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Skip to 0 minutes and 4 seconds Earlier on the course, we saw that the finance team have a broad remit and that financial information is used in many different ways in an established business. So far, we have focused on internal uses of financial information such as for planning and control and to support decision making. However, reporting success to external stakeholders, a big part of which is reporting financial performance, is equally important, because it is a legal requirement in many countries. It’s not just about the legal aspects though as external financial reporting may attract media attention and even new funding for an organisation.

Skip to 0 minutes and 44 seconds If the stock market likes the news released by the business, then the share price will usually rise, and people will rush to buy shares in the company. However, bad news, especially if it is unexpected, can have the opposite effect. Well, investors hate surprises. That’s what they really hate, so I think typically when the news is good, it’s easier to manage. When the news is not so good, then clearly investors are disappointed. A recent example is what happened in April 2015 when Twitter reported lower than expected results. The share price went down, because investors were concerned about the return on their investment not being as good as they initially thought it would be.

Skip to 1 minute and 32 seconds Share prices move due to internal and external issues affecting the company. External issues are usually economic factors outside of the control of the company. For example, the global oil price fell from $110 to $40 a barrel in the second half of 2014. The share price of BP fell from 526 to 411 pence during that period. easyJet, the airline, saw its share price rise from 1349 to 1644 pence during the same period. The reason for this is that BP sells oil and so wants as high a price as possible. easyJet buys oil in the form of airline fuel and so wants as low a price as possible.

Skip to 2 minutes and 17 seconds Internal issues relate to the company itself in terms of the popularity of its products. When Apple brought out the iPhone 5 in 2013, it didn’t seem much of an improvement on its predecessor, and the share price dropped. The job of investment analysts is to produce reports that help advise investors. To do this, they review information released by the company as well as information affecting the wider economy and the particular sector a business is in such as retail, technology, or oil and gas. Analysts are trying to predict whether the business is expected to do better or worse in the future, so that they can advise investors what is likely to happen to their investment return. Will it increase or decrease?

Skip to 3 minutes and 3 seconds If it is likely to increase, then investors will want to keep their shares, and maybe, buy some more. However, if it is likely to decrease, then investors may want to sell their shares and cut their losses.

Measuring success: businesses

The financial information a business communicates to the outside world has important implications for how the business is perceived.

As Alice explains in this video, the ways in which businesses measure and report their achievements are critical in a number of ways. Good or bad news may inform media perceptions of a business, and will also have an impact on the willingness of people to invest in the company.

An important barometer of success for many businesses is the organisation’s share price. We’ll see in this video that share prices can move up or down as result of both internal and external issues.

What’s next?

We’ve seen in this video how, for businesses, factors like profits, sales growth and cash flow are important benchmarks to assess success. But what about organisations such as charities and universities, who do not exist to make a profit? In the next step we’ll consider how not-for-profits often measure their success.

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This video is from the free online course:

The Importance of Money in Business

University of Leeds