Balanced Scorecard (BSC)

Balanced Scorecard BSC Management Accounting Financial Performance Non-Financial Measures
An approach to management integrating both financial and non-financial performance measures into a comprehensive framework developed by Professors Kaplan and Norton.
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What is Balanced Scorecard (BSC)?

The Balanced Scorecard (BSC) is a strategic planning and management system that organizations use to:

  1. Communicate what they are trying to accomplish.
  2. Align the day-to-day work that everyone performs with the organization’s strategy.
  3. Prioritize projects, products, and services.
  4. Measure and monitor progress towards strategic targets.

Originally proposed by Professors Robert Kaplan and David Norton, the BSC was introduced in the Harvard Business Review in 1992. It has become a widely adopted management tool for balancing traditional financial metrics with more forward-looking, non-financial metrics.

The Four Perspectives of BSC

  1. Financial Perspective: How do we measure financial performance? Common metrics include:

    • Operating profits
    • Return on Capital Employed (ROCE)
    • Unit costs

  2. Customer Perspective: How do we measure customer satisfaction? Common metrics include:

    • Customer profitability
    • Customer satisfaction ratings
    • Market share

  3. Internal Business-Process Perspective: What must we excel at? Common metrics include:

    • Time to develop new products
    • Defect rates
    • Product return rates

  4. Learning and Growth Perspective: How can we continue to improve and create value? Common metrics include:

    • Employee satisfaction
    • Employee productivity

Leading and Lagging Measures

The balanced scorecard distinguishes between:

  • Lagging Measures: Financial metrics that indicate the outcomes of past decisions (e.g., profits, cash flow).
  • Leading Measures: Non-financial metrics that predict future performance and are critical for driving future financial results (e.g., employee skills, customer satisfaction, and internal process efficiencies).

Examples

  1. Financial Perspective:

    • Measure: Return on Assets (ROA)
    • Example: A company calculates its ROA quarterly to track how efficiently management is utilizing its assets.

  2. Customer Perspective:

    • Measure: Net Promoter Score (NPS)
    • Example: A retail chain surveys customers after every shopping experience to determine their likelihood to recommend the store to others.

  3. Internal Business-Process Perspective:

    • Measure: Cycle Time
    • Example: A software company tracks the time taken from receiving customer requirements to delivering the software to ensure timely deliveries.

  4. Learning and Growth Perspective:

    • Measure: Employee Training Hours
    • Example: An IT firm monitors the number of training hours per employee to ensure continuous skill development and innovation.

Frequently Asked Questions (FAQs)

  1. What is the main advantage of using a Balanced Scorecard?

    • The main advantage is that it provides a holistic view of an organization’s performance by combining financial and non-financial metrics.

  2. Can small businesses benefit from implementing a Balanced Scorecard?

    • Yes, small businesses can benefit as it ensures alignment of business activities with the organizational vision and strategy.

  3. How frequently should a Balanced Scorecard be reviewed?

    • It is typically reviewed quarterly to ensure alignment with strategic objectives and to make necessary adjustments.

  4. Is the Balanced Scorecard only suitable for profit-oriented organizations?

    • No, it can be tailored for use by not-for-profit organizations and government agencies as well.

  5. What software tools can help in implementing a Balanced Scorecard?

    • Various software tools like BSC Designer, QuickScore, and Balanced Scorecard Professional can assist in implementation and monitoring.
  • Key Performance Indicator (KPI): A type of performance measurement that helps you understand how your company or department is performing.
  • Strategic Planning: The process of defining a business’s strategy, making decisions on allocating resources, and pursuing the strategy.
  • Performance Management: Continuous process of improving performance by setting individual and team objectives which are aligned to the strategic goals of the organization.
  • Benchmarking: The practice of comparing business processes and performance metrics to industry bests and best practices.

Online Resources

Suggested Books

  1. The Balanced Scorecard: Translating Strategy into Action by Robert S. Kaplan and David P. Norton
  2. Balanced Scorecard Evolution: A Dynamic Approach to Strategy Execution by Paul R. Niven
  3. Performance Dashboards: Measuring, Monitoring, and Managing Your Business by Wayne W. Eckerson
  4. HBR Guide to Performance Management by the Harvard Business Review

Accounting Basics: “Balanced Scorecard” Fundamentals Quiz

### Which perspective of the Balanced Scorecard focuses on financial performance? - [ ] Customer Perspective - [x] Financial Perspective - [ ] Learning and Growth Perspective - [ ] Internal Business-Process Perspective > **Explanation:** The Financial Perspective focuses on traditional financial metrics such as operating profits and return on capital employed. ### What type of measures are considered lagging indicators? - [x] Financial metrics - [ ] Customer satisfaction metrics - [ ] Employee productivity metrics - [ ] Process efficiency metrics > **Explanation:** Lagging indicators are financial metrics that show the impact of decisions made in the past. ### Which perspective of the Balanced Scorecard measures customer satisfaction? - [ ] Financial Perspective - [x] Customer Perspective - [ ] Internal Business-Process Perspective - [ ] Learning and Growth Perspective > **Explanation:** The Customer Perspective focuses on metrics like customer satisfaction, market share, and customer profitability. ### What kind of measures are leading indicators? - [ ] Inventory levels - [x] Non-financial metrics - [ ] Profit margins - [ ] Financial ratios > **Explanation:** Leading indicators are non-financial metrics related to customers, internal processes, and learning and growth that predict future performance. ### What is a common metric used in the Learning and Growth perspective? - [x] Employee satisfaction - [ ] Return on Assets - [ ] Net Promoter Score - [ ] Defect rates > **Explanation:** Employee satisfaction is often used to gauge the organizational climate and potential for innovation in the Learning and Growth perspective. ### Which Balanced Scorecard perspective asks "What must we excel at?" - [ ] Financial Perspective - [ ] Customer Perspective - [x] Internal Business-Process Perspective - [ ] Learning and Growth Perspective > **Explanation:** The Internal Business-Process Perspective focuses on key processes that the organization must excel at to deliver on customer and financial objectives. ### What is the significance of connecting financial with non-financial measures in BSC? - [ ] It sets higher standards of financial performance. - [ ] It balances the value delivered to shareholders. - [x] It ensures a more holistic and complete view of organizational performance. - [ ] It increases the focus on short-term profitability. > **Explanation:** Combining financial with non-financial measures ensures a holistic and complete view of organizational performance, aligning short-term actions with long-term strategic goals. ### Why might small businesses adopt the Balanced Scorecard approach? - [ ] It requires minimal implementation cost. - [ ] It focuses exclusively on financial gains. - [x] It helps align daily work with the business's strategic vision. - [ ] It provides legal compliance advantages. > **Explanation:** Small businesses can benefit by using BSC to align day-to-day operations with the strategic vision, ensuring all activities contribute towards common goals. ### Which metric falls under the Internal Business-Process perspective? - [ ] Customer profitability - [x] Cycle time - [ ] Employee productivity - [ ] Market share > **Explanation:** Internal Business-Process metrics like cycle time measure the efficiency and effectiveness of key business processes within the organization. ### Can the Balanced Scorecard be used by Non-Profit Organizations? - [x] Yes, it can be tailored to fit the goals of diverse organizations. - [ ] No, it is only suitable for profit-oriented businesses. - [ ] Only in specific cases as approved by regulatory agencies. - [ ] Exclusively in financial sectors. > **Explanation:** The Balanced Scorecard is flexible and can be adapted to align with the strategic goals of non-profit organizations, focusing on mission success rather than profit.

Thank you for exploring the intricacies of the Balanced Scorecard and enhancing your understanding with our comprehensive quiz. Keep aligning strategy with action for optimal performance!

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