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A Closer Look At The Balanced Scorecard Financial Perspective
The financial perspective is the most important element of a strategy for many organizations. Are you monitoring the right objectives & measures?
Finances have always been critical for companies to monitor and measure—and are still naturally considered the most important element in most for-profit strategies. In the 1980s and early 1990s, many organizations were not paying close enough attention to other aspects of their strategy and were then surprised when they did not achieve their financial goals. Because financials are a lagging indicator, Drs. David P. Norton and Robert S. Kaplan conducted a study to look for leading indicators in an organization’s strategy, which lead to the concept of the Balanced Scorecard (BSC). Today, the Balanced Scorecard is a business framework that helps companies manage four critically-important perspectives in their company: finances, customers, internal processes, and people (or “learning and growth”).
Because the financial perspective still remains at the top of most for-profit scorecards (and at or near the top of most non-profit and government scorecards), it’s important to be sure the objectives and measures you’re using in this perspective will truly tell you whether your strategy will contribute the growth you are looking for.
The For-Profit Financial Perspective
As a for-profit company, your top financial goal is most likely to increase profits. There are a number of measures you might use to track this goal, including monitoring sales growth, program profitability, or net profit margin.
While profits are important, you have to gain deeper insight into where you’re getting your revenue from and how to ensure your costs don’t grow faster than your revenue. Objectives or measures focused on revenue may emphasize growth in a particular vertical, product, industry, or geography. Objectives or measures focused on cost may emphasize product expenses, overhead expenses, the cost of a particular business channel, etc.
Many organizations also consider objectives or measures based on cash flow, bond ratings, debt leverage, or other financial tools used to manage a business. Some organizations include these objectives or measures in a Balanced Scorecard financial perspective on their corporate strategy map, while others might include them on their finance department’s strategy map. If you're a financial institution or bank, check out this list of KPIs we've compiled just for you.
|A note about leading and lagging indicators:
If you’re using the Balanced Scorecard, you may feel strongly about using leading indicators, which are driving measures that tell you how you’re progressing toward a goal. But because the Balanced Scorecard financial perspective is primarily made up of lagging indicators (which aren’t predictors of what is going to happen, but are great at telling you what did happen), it typically includes no (or few) leading indicators. And because the Balanced Scorecard financial perspective is made up primarily of lagging indicators, there are rarely projects or initiatives linked to this perspective (those are linked to drivers like operations or learning and growth).
The Nonprofit Financial Perspective
By nature, most nonprofits and government organizations have a different financial structure than for-profit companies. Finances are still important, but are usually not at the top of their strategy map. (For a few examples of for-profit vs. nonprofit strategy maps, take a look at this article.) Finances are the fuel used to drive strategy, not the output of the strategy.
Nonprofits and government organizations typically track the gathering, sourcing, and use of funds. More specifically, they track the input rate (i.e. tax rate, millage rate, fundraising, etc.), sources of funding (i.e. fundraisers, grants, government funding, etc.), and how those funds are applied (i.e. how much is allocated to overhead, operations, additional fundraising efforts, and research). For example, an organization like the American Diabetes Association uses its fundraising efforts to drive more medical research on diabetes. Public schools use their funding (which typically comes from local taxes) to invest in teachers, programs, and facilities.
Download 68 important financial metrics (for free).
If you’re not monitoring the right performance indicators, you’re missing out on an opportunity to make better financial decisions. This list of financial measures—downloaded into financially-specific categories—is a great place to start. Download them today to begin monitoring the financial metrics that will lead to growth in your organization.