The Balanced Scorecard demystified
Financial Accounting information is essentially what has happened in the past, transactions that have been recorded.
Whereas, management accounting was developed because people recognize the need to try to use this combined with other information to predict future performance.
It became clear that constraining this to purely financial information also had its own limitations.
One way of addressing these limitations is to use what is called The Balanced Scorecard.
The balanced scorecard
This was developed in the 1990s by two finance academics, Dr. Robert Kaplan, and Dr. David Norton.
The balanced scorecard is a performance measurement framework that added a strategic non-financial performance measures to traditional financial metrics to give managers and executives a more balanced view of the organizational performance.
This was developed because of a year-long research project with companies that work at that time at the leading edge of performance management.
Kaplan and Norton, were trying to identify measures that drive financial performance, and these were leading measures, as opposed to focusing entirely on more traditional Financial Accounting measures such as profit and loss:
Let us now all look at the four boxes in the above diagram:
The financial perspective
An organisation will not be able to survive if it is not able to manage its finances, and money is the common way in which resources are valued.
It is important therefore, that key financial measures need to be clarified if the organization is to be judged by the outside world.
Example financial measures include ratios such as net profit, return on capital employed, cost/income Ratio, and profit per employee.
If we don’t serve our customers well, they will not buy from us or use our services. How we appear to our customers will certainly drive our financial performance.
Example measures include customer satisfaction, customer complaints, on time delivery to customers, share of purse/wallet
Business process perspective
We need to serve our customers well but we also need to do this efficiently with the optimum balance between inputs and output, that is, how well our key business processes perform.
Example measures here are manufacturing cycle time, defect rates, utilization of plant, and staff output
Learning and growth perspective
All the above should drive financial performance, certainly in the short to medium term. However, in the rapidly changing business environment these may not guarantee success far into the future.
This perspective helps managers to try to identify measures that will enable the organization to renew and regenerate itself in the long term.
Example measures here are new products introduced, staff suggestions, R&D Spend, and Time spent on staff training
A well-run and successful organization will have a clear mission supported by objectives and strategies that are aligned across the organization. Everyone within the organization should understand how their actions contribute to the organization’s objectives.
Recent research has concluded that around 20% of organizations use some sort of Balanced Scorecard.
The Balanced Scorecard is intended to provide a framework for identifying which measures to our financial performance and there is also a lot of evidence that organizations do not all understand these linkages.