on financial reports, owners can get either encouraged by or discouraged from making further ___ in the business.


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Answer

investments 

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Question

___ allows one to compare a business’s net profit with its revenue.

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Answer

Net profit margin

Show question

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