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BMP6015-21-UOB-A: Evaluating the Impact of Performance Measures on the Business Environment

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Introduction : Financial Reporting and Performance Analysis for Business Operations

Part 1:Written analysis of adopting performance measures and projections of their benefits

Financial reporting considers analysing the operations of a business overall and thereafter representing its performance. Significant management reporting processes take a detailed look in a detailed manner at the operation of a business and then display the results from multiple aspects. presentation of financial reports and management of the same provide key financial insights into the overall company by focusing on the specific requirements of the business (Pattawe et al., 2022). Financial reporting can be treated as a compliance-oriented process that can be utilised for external purposes, which are thereafter treated as the general visualisation of the entire business activities.

Financial reports critically focus on the performance measures of a company which helps to identify the strengths and weaknesses of a company by analysing the financial statements, based on which the financial reports and framed (Šušak, 2020). Thus, the performance measures are impossible to construct without the incorporation of proper financial reports to reflect and evaluate the financial performance of a company. The transactional data prepared for the companies serves to be a legal document or record that promotes strategic performance comparisons. These transactional data are quantitative by nature which manages the business performance in a better manner. Different performance frameworks like balanced scorecards (BSC) are leveraged which helps in the formulation of a “concrete goal statement” (Forbes, 2022).

Financial ratio analysis can be treated as a key metric that compares all the line-item data derived from the company’s “financial statements” that reveal critical insights concerning liquidity, profitability, efficiency and solvency (Mahdi Sahi et al. 2022). Companies estimate “net profit margin”, working capital, leverage ratios, current ratio, acid-test ratio, debt-equity ratios, turnover ratio, and many more to measure the performance capability of a company. Along with this, the utilisation of BSC had been implemented by companies to ensure significant competitive advantages with “effective control mechanism” and “innovative strategies”. As mentioned by Camilleri (2021), key business organisations incorporate BSC as a “reliable performance management tool” from different sectors like technology, automobile, electronics pharmaceuticals and many more.

Components of a balanced scorecard

Figure 1: Components of a balanced scorecard

The utilisation of BSC for Apple Inc. for an assessment of senior management stressed vital topics like customer satisfaction, its core competencies, “employee commitment and alignment, market share and shareholders' value. As highlighted by Dev and Madhavan (2018), “Apple uses the scorecard as a method of long-term success management, not as a mechanism for making improvements inactivity“. On the other hand, “Philips electronics” had incorporated the BSC framework to ensure “profitable revenue growth”, customer delights, “driving for operational efficiency”, employee satisfaction, IT support and organisational developments. Thus, all of these factors have an impact on performance measures which require to be evaluated.

Part 2: A Critical evaluation of performance measures in a business environment

In the current business environment, the appraisal of performance measurement can be referred to as critically significant. This is because analysing performance measurement helps the companies to understand the current business position that they are thriving in along with a clear projection of financial capabilities (Oro and Lavarda, 2019). These financials are presented in the form of reports which are thereafter crucial for the formulation of financial ratios or construction of a balanced scorecard framework which highlights the company’s efficiency. Furthermore, this can be denoted as the key metric for “good performance measurement techniques” that help set organisational goals. Such goals are realistic and those are incorporated into making crucial business decisions under the control of the manager.

In business, performance measures are considered to be a set of “quantifiable metrics” that are derived from multiple sources that are allocated together. The incorporation of “appropriate analytical processes” allows a management system of a company to track as well as assess the present status (Buallay et al. 2021). On the other hand, the evaluation of performance measurement can be identified as having specific loopholes that create a drawback for companies in using the same within a business environment. The tools and techniques that are incorporated within performance measurement impact the current business environment by providing data as well as key information which are necessary for making informed decisions.

In the viewpoint of Lobell et al. (2021), performance measures critically provide a clear snapshot concerning the present performance capabilities which results in tracking if the actual business performance is better or not. On the contrary, as highlighted by Omran et al. (2021), performance measurement can fail at times when the financial managers lack the processes of data understanding creating significant resistance to shedding light on the business environment. The “internal performance measurement system” influences driving results as well as enabling the companies to gain financial knowledge from the successes and failures experiences. Other significant benefits of diverse performance measures involve stakeholder valuation by setting organisational targets along with goals altogether.

Limitations of using financial ratios as performance measures

Figure 2: Limitations of using financial ratios as performance measures

The financial data that are used for the creation of performance measures might not be accurate always as well as reflective which results in estimating false performance metrics. Critically appraising it can be mentioned that if a company lack appropriate resources and lacks data accuracy then a negative impact can be generated from the performance measures on the business environment. A primary drawback that can be projected from performance measurement is that it can provide negative and falsified results easily (Nadezhda et al. 2020). Moreover, if the senior leadership of a company is involved in the lack of strategic decision-making processes the business environment of a company can be impacted negatively. However, according to, the evaluation of performance measures is significant as they are utilised for motivating the financial managers in making operational decisions which benefit corporations of business.

In a business environment, the incorporation of performance measurements is immensely impactful in delivering positive outcomes, however, is required to be implemented with proper knowledge. Based on the opinions of Machova and Geierova (2021), the ratio measures a relationship that is prevalent between multiple components within a financial statement and can be most effective for comparing financial performance. It critically allows the companies for following the company performances across different periods to uncover the signs of risks and challenges. Ratio calculations affect the business environment as investors can derive profitable advantages from the stock markets with the utilisation of ratio estimation. Financial ratios provide highlights of historical data that the management uses in ratio calculations for the identification of internal strengths as well as weaknesses (Liu et al. 2019). Moreover, it helps to estimate the financial performance that the company might project in future and investors derive knowledge from these ratios to compare different companies within a similar industry.

As a performance measurement, the implementation of balanced scorecards has been identified as a “strategic management performance metric,” which had helped companies to identify as well as improve internal operations. This has critically facilitated the external outcomes by measuring the past's “performance data” along with providing the companies with significant feedback on the information to make better futuristic decisions. As per Zhang et al. (2020), businesses derive significant benefits from the creation of a balanced scorecard to design the “key performance indicators” for the achievement of elaborative strategic objectives. This has thereafter ensured that companies measure management information by offering data-driven insights for assisting the decision-making processes.

Reflection relating to the impact of performance measure on the business environment

From the above assessment that has been made in the context of financial reporting and management, it can be reflected that it is essential to frame financial reports and manage the same for business decisions. I have identified the processes by which financial reports help in the formation of performance measurements which impact the business environment of a company. Various tools are incorporated into the performance measurement process like the conduction of financial ratios and balanced scorecards. Real-life examples of Apple Inc. and Philips Electronics have been identified by me where I derived a clear understanding of the processes by which such big companies are using performance measures. However, performance measures have specific drawbacks as well which I have assessed within the critical evaluation section of this assignment. Summarising the written analysis I can mention that the business environment is greatly impacted by the incorporation of performance measurement procedures.

Reference list

Dev, A. and Madhavan, V., (2018). The Approaches and Uses of the Balanced Scorecard-A Comparative Study.

Forbes (2022), What Data Should You Track To Optimize Your Business Performance? Available at: https://www.forbes.com/sites/forbestechcouncil/2022/01/10/what-data-should-you-track-to-optimize-your-business-performance/?sh=7993b74c2432 [Accessed on 28.10.22]

Pattawe, A., Abdullah, M.I., Karim, F., Kahar, A., Din, M., Zahra, F., Furqan, A.C., Tanra, A.A.M. and Dharma, D.M.A., 2022. Improving Regional Financial Management through Administration of Regional Property and Financial Reporting on Regional Assets. Research Horizon, 2(1), pp.283-294.

Šušak, T., 2020. The effect of regulatory changes on relationship between earnings management and financial reporting timeliness: The case of COVID-19 pandemic·. Zbornik Radova Ekonomski Fakultet u Rijeka, 38(2), pp.453-473.

Mahdi Sahi, A., Mahdi Sahi, A., Abbas, A.F. and FA Khatib, S., 2022. Financial reporting quality of financial institutions: Literature review. Cogent Business & Management, 9(1), p.2135210.

Fatima, T. and Elbanna, S., 2020. Balanced scorecard in the hospitality and tourism industry: past, present and future. International Journal of Hospitality Management, 91, p.102656.

Oro, I.M. and Lavarda, C.E.F., 2019. Interface between management control systems and strategy and performance measures in a family business. Revista Contabilidade & Finanças, 30, pp.14-27.

Buallay, A., El Khoury, R. and Hamdan, A., 2021. Sustainability reporting in smart cities: A multidimensional performance measures. Cities, 119, p.103397.

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Omran, M., Khallaf, A., Gleason, K. and Tahat, Y., 2021. Non-financial performance measures disclosure, quality strategy, and organizational financial performance: a mediating model. Total Quality Management & Business Excellence, 32(5-6), pp.652-675.

Hashemkhani Zolfani, S., Yazdani, M. and Zavadskas, E.K., 2018. An extended stepwise weight assessment ratio analysis (SWARA) method for improving criteria prioritization process. Soft Computing, 22(22), pp.7399-7405.

Nadezhdina, S., Filatov, S., Khramtsova, T., Shaposhnikov, A. and Krasnova, M., 2020. OPPORTUNITIES AND LIMITATIONS OF THE INDICATOR SYSTEM FOR FINANCIAL DIAGNOSTICS AND BANKRUPTCY FORECASTING. Economic and Social Development: Book of Proceedings, pp.473-481.

Machova, V. and Geierova, T., 2021. Application of the classical Payout Ratio Model and determination of the limitations of the Lintner Model demonstrated on the example of Komer?ní banka, PLC. In SHS Web of Conferences (Vol. 91, p. 01043). EDP Sciences.

Liu, X., Zhang, L., Xiong, J., Zhang, X., Zhou, L. and Wei, J., 2019. Peak-to-average power ratio analysis for OFDM-based mixed-numerology transmissions.IEEE Transactions on Vehicular Technology,69(2), pp.1802-1812.

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