How Challenging Should Financial Performance Targets Be?

Al Wahfi Suhada Sipahutar1, Ermadayani2, Iskandar Muda3

1,2,,3
Universitas Sumatera Utara, Medan, Indonesia
1
Email: alwahfi@student.usu.ac.id
Abstract
To measure financial performance, financial ratios are needed. Financial ratios are one of the
methods of financial analysis used as an indicator of the company's development assessment, by
taking data from financial statements during the accounting period. So that it can be seen the
maximum financial performance of the company. Financial ratios offer a way to evaluate their
company's performance and compare it to other similar businesses in their industry. In addition, this
ratio is often used by company management for making decisions related to saving company assets
so that they do not take wrong steps in making decisions.
Keywords : measure financial performance, financial ratios, accounting period, development
assessment

1. INTRODUCTION
Financial performance is an evaluation of a company regarding assets, liabilities, equity, costs,
revenues, and overall profitability. Financial performance is measured through various formulas and
formulas that allow to determine the effectiveness of the company. Internally, financial performance
is examined to determine the company's current benchmarks or achievements. For externals,
financial performance is analyzed to determine potential investment opportunities and to determine
whether a company is feasible for these external parties. Companies and interested groups such as
managers, shareholders, creditors, and tax authorities seek to answer important questions.
Financial performance is financial performance is a description of the economic results that can be
achieved by the company at a certain time through the company's activities. These activities are
recorded and summarized into information that can be used as a medium to report the condition and
position of the company to interested parties, especially creditors, investors, and the company's
management itself.
Information that is presented correctly in a financial report will be very useful for companies in
making decisions and to determine the company's financial performance. To explore more
information contained in financial statements, an analysis of financial statements is needed.
Performance measurement can be done using a measuring instrument called a ratio. Financial ratio
analysis is the process of determining the important operating and financial characteristics of a
company from accounting data and financial statements. Financial statement analysis predicts what
may happen in the future, so this is where the financial statements are needed.
Analysis of financial data reflected in financial statements is needed to measure progress in
generating profits effectively and efficiently. Ratio analysis allows interested parties to evaluate the
financial condition that will indicate the health condition of a company. The ratio analysis used will
be the basis for the company in evaluating the performance of the company's management and
financial management to obtain the resulting profit Financial statement analysis uses ratio
calculations in order to evaluate the company's financial condition in the past, present, and future.
Ratios can be calculated based on the data source consisting of balance sheet ratios, namely ratios
compiled from data derived from the balance sheet, profit and loss statement ratios compiled from
data derived from profit and loss calculations, and ratios between reports that compiled from
balance sheet data and income statement. Financial statements need to be prepared to find out
whether the company's performance is increasing or even decreasing and in analyzing financial
statements financial analysis tools are needed, one of which is by using financial ratios.

2. LITERATURE REVIEW
One way that can be used to assess the performance of a company is by analyzing and calculating
the company's financial ratios. A ratio does not have its own meaning, but must be compared with
other ratios so that the ratio becomes more perfect.
According to Kasmir (2015) financial ratios are activities to compare the numbers in the financial
statements. Comparisons can be made between one component with components in one financial
report or between components that exist between financial statements. Then, the numbers being
compared can be in the form of numbers in one period or several periods.
According to Harahap (2015) financial ratios are numbers obtained from the comparison of one
financial statement post with other posts that have a relevant and significant relationship.
According to the definition of financial ratios according to Irham Fahmi (2012:107), it is stated as
follows: "This financial ratio is very important for analyzing the company's financial condition.
Short- and medium-term investors are generally more interested in the short-term financial
condition and the company's ability to pay adequate dividends. This information can be known in a
simpler way, namely by calculating financial ratios that are as desired.

Financial performance according to Indriyo Gitosudarmo and Basri (2002:275) is a series of

financial activities in a certain period that are reported in the financial statements including the
income statement and balance sheet. Financial performance according to Irham Fahmi (2014: 2) is
an analysis carried out to see how far a company has implemented using financial implementation
rules properly and correctly. Financial performance according to Sucipto (2003) is the
determination of certain measures that can measure the success of an organization or company in
generating profits. Meanwhile, according to IAI (2007) financial performance is the company's
ability to manage and control its resources.
From the above understanding it can be concluded that financial performance is a formal business
that has been carried out by a company that can measure the company's success in generating
profits, so that it can see the prospects, growth, and potential for good development of the company
by relying on existing resources. A company can be said to be successful if it has achieved the
standards and goals that have been see. From the above understanding it can be concluded that
financial ratios are a mathematical calculation carried out by comparing certain items or
components in financial statements that have a relationship for later which is intended to show
changes in the financial condition of a company.

3. METHODS

To measure financial performance, financial ratios are needed. Financial ratios are one of the
methods of financial analysis used as an indicator of the company's development assessment, by
taking data from financial statements during the accounting period. So that it can be seen the
maximum financial performance of the company. Financial ratios offer a way to evaluate their
company's performance and compare it to other similar businesses in their industry.
In addition, this ratio is often used by company management for making decisions related to saving
company assets so that they do not take wrong steps in making decisions. Financial ratios are made
by measuring the relationship between two or more components of financial statements to obtain
meaningful information about the company.
Numbers in a company's financial statements, such as balance sheets, income statements, and cash
flow statements, are used to perform quantitative analysis and assess a company's liquidity,
leverage, growth, margins, profitability, rate of return, valuation, and more.
Financial ratios are most effectively used to compare results over several periods. This makes it
possible to track the company's performance from time to time and find if there are signs of
problems.
Performing an analysis of financial ratios will provide two main benefits, including:
1. Track company performance
 Determining financial ratios per period and tracking changes in their value over time is done to
see trends that may develop in the company. For example, an increasing debt-to-asset ratio
could indicate that the company is burdened with debt and may eventually face the risk of
default.
2. Make a comparative assessment of the company's performance
Comparing financial ratios with major competitors is done to identify whether a company is
performing better or worse than the industry average. For example, comparing returns on assets
between companies helps the analyst or investor to determine which company is the most
efficient use of its assets.

4. RESULT AND DISCUSSION

4.1. RESULT
The first problem setting financial performance targets is how difficult, or how challenging,
setting them will be. For planning purposes, the budget target should be an unbiased best
estimate. The budget target should be the same as the expected performance, namely: with a
50% chance of achieving it. The target will be the best decision-making view for managers who
plan resource levels without (or less) the risk of over- or under-resourced activities.
Performance targets are related to the results control system. If a target is set incorrectly, or the
target is set in the wrong way, the results control system will fail. Two important issues
regarding financial performance targets relate to:
1. The amount that is in accordance with the challenges on the target needs to answer the
question: is the target made challenging or made to ensure it is achieved? A budget with
a high level of achievement has several advantages:
a. Increase manager commitment
b. Convincing projection protection
c. Manager's highest achievement
d. Reduction of intervention costs
e. Reduce game play
2. The role of subordinates in setting targets Another important issue in designing results
control systems when targets are negotiated is the extent to which subordinates'
influence is allowed in their target setting. Some organizations set their targets from the
bottom-up to the managerial level. Allowing employees to be involved in the process of
setting their performance targets can provide several benefits, namely:
a. Increase the manager's commitment to the achievement of targets
b. sharing information
c. Cognitive benefits
The following are some situations where a top-down targeting process can produce good
results:
1. Targets can be effectively derived from a top-down process when top management has
sufficient knowledge of the operating business and operational prospects to properly set
challenging performance targets.
2. A second situation that can lead to top-down target setting is when top-level managers
have information to evaluate relative performance. For example, they manage a large
number of relatively homogeneous entities operating in a stable environment.
3. Top-down target setting is usually carried out in organizations where lower-level
managers have less ability in terms of budgeting.
4. Upper management knows better how to set standards according to learning curve
models that have proven accurate in the past or they are better informed about new
technologies that can cause structural changes in the way work is done and can change
business prospects, making historical performance standards obsolete.
5. Top-down targeting needs to be done to avoid bias, so that targets are not set too high or
too low than they should be. Lower-level managers have a tendency to try to lower
 targets, because it can make it easier for them to achieve them so they can earn bonuses
with less effort. There are also some managers who are overly optimistic, so they want
high targets to show management their abilities.
6. The biggest top-down risk is, losing commitment from subordinates to achieve targets

4.2. DISCUSSION
Financial ratio analysis is important in the business world, especially for management, investors and
potential investors. Through this analysis, investors can determine the amount of investment to be
invested. In addition to investors, financial ratio analysis is also useful for the management itself,
because it can be used to assess business development. Financial analysis is also included in the
balanced scorecard, a tool to measure the company's performance, how effective the strategies that
have been used to achieve competitive advantage. This activity is not only addressed to the
management, but also to other parties such as investors or creditors. For them, financial ratio
analysis becomes an assessment material for how healthy the company deserves to inject
investment or loan funds to manage. Basically, financial performance reports are very useful for a
company. Information that can be utilized in several ways, namely.
a. Used as a basis for determining the company's strategy for the future.
b. Measuring the achievements achieved by the company in a certain period that reflects the
level of success of the implementation of its activities.
c. Assess the contribution of a part in the achievement of company goals as a whole.
d. The basis for determining investment policies in order to increase company efficiency and
productivity.
e. See the company's overall performance
f. Provide guidance in making decisions and activities of the company in general and company
divisions in particular.
g. Financial performance can be assessed in several ways such as comparative analysis of
financial statements, financial ratios, position tendencies, percentage per component, sources
and uses of working capital, breakeven, sources and uses of cash, and analysis of changes in
gross profit.

5. CONCLUSION
All company activities from a financial point of view are divided into two main forms of activity,
namely; activities of companies that use funds (allocation funds) and activities of companies that
seek/generate funds (raising funds) these two activities of companies are often called financial
functions. When the company is so eager to carry out activities that use funds (allocation funds) but
is hampered in finding/generating funds (raising funds), the company is said to be experiencing
financial distress (financial distress). Continuing financial distress has resulted in various problems
within the company. Therefore, managers are expected to have a good understanding of good
financial performance. In addition, it is also expected that managers have knowledge of good
financial performance analysis techniques so that they can overcome the company's financial
problems

Apart from being a measuring tool for the health of a company, financial ratio analysis has other
benefits, namely;
a. See the trend of company performance in a certain period.
b. Materials for evaluating company resources such as suppliers, equipment, production processes
and even the employees themselves.
c. As a reference for investors to choose companies.
d. For consideration by creditors.
e. Assess the effectiveness of the company's strategy in building a competitive advantage.
f. Analysis of the company's internal strengths and competitiveness with competitors.
g. As reference material for internal audit transactions that occur in companies from the financial,
operational, or other sectors.
h. Determine the fair value of the profits earned by the company.
Based on the points above, the role of financial statement analysis essentially has two roles; as
material for consideration and evaluation by both business owners and internal parties such as
creditors or investors.
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