Measuring Performance and Goals
The balanced scorecard is a methodological tool meant to help businesses manage their future growth, objectives and plans. The purpose of the balanced scorecard is to give a measuring tape by which someone can determine whether the set goals have been met or exceeded. It adds non-financial metrics to traditional financial metrics to give a well-rounded view of the performance in an organization. Balanced scorecards can be as simple or complex as needed for the purposes of a company’s metrics. There are four components to the balanced scorecard:
- Financial - traditional financial data - where is the company now, where should the company be?
- Internal Business Processes - this deals with business process improvement and improving the way the business runs
- Learning and Growth - this deals with training and implementation of the corporate culture
- Customer Satisfaction and Appeal - this deals with the end-user of the rpoduct and service, they are ultimately the reason that financial aspects succeed or fail
Like all tools meant to gauge the metrics of a company’s financial performance, there are advantages and disadvantages of balanced scorecards.
Balanced Scorecard Advantages
The first advantage of using the balanced scorecard method is that by looking at four aspects of a company’s performance, you really do get a balanced view of company performance. Unlike traditional methods of tracking the financial health of a business, the balanced scorecard gives you a full picture as to whether your company is meeting its objectives. While it may seem that a company is doing well financially, it may be that customer satisfaction is down, employee training is inadequate, or that the processes are outdated.
Second, by using a balanced scorecard approach, the immediate future isn’t the only thing being evaluated. Often, when an accountant sees the financial bottom line (perhaps the company isn’t doing well), suggestions are given that are immediate, but do not look at the long-term. Using balanced scorecards allows for stakeholders to determine the health of short, medium, and long term objectives at a glance.
Finally, by using a balanced scorecard, a company can be sure that any strategic action implemented matches the desired outcomes. Will raising the price of a product help the bottom line of the company in the long run? It might, if the customer is satisfied with that product, or if the processes involved with creating that product make the product of a higher quality.
Balanced Scorecard Disadvantages
While there are many advantages to using balanced scorecards in your accounting toolbox, there are a few disadvantages to the method as well. First, the balanced scorecard takes forethought. It is not a tool you can just think up one night to solve a problem. Instead, it is recommended that you hold a meeting to plan out what goals you would like to see your company reach in each of the four above areas. Once you have clearly stated objectives, you can then begin to break down these objectives in what you will need, financially, to bring these objectives to fruition.
Second, while the balanced scorecard gives you an overall view of the four areas for concern in business growth and development, these four areas do not paint the whole picture. The financial information included on the scorecard is limited. Instead, to be successfully implemented, the balanced scorecard must be part of a bigger strategy for company growth that includes meticulous accounting methods.
Finally, many companies use metrics that are not applicable to their own situation. It is vitally important when using balanced scorecards to make the information being tracked applicable to your needs. Otherwise, the metrics will be meaningless.
Is The Balanced Scorecard Right For Your Accounting Needs?
Given that there are various advantages and disadvantages of balanced scorecards, it is important to recognize that this tool is truly beneficial when it is fully integrated into a system of accounting. If your company relies upon the balanced scorecard as its sole metrics for measuring performance, you will likely be disappointed. If, instead, the balanced scorecard is used as a shorthand glance at the health of the company, the tool can be quite effective.
This post is part of the series: Balanced Scorecards
Thinking about developing a balanced scorecard for your business? Learn more about these important analysis tools and find examples that you can freely download for your own personal or business use.