CHAPTER 5: Assessing the Importance of Firms Financial Management

Abstract

A firm’s financial performance is of importance to investors, stakeholders and the economy at large. Investors are interested in the returns for their investment. A business that is performing well can bring better reward to their investors. Financial performance of a firm can increase the income of its staff, rendering quality product or services to its customers and creating more goodwill in the environment it operates. A company that has good performance can generate more returns which can lead to future opportunities that can in turn create employment and increase the wealth of people. Firm’s performance is the ability of a firm to achieve its objectives resources. According to Rahul (1997) a company’s performance is  its  ability to  achieve  its  target  objectives  from  its  available  resources. Suleiman (2013) viewed a firm’s performance as the result of a company’s assessment or strategy on how well a company accomplished its goals and objectives. Financial performance provides a deductive measure of how well a company can use assets from business operations to generate revenue. Van Horn (2005) defined financial performance as a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term according to Pandey (2001) is used as a general measure of the overall financial health of a business. Research on the firm’s financial performance emanates from organizations theory and strategic management. The notion of financial performance is used to describe performance of an entity with the legal status of a company. The concept of financial performance is a controversial issue in finance due to its multidimensional meaning. In analyzing a firm‟s financial performance, emphasis should be made in formulating an adequate description of the concept of a financial performance.