FINANCIAL PERFORMANCE
Beyond the bottom line
Heshana Kuruppu
While financial performance remains a priority in uncertain economic times, businesses should also focus on the environmental and social impacts of their operations, says Heshana Kuruppu.
Concepts such as triple bottom line and ESG (environmental, social and governance) reporting are part of this approach. He avers that financial objectives and performance are important as they help a business generate profits, create wealth for shareholders and sustain the organisation in the long term.
“But to say that financial performance takes priority over social or environmental aspects is tricky. A business can have financial priorities but not at the expense of impacts on these factors,” he posits.
And he adds that “in other words, what’s more important is not the money a business makes but how it made that money.”
Kuruppu notes that to sustain business operations, the key prerequisites are foresight, a well crafted strategy, and strong execution and ability – based on continuous learning and improvement.
He elaborates: “In the prevailing knowledge economy, businesses need to focus more on intangible assets to achieve and sustain growth momentum. If you analyse most of the companies that have achieved substantial growth, be it locally or internationally, you’ll note a considerable increase in investments in intangible assets compared to tangibles.”
He cites research conducted by McKinsey in 2021, which indicates that globally, high growth companies invested 2.6 times more in intangible assets (as a share of total revenue, 4.4% against 1.7%) than low growth peers. And they achieved faster growth at a rate of 6.7 times.
Other factors to be considered, according to Kuruppu, are geopolitical risks, local economic crises and global conflicts, coupled with the aftermath of the COVID-19 pandemic, volatile commodity markets, spiralling inflation and other factors that can have negative impacts on businesses.
“It can be challenging to remain resilient and sustain growth without a robust immune system. Traditional cost cutting and efforts to improve efficiency or substantial budget cuts to preserve cash may not be sufficient, as crises and disruptions are here to stay,” he laments.
Nevertheless, he believes that there are a few areas businesses should consider to navigate these challenges.
These include adopting asset light business models that require minimal capital investments to reduce risks and increase agility; developing a mindset of building a business through acquisitions to access new markets, customers and technologies, and diversifying portfolios; and focussing on value innovation from a customer perspective so that competition becomes irrelevant – i.e. instead of merely staying ahead of it.
Kuruppu points out that some argue that focussing on ESG can affect financial performance due to tradeoffs.
However, he explains: “These aspects are interconnected and cannot be separated. Integrating ESG practices into an organisation’s strategy and operations can have significant benefits, including cost reductions, top line growth, talent attraction and better risk management.”
Over time, it has become clear that financial performance is not the only (or even the most) critical indicator of a company’s success. Corporates must also consider nonfinancial aspects such as customer satisfaction, internal processes, and innovation and learning.
To this end, the balanced scorecard is a popular tool for measuring and managing these areas.
“To ensure long-term success and sustainability, businesses must move beyond financial considerations and balanced scorecards, and adopt a 360 degree holistic view of their performance that includes environmental and social aspects aligned with ESG principles,” Kuruppu stresses.
He sums up: “This approach recognises that a company’s success is not only measured by financial performance but also its contribution to sustainable development, and impact on society and the environment.”
