Triple bottom line theory

According to Agnieszka Zak (2015), The triple bottom line was created by John Elkington which he stated that companies should
not always be delving deeper on its profit, but also looking at the company’s consideration’s people and planet. These
considerations are presented on the triple bottom line which will be based on the measurement of financial, social, and
environmental performance of each business who are applying this theory. The idea of John Elkington is to initiate an improvement
on its reputation, productivity, and market potential that increases the transparency and accountability of an organization’s
performance (Matteson & Metivier, 2020).Thus, measuring your business based on this theory will help companies to sustain by its
competitiveness and measure how profitability the business included that it has a relationship with the community and contribution
to the economy.
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The triple bottom line theory, which was introduced by John Elkington in 1994, highlights the business's performance based on its
relation to the environment, environment, and employees, which would give the full costs of the company aside from the total net
income. With this, many businesses adopted TBL as a sustainability framework to evaluate the performance and approaches,
resulting in investments made from shareholders' value and profits. (Slapher, 2011). This accounting system would be a powerful
tool for measuring how well a company achieves higher sustainability given that these 3 dimensions in Tripple bottom line are
interconnected, that could be on the investments made by a company. Since many companies have adopted this theory, it would
give them an outcome which depicts these 3 dimensions a solution that could make changes based on their specific needs and
demands and allowing organizations to evaluate their decisions made for future generations to follow.
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Relationship of Triple bottom line theory and financial performance

The triple bottom line theory associates its financial performance based on the given interconnected dimensions of this theory,
which assess the profit, people, and planet that would help determine whether the company has gained or made a financial loss.
With regards to companies’ assessment by evaluating the measurement of their performance, there is a high relationship between
TBL and the financial performances of the businesses (Wisconsin, 2020). Many businesses have practice in highlighting the
financial performance resulted on recycling materials or equipment that gained $37.6 billion in 1 year. With this, the company made
an increasement of $1 million per year using the TBL as an indicator of succession towards the company’s performance with
regards to its assets and promotion within the determining index based on the result (Wisoncisn, 2020).
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According to Li-Chin Ho (2007), they have investigated 50 companies from USA and Japan, which uses this theory of triple bottom
line, which shows firm's disclosure towards the financial report within the three dimensions of this theory. And it was assessed
based on multiple regression used to determine the financial performance of a business, which shows how shareholders and
stakeholders would alleviate the transparency of the financial performance, which resulted in a failure of the result. Given that these
three different aspects of a business could possibly disclose the reporting of liquidity and profitability, which is driven towards the
awareness of its stakeholders, that could result in a fair result and disclosure towards the public. As stated by Li-Chin Ho (2007),
those 50 companies who participated through the help of Triple bottom line helps firms with a suggestion to be consistent on the
financial report prior to these findings that give public information in regards to the activities made in each firm.
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Relationship of environmental responsibility and financial performance

This article has shown that there is a significant relationship between environmental responsibility and financial performance based
on the result that shows how it would affect the financial status of a corporation. Its result shows how businesses decreased the
greenhouse gases emitted, resulting in better financial performance, which increased the profitability of a business (Huang & Fu,
2018). It is highly perceived that stakeholders have a higher interest when companies are promoting environmental sustainability
with regards to the governments’ requirement for a promotion of environmental sustainability in their country. Thus, corporates tend
to decrease the quantities of the wastewater that positively impact the assets and profit ratio of their corporation. (Huang & Fu,
2018).
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The environmental sustainability was not acknowledged by companies who were focused on the profitability of their businesses.
Thus, it made their sustainability low in terms of the involvement which will convince positive financial report/performance (Ang,
2014). According to Ong et al. (2014), government in Malaysia has shown sustainability as a need to shift on the demands where
people would not be affected on its activities such that would it would harm the environment and in risk on losing the natural beauty
of nature, which sustainability directly impact the gross profit margin that acts as an indicator to the environmental responsibility of a
company.

Environmental responsibility has greater impact to its stakeholders which they have environmental awareness that causes them to
look at the financial report of a business. This is mainly due to the cost savings which includes the materials, energy, and other
environmental aspects related to it, which is according to this study that when companies advocate its environmental responsibility,
there is a high chance that profitability on its business will increase (Ang, 2014). With this, it increases the financial status by
delving more on the disclosure of waste emitted and effectively follow the superior its corporate governance.
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Relationship of social responsibility and financial performance

The social responsibility of a firm in a developing country would face issues such as energy crises, lack of infrastructure, and
terrorism, which gives the government the underlying conditions towards the organization’s problem. With this, organizations in a
developing country such as Pakistan could increase their welfare role in their society and providing a better reputation and growth
that would increase and boost their financial performance (Kanwal et al., 2013). However, applying CSR, especially in developing
countries, would take time, and it was proved that the Pakistani government wanted to evaluate whether an organization using the
CSR could increase its role to the society and its stakeholders. According to Munaza Kanwal et al. (2013), given that organizations
in a developing country put their Social responsibility towards their stakeholders, they have seen an increase in the profitability of
their business through CSR's impact. And it is shown in their data that customers will be driven towards their promotion because of
their strong commitment and relationship to the society, which, therefore, enhance the financial health of the
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In India, Corporate Social responsibility has been made a requirement or mandatory for each company to contribute to the welfare
of their society. It is in the Companies Act 2013, that developing nations (India) must underly to the requirements for social welfare
and promote the involvement of its stakeholders (Bhunia, 2016). This study is has shown that the financial performance of business
would directly impact by applying CSR and delving more on the community involvement with each organization’s style. With this,
20 companies have been evaluated, and it shows how effective the regulation from the government, to strictly implement this Act as
a promotion for social welfare and responsibility towards its employees, management, and society. According to Amalendu Bhunia
(2016), the result shows how firms who followed the regulation set by the government will boost their financial performance if they
would promote social welfare its stakeholders.
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Relationship of economic responsibility and financial performance

The company's capacity to innovate prior to CSR policies' changes would increase the financial performance. Results
indicate that the balance of the economy by facilitating innovative outputs such as transparency and communication to their
stakeholders will allow them to share resources and gather feedbacks resulting to a better financial performance. According to Juan
– Gabriel Navarro et al. (2016), the results show that innovative outputs are a key factor in achieving the relationship between the
economic responsibility and financial performance. Thus, it allows internal stakeholders to share, communicate, show transparency
of profit to their relationship with external stakeholders, and adopt new processes through social innovation. With this, the
company's capability to innovate may help balance the economic responsibility with their stakeholders and attends to balance being
a good corporate citizen which leads to an increment of sales. (Navarro [Link], 2016)
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How to measure financial performance.
According to Mochklas et al. (2018), the achievement of a firm’s financial performance can be measured based on the assets to the
product revenues. Thus, it would help the firm determine the feasibility of improving and enhancing the operations of a firm’s
objective. There are many ways to measure financial performance, but we should consider the financial ratios such as capital
adequacy, and liquidity, solvency, leverage, and profitability. With this, leaders in a firm would manage and control the resources
they have, which would boost their cash flow and profit-gain, given that they have implemented changes based on the results. 

To further explain, the measurement based on the given financial ratios would be able to resolved the advantages of each
competitor, its market, and business issues that could lead to a better economic performance given that managers who are
assigned to check the financial health of a business, determine its cause and plan on its way to resolve the financial issues within
the company. 
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How to measure capital adequacy

According to Steven Bragg (2020), capital adequacy is to be able to measure and support the operation of a bank and loss of
assets which might result to a failure of the bank’s operation, and it is used to protect depositors within the financial system of each
bank provided in the event of liquidation, and meet its obligation by comparing the capital and assets of a bank. Given that banks
are at high risk of failure, they should be monitoring the financial bank that may result in a failure, which includes the funds from the
depositors and debt holders. To measure the capital adequacy, “(Tier 1 capital + Tier 2 capital) ÷ Risk-weighted assets = Capital
adequacy ratio”, this can be used to measure the losses, bad debts, and share capital based on Tier 1 and 2. (Bragg, 2020). Given
that banks would be using this formula to measure capital adequacy, it would show whether a bank is low on ratio or high, which is
required nowadays by the government’s authority.
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How to measure liquidity

According to James Forjan (2019), a firm’s liquidity is measured by its assets, cash, inventory, receivables ap/ar which can be used
to satisfy its short-term obligations. With this, liquidity ratios can be measured by using a formula which is entitled to quick ratio,
“Quick ratio=current assets−inventories current liabilities Quick ratio Cash & Cash Equivalents +Short-term investments + Account
receivable Current liabilities” Average receivables “Credit sales/ Average receivables, and # days of receivables “Inventory turnover
= cost of goods sold”, average inventory, Number of days of inventory” =Inventory average day’s cost of goods sold=Inventory cost
of goods sold/365”, # of days of inventory, and #number of days of payables number of days of payable=Accounts payable Average
day’s purchases=Accounts payable purchases/365; that ratios are best utilized when a firm has a financial problems or it is properly
managed based on the liquidity measured whether if it is high or low (Forjan, 2019).
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How to measure solvency

According to John Shieldsmith (2020), solvency measures the company’s debt for payment, which is similar to liquidity, but more
into the long-term debt. In solving for solvency, “Net after-tax income + non-cash expenses) / (short-term liabilities + long-term
liabilities” is the formula to be used that ensures the evaluation of a company’s financial health. It would also give an insight to its
financial decision and ensure the profitability of the business and give assurance the shareholder's debt on the company. If a
company is experiencing a downfall based on the solvency measured, there are ways to help the business. By re-evaluate and
increase the owner’s equity (Shieldsmith, 2020). This would ensure that companies would meet its long-term obligations with their
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How to measure efficiency
Efficiency ratios measure the capacity to of any firm to generate sales by using its assets and liabilities. The application of
measuring efficiency ratios if often used in banks which measures the turnover, used equity, and as for the general operations for
inventory and machiney (Bragg, 2019). It enables banks or any institutions to work on the performance whether if the ratio has
greater efficiency or not. These are the formulas in solving for the efficiency ratio: “Working Capital Turnover = Sales/Average
Working Capital” Note – Working Capital = Current Assets-Current Liabilities, Fixed Asset Turnover = Sales/Average Fixed Assets,
and Total Assets Turnover = Sales/Average Total Assets.
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How to measure leverage
According to Adam Hayes (2020), the importance of leverage ratio is the debt to equity ratio, which gives insight into a company’s
equity in the disposal to determine the cost mix and its effects on the operating income. Most companies with a high cost could
earn profitability when it reaches after the break-even point based on the outputs calculated. It can be said that leverage ratios
would give the ability to meet their obligations, such as the debt, expenses, and assets of a company.
“Debt/Equity=(Short term debt + Long term debt)/Equity”, “Interest Coverage = Operating Income / Interest Expenses”,
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How to measure profitability
To measure profitability ratio would help companies determine and evaluate the balance sheet and profit based on the expenses
incurred, which would help analyze the business's performance. With this, companies would be able to monitor their performance
using the profitability ratio by using the formulas stated:
1. Gross Profit Margin Ratio: Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue*100%
2. Net Profit Margin Ratio = Net Profit Margin = PAT / Revenue * 100%
3. EBITDA Margin Ratio = EBITDA / Net Sales
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