The Balanced Scorecard
The Balanced Scorecard:
In the past and until recently, organisations have always been driven by financial reports in managing their business. However, in the past few years, these traditional management reporting systems have been found not to be as beneficial in the current business environment. They are viewed as being backward looking and, while they generated financial results for various organisational units, they failed to supply information necessary for a healthy future. Senior executives now realise that no single measure can provide a well-defined performance target or emphasise critical areas of the business. Nowadays, managers require a balanced presentation of both financial and operational measures.
One approach being utilised in many companies is the Balanced Scorecard concept. Essentially, the Balanced Scorecard is a set of financial and non-financial measures that gives managers a fast and comprehensive view of the critical success factors of the business. It looks at medium- and long-term policies and aspirations as well as short-term targets, and also at internal and external measures. The Balanced Scorecard translates mission and strategy into objectives and measures to guide the company towards a prosperous future- it helps to focus on what drives performance.
The Balanced Scorecard is constructed in such a way as to allow managers to view the business from four important perspectives. It includes financial measures giving the results of actions taken- the financial perspective- and introduces three additional perspectives- those of customer, internal business processes and organisational learning. Scorecard users select measures of progress from all these perspectives and set targets for each of them. Performance drivers are then identified along with measures to be applied to these drivers from the perspectives, and short-term milestones to mark strategic progress are established- thus the scorecard enables the company to link its financial budgets with its strategic goals.
FINANCIAL PERSPECTIVE: The Balanced Scorecard retains traditional financial measures. This perspective essentially asks the question “How do we look to our shareholders?” and serves as a focus for the objectives and measures in the other scorecard perspectives. This perspective needs to link in with the others to ensure a successful future. Financial performance is the result of operational actions, and a failure to achieve it from improved operational performance forces a rethink of strategic plans. The challenge is to make explicit linkages between operations and finance.
Financial performance measures indicate whether the strategy, implementation and execution of the company are contributing to bottom-line improvement. Examples of financial objectives include improving returns on spending, cost reductions, increasing revenues, reducing