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What Is a Financial Impact?

Terry Masters
Terry Masters

A financial impact is an expense that has an 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 interrupts 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 a financial impact does have a specific use in business management and financial accounting that limits the scope of the term.

Generally, events that have a financial impact change the financial position of the underlying situation. For example, the death of a husband will ordinarily have a financial impact on the rest of the family. Likewise, 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 as the word relates to a change in one thing that is caused by another.

Natural disasters can have a serious financial impact on a community.
Natural disasters can have a serious financial impact on a community.

In financial accounting, the notion of a financial impact has a more structured meaning. Businesses are typically required to maintain an accounting system and generate reports that conform to national and international accounting standards. A financial impact in this context is defined so that businesses know when a specific occurrence that causes a particular financial situation should be labeled with this term.

Businesses regularly generate expenses that are offset by income. A business very rarely wants to purposely operate at a loss. Operating losses happen 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, even though the company's income has changed as a result, and it directly worsens the company's financial position.

For example, if an unexpected natural phenomenon, such as a tsunami, decimates a business so that it cannot generate the same level of income, there is typically a corresponding decrease in operating expenses. Plants close down and employees are furloughed. If there are certain operating expenses that cannot be canceled or offset by income, such as a lease for equipment that has to be paid regardless of the current circumstances or a monthly payment for technical support on a software program, they are deemed to have a financial impact on the company.

The types of situations that create 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 sorts of occurrences are impactful because they have the ability to sink the company. Business managers and accountants pay special attention to this category of expenses so they can mitigate that impact before the effect on the company goes that far.

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    • Natural disasters can have a serious financial impact on a community.
      By: Leonard Zhukovsky
      Natural disasters can have a serious financial impact on a community.