A Closer Look At The Balanced Scorecard Financial Perspective

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.

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.

FAQ:

What are balanced scorecard perspectives?

The balanced scorecard (BSC) is a strategic management framework that examines an organization's performance through four key perspectives:

- Financial: This perspective focuses on the organization's financial health and performance, including metrics like revenue, profit margins, return on investment, and cash flow.

- Customer: This perspective assesses customer satisfaction, loyalty, and perception of the organization's products or services. Metrics may include customer satisfaction scores, net promoter score, and market share.

- Internal Processes: This perspective evaluates the efficiency and effectiveness of the organization's internal processes, such as production, operations, and customer service. Metrics might include cycle time, defect rates, and productivity measures.

- Learning and Growth: This perspective focuses on the organization's capacity for innovation, employee development, and continuous improvement. Metrics could include employee satisfaction, training participation, and the number of new products or services developed.

How does the balanced scorecard improve performance?

The balanced scorecard improves performance by:

- Providing a holistic view: It encourages organizations to look beyond financial metrics and consider a broader range of factors that contribute to long-term success.
- Aligning goals: It helps align individual, departmental, and organizational goals with the overall strategic objectives.
- Enhancing communication: It facilitates communication and collaboration across departments by providing a shared framework for understanding performance.
- Promoting accountability: It establishes clear performance targets and metrics, making it easier to track progress and hold individuals and teams accountable.
- Driving continuous improvement: It fosters a culture of continuous improvement by encouraging regular review and adaptation of strategies based on performance data.

How do you implement a balanced scorecard?

Implementing a balanced scorecard involves several steps:

-Define strategic objectives: Clearly articulate the organization's long-term goals and vision.
- Develop key performance indicators (KPIs): Identify specific metrics that will be used to measure progress towards each strategic objective.
- Set targets: Establish realistic and challenging targets for each KPI.
- Communicate and cascade: Ensure that all employees understand the balanced scorecard and their role in achieving its objectives.
- Track and review performance: Monitor progress against the KPIs and targets on a regular basis, and make adjustments as needed.

Why is the balanced scorecard important for an organization?

The balanced scorecard is important because it provides a comprehensive framework for managing performance and achieving strategic objectives. It helps organizations move beyond a narrow focus on financial results and consider the broader factors that contribute to long-term success.

How does the balanced scorecard work?

The balanced scorecard works by integrating financial and non-financial measures into a single framework. This provides a more complete picture of an organization's performance than relying solely on financial metrics. By tracking performance across all four perspectives, organizations can identify areas for improvement and make data-driven decisions to drive continuous improvement.