One of the most important concepts in the orbitational research which is the firm performance. Firm performance is the measure of performance of a company that may not depends on the efficiency of the company by itself, it depends on the markets also. Its known as the financial stability in the financial sector, there are many differences of financial measures that can be used in order of evaluating the performance of the company. Stock prices, revenues, return on assets, profit margin, Sales growth, Capital adequacy, liquidity ratio, return on equity is considered as some of the common financial measures.
To illuminate, some of the ratios will be more meaningful than the others depending on the market or the industry that the company operates in. For example, the manufacturing industry field, the return on assets, inventory turnover, and total unit sales might be the key ratio to display. On the contrary, the operating income, stock prices, revenues and cashflows could be the key ratios for the financial institution. Its complex term which might include various shadows of meaning as long as it stays related to the organizational performance.
Generally, the firm performance implies the institution performance that includes manufacturing products and services, performance of its employees and their outcomes in the institution of their work. The firm performance can be also viewed in the broad context. The more effective and completed operations in the firm the more positive sign of the institution performance is, and, on the other hand, the performance of the firm becomes poor when the efficiency of the firm’s operation and the employees’ performance getting low.
Various models for firm performance:
There are many models to determine or present the firm performance and in this research the models that will be present are the profitability performance, market value performance, growth performance and other financial performance elements.
The possibility to the firm to generate the profits is the profitability performance. A profit is what remain from the earnings that the firm earned after paying all costs, specifically related to the earning of the income, for example, production of item, and other costs regarding to the business exercises. The goal of the firm is to increase the wealth of the current investors. Financial performance is a method to fulfil the shareholder’s needs and It can measure by profit, growth and market value. These three elements complementary each other. The profitability will show how the firm was able to collect its returns(Selvam et al., 2016).
Market value performance:
Market value can assume as potential variable and it shows the evaluation outside the firm and the future expectation of the performance. It should be a relation with past profitability and expand level of the organization, but in addition non-corporative expectation market differences and competitor movements. The diversification strategy gives a strong risk minimize and earning maximize. The MV of a firm is an important factor to be able to determine the stocks trends using the information that announced publicly. Information announced is substantial to the general spectaculars and stockholders of public firms. Market oddities can help the investors by gaining from market shifting’s(Selvam et al., 2016).
the growth will show the organization previous ability to expand its size. Expand in size will able the firm to generate more gains and money. Bigger size may drive the economics of scale and market power which means enhance the firm profit in the future. The enhancement of financial markets is directly affecting the economy growth(Selvam et al., 2016).
Another factor to measure the firm performance is the financial performance, it has several measures which is, return on equity (ROE), return on assets (ROA), total assets and assets age.
First of all, return on equity. Its affect the firm total earnings by compute stockholders return. ROE is calculated by dividing the net income over the owner’s equity. Secondly, the return on assets, this element will affect the assets usage. There is another benefit from return on assets which is related to return on equity by financial leverage that calculated by dividing the total assets over the net stakeholder’s equity. When return on assets decreased there will not be an important change in the business level of the firm. Return on assets is calculated by dividing net income over the net assets. Thirdly, the total asset variable which responsible to the size of the assets and in general there will not be a big difference from a period to period. Fourthly, the assets age. Financial performance measure will be response the average life of the fixed asset in the firm and it can calculate by dividing all fixed assets over the gross fixed assets(Griffin and Mahon, 1997).
Other important measures of firm performance:
Until the historical turning point most managers attempted for ambitious prosperity targets, as the financial crisis enforced many companies to shift their focus. However, ensuring sufficient liquidity became the primary target of decision makers, when the sharp drop in sales figures which prepared companies to pay irrespective interest rate. That caused obtaining liquidity at a fixed capital level due to attention being drawn to short term actions. Setting up processes in a form that would increase overall firm profitability by relationships between them and their impact, as practitioners are expected to possess a profound knowledge of the relevant drivers. Only firms that properly align organizational parameters with the environmental context will achieve maximum performance is supported by the configurational theory. allowing critical evaluation of net effects and laying the foundation for optimization model is done by investigating the relationships between impact on firm performance and its supply chain performance, manufacturing performance, cash conversion period and supply chain risk. a company’s capability to make high-quality goods with short lead times and at low unit costs while sustaining reasonable flexibility is called manufacturing performance. Shown by its emphasis on operational priorities and overall firm performance the void in academic literature suggests a positive relationship between manufacturing performances. Driving a firm’s supply chain performance, is obtained not only by correlate positively to firm performance by postulating manufacturing performance. A genuine link is established between the focal firm’s operations and its upstream and downstream supply chain, due to rare direct control over a firm’s value chain. Improving a firm’s profitability and decreasing its cost base is achieved by superior supply chain performance. Maintaining firm’s operating cycle is affected by the level of supply chain performance and also affects level of working capital. As the average time that raw materials and finished products spend in stock declines, punctual and accurate delivery will decrease average inventory levels. The period in the operating cycle which needs to be financed is often referred to as positive cash conversion period. The time when a firm has to pay for its purchases and the time when customers pay for its products is reflected by the gap between them. Customers who depend on credit are barred by aggressive accounts receivable policy. A firm can be exposed to risk of forfeiting early payment discounts and boomerang in the form of a less financially stable supplier base if running up accounts payable. A measure of exposure to uncertainty that optimizes returns for the underlying risk level should be maintained instead of seeking elimination of all uncertainty. Key competitive factors for companies are short to order delivery time and flexible production processes. Firms might operate at a comparatively low cost by efficient and effective production operations. However, ensuring high-quality output and state of the art technology is critical to generate sales and increase market share are the merely maintaining comparatively low-cost base neglects top-line. Efficient and effective production operations help firms to operate at comparatively low-cost effects (Christian Faden, 2014).
It has been always known that the corporation board plays a fundamental role in the corporate governance, the corporation strategic dimensions of the company structure, and the organizational goals and operational target, (Agyemang et al., 2014). The conflict of interests between the board of directors and the interior managers are always existed, which affects the firm performance, and improvement. Moreover, the argue was always about the independency of the inner effective managers, which are the concern of the Board of the director’s concern where from their point of view that the managers are not independent by their very nature, (Heravia et al., 2011). Besides, this argue the inner director’s managers are always more effective than the outsiders’ directors, because of their better knowledge of the organization operating details, and the industry needs, (Dalton and Dalton, 2005; Zhang and Wang, 2013). However, the main goals, and strategy of the firm is determined by the board of the directors, which in a fact the managers must apply it in a way to keep their positions. So, these strategies are that path of the firm which will always have impacts on the firm performance, either in a positive or negative way. One of the most important policies is the capital structure of the firm, which decides the firms leverage ratio to debt. The concept of the capital structure is made mostly essential to the shareholder perspective to achieve a suitable capital structure, to deal with the economic environment, competitive, and to maximize shareholders wealth. However, capital structure takes many concerns before making the decision such as taxes, shareholders goals of earnings, firm liquidity, stock market interests, the environmental industry risks, and interest rates of the debt. for an example, shareholders will prefer debt ratio in their firm if they firm located in high tax rate country, so they avoid paying high taxes twice, before and after dividends distribution which leads to governmental polices, which can also affect the companies and corporation’s performance in a way that adopting some rules and regulations. Corporations will always be flexible to the government rules, but in a way of changing their own policies which indeed will affect the firm performance. in the other hand, debt ration or leverage ratio of course will affect the stock price of the firm, Which will leads to an problem in issuing more shares in the future to raise revenue or new funding plans, because investors will not be attracted to the stock due to the affection that will be caused in the net income through interest expenses and taxes which will decrease the capital value, and also the firm may not have confidence in issuing more shares as they would get a low return. Additionally, other types of policies that may affect the firm performance is directors and management restructure. As it generally accepted, that the management team always need some time to understand the firm system, and operating strategy. Board of directors are always expecting achievements from the management team from the first day, which will always be conflict between the board of directors and the management team. Due to the board of directors’ corporate governance strategy to avoid management self-interest and frauds, some of the directors adopt the firm employees restructure strategy, which will always lead to a lack of knowledge of the organization operating system, and the environment industry needs between the company goals and competitors. Furthermore, other policies that may affect the performance of the firm is import of technology policy. Currently, technology is related to all kinds of industry in way depended on the industry type, needs, and environment. Board of directors and management team should apply for technology improvement in the market to stay in the race of the industry, by keeping in knowledge of the new technology in the market, study it, linked to the firm goals and budget, and adopt it fast to the organization operation and production lines. In many cases big firms has been collapsed, and fallout of the industry race, such as Nokia which has been the biggest firm on the phones industry, now Nokia corporation is no longer available in the market and it lost it share in the pie due to a bad polices and decisions of not adopting the smart technology of smart phones industry, which is now controlled by Apple and Samsung corporations due to their good policies of adapting new technology and be the first to release it. The variables employed for firm profitability were ROA, ratio of the market value of equity, and economic value added (EVA). The firm performance is considered by using three types of performance measures, first, accounting-based measures ROA, second, market-based measure, and third, economic profit. Economic value added is based on a company’s accounts. Its mechanism which is accounting-based simplifies to the following:
EVA = Operating?Profit?after?tax – (Operating?expenses?–?Invested?Capital)
NOPAT = Net operating profit after taxation
WACC = Weighted average cost of capital
IC = Invested capital
In the current economic environment, corporations are racing for variety and more revenues, that is the mission of the management team to increase the wealth of the shareholders, and to keep their positions. Globalization made corporations as open book for everybody, even financial trading is easier, so corporations are competing to be the best to attract investors to invest their money in their corporation. Frim performance is the guide line for investors to invest their money in a company, so every board of directors and management team should work to improve the organization performance. Engaging the employees to the work decisions by allow them to give their opinions, that will help the board of directors and the management to build a strong knowledge and understanding of the business strategy through work force. Furthermore, it will build trust between the management and the employees, make certain each employee is using his preferred skills and has an effective degree of autonomy, and focusing on each department to improve their procedures and targeting the department activities to do better achievements. Leverage is one of the biggest challenges for the firms’ decisions. Debt ratio should be studied well and taking in consecration all the concerns that maybe affect the firm performance and capitalism in a bad way in the future. Moreover, using training and development strategies always in the company. Technology and employees’ knowledge is the best investment to improve the firm performance, which are linked together. Technology needs some knowledge employees to operate it, and they must be in a deep knowledge of it, which is better for the business, production, and performance.
Firm performance is the measure of performance of a company that depends on the efficiency and the market of the company. The firm performance implies the institution performance that includes manufacturing products and services, performance of its employees and their outcomes in the institution of their work. The more effective and completed operations in the firm the more positive sign of the performance is, on the other hand the performance of the firm becomes poor when the efficiency of the firm’s operation and the employees’ performance getting low. The goal of the firm is to increase the wealth of the current investors.
There are many models to determine or measure the firm performance like, Profitability performance: which is the possibility to the firm to generate the profits. A profit is what remain from the earnings that the firm earned after paying all costs. Market value performance (Potential value): it shows the evaluation outside the firm and the future expectation of the performance. Growth performance: The organization ability to expand it is size by making the firm generate more money and gains. Financial performance: ROE affect the firm total earnings by compute stockholders return. ROA affect the assets usage. The total asset variable responsible to the size of the assets. The asset age which is the average life of the fixed asset in a firm. Policy implication: The conflict of interests between the board of directors and the interior managers which affect the improvement. An important policy which is the capital structure of firm consider the firms leverage ratio to debt and maximize shareholder wealth Corporations will always be flexible to the government rules, but in a way to change their own policies which will affect the firm performance. The director and the management restructure policy and the import of technology policy. Liquidity, manufacturing performance and supply chain performance.
Finally, in the current economic corporation are racing for variety and more revenues. Corporations are competing to be the best to attract investors to invest their money. The firm performance is the ‘Tour guide’ for investors to make them invest their money in the corporation. The board of directors, managers and the employees need to improve the performance of the firm in order to achieve the goal of the corporation which is increase the shareholders wealth.
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Griffin, J. and Mahon, J. (1997) ‘The corporate social performance and corporate financial performance debate. Bus. Soc. 1997, 36, 5–31.’, Business Society, 36, pp. 5–31.
Christian Faden, (2014), ‘Optimizing firm performance: Alignment of Operational Success Drivers on the Basis of Empirical Data. pp. 78-84.
Selvam, M. et al. (2016) ‘Determinants of Firm Performance: A Subjective Model’, International Journal of Social Science Studies, 4(7), pp. 90–100. doi: 10.1007/978-3-319-38810-6_39.
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Elisabete Simões Vieira, (2017) “Debt policy and firm performance of family firms: the impact of economic adversity”, International Journal of Managerial Finance, Vol. 13 Issue: 3, pp.267-286, https://doi.org/10.1108/IJMF-03-2016-0062
International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-3, Issue-6, Jun.-2017, http://iraj.in