A financial impact is an expense that disrupts business and cannot be controlled, such as natural disasters, market changes, and catastrophic product failures. In financial accounting, it refers to events that cause a particular financial situation and have a negative effect on a company’s financial position.
A financial impact is an expense that has an effect on a financial position that cannot be controlled. The types of events that create this type of impact are disasters, unexpected changes in market conditions, catastrophic product failures, and anything else that disrupts business and over which business management has no control. Technically, the term is generic. It is often used to analyze any situation that changes any financial position. The concept of financial impact has a specific use in business management and financial accounting that limits the scope of the term.
In general, events that have a financial impact change the financial position of the underlying situation. For example, the death of a spouse will typically have a financial impact on the rest of the family. Similarly, a high turnover rate can have an impact on a business. This is a generic use of the term, based on the definition of impact, since the word relates to a change in one thing that is caused by another.
In financial accounting, the notion of financial impact has a more structured meaning. Businesses are typically required to maintain an accounting system and generate reports that comply with national and international accounting standards. A financial impact is defined in this context so that companies know when a specific event that causes a particular financial situation should be tagged with this term.
Businesses regularly generate expenses that are offset by revenue. A company rarely wants to purposely operate at a loss. Operating losses occur when expenses exceed income. An operating expense is considered to have a financial impact when the expense continues after the occurrence of a catastrophic event, despite the fact that the company’s revenues have changed as a result and directly worsen the company’s financial position.
For example, if an unexpected natural event, such as a tsunami, decimates a business so that it cannot generate the same level of revenue, there is usually a corresponding decrease in operating expenses. Plants close and employees are laid off. If there are certain operating expenses that cannot be written off or offset against revenue, such as an equipment lease that must be paid regardless of current circumstances or a monthly payment for technical support on a software program, they are considered to have an impact on the business.
The types of situations that generate expenses that have financial impacts are natural disasters, changes in market conditions, product disasters, and other events that are beyond management’s control. Expenses that cannot be covered by income after these types of events are shocking because they have the ability to sink the company. Business managers and accountants pay special attention to this category of spending so that they can mitigate that impact before the effect on the business goes that far.
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