written by | September 27, 2022

Balanced Scorecard: Definition, Benefits and Examples

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Table of Content


A balanced scorecard is a key metric used to analyse an organisation's internal issues and take steps to identify and resolve challenges. It is an approach to strategic management, and by collecting sufficient information, an enterprise can overcome obstacles, boost revenue, and enhance its reputation in the industry. 

Balance scorecards are widely used in countries like Japan, India that cover around 43%, the UK, the USA, and certain parts of Europe. It can be used for gauging performance and gives a bird's-eye view of an organisation's various internal functions.

Did you know? More than 95% of organisations have zero clue about their performance strategy!

What is a Balanced Scorecard?

A balance scorecard is a comprehensive strategy map used by companies to grow their business, meet objectives, and align organisational performance with desired milestones. Metrics in balance scorecard frameworks may change over time, and these metrics are continuously monitored. A balanced scorecard's financial results demonstrate these frameworks' effectiveness alongside customer satisfaction rates and product innovation.The four main aspects of balanced scorecards are - customers, financials, internal processes, and finally, learning and growth.

Advantages of Balanced Scorecards

Robert Kaplan introduced the concept of balance scorecards in 1992 alongside David Norton, who pioneered study records, management styles, and operational procedures. Experts say that a balanced scorecard is one of the best operational management available to enterprises, and it is not just a model for simply processing information. Balanced scorecards add value to organisations and do more than simply organise workspaces. Following are the huge benefits of using balanced scorecards:

1. Improved Organizational Performance

A balanced scorecard improves organisational efficiency by analysing performance metrics. It tells companies where they need to focus on and in what order to prioritise tasks. Managers create a strategy map to help visualise challenges and all possible outcomes of solutions. You can understand cause-and-effect relationships better, and in short, you get a bird's-eye-view of your strategy.

2. Enhanced Communications

Having a visual idea of your strategy allows you to communicate well with your team members. There is no confusion, and you can engage stakeholders about the delivery, planning, execution, correction, and re-iteration phases.

3. Good Alignment with Project Initiatives

A balanced scorecard gives organisations an overview of key performance indicators (KPIs) on various strategic objectives. It ensures projects align with the company's vision and milestones are met by high-quality tracking. The best part about this is data-driven decision-making, which means businesses derive actionable insights from big data.

4. Focused Reporting

A balanced scoreboard focuses on the organisation's most important issues and quality reporting. Good balance scorecards align organisation processes, too, such as interactive alerts, reporting, risk management, analytics, budgeting, and real-time data collection.

5. Information Flow

Information overload is a huge problem; sometimes, we get the wrong information. A balanced scorecard organises data, processes it, and presents it visually engagingly. It consolidates key information, outlines the basics, and stays consistent, example by example.

There is a flow in the structure and way data is presented. Without a proper Balanced scorecard framework, it is impossible to adapt to cultural shifts and changes in the workplace. Employees find coping tough without external resources, which is why balanced scorecards are so important.

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Downsides to Balanced Scorecards

1. Balanced Scorecards Require Strong Leaders

Balanced scorecards can quickly become confusing if you don't know what you're doing, and they portray a huge volume of information and may overwhelm users. These cards are primarily designed to help leaders in an organisation, guide them, and improve performance. But if leaders aren't of high calibre, then no amount of metric reviews will be of service. To actually exercise their effectiveness, an organisation needs strong leaders who are committed to achieving goals. 

2. Cannot be Copied

If you're switching organisations or planning to migrate data, the bad news is that balanced scorecards aren't designed to be adaptive. You cannot copy a balanced scorecard from another company and expect it to work for you. Every business is different and has its own unique requirements.

3. May Get Discarded

Many organisations find themselves making a balanced scorecard only to realise it is of no use. Many balanced scorecards that are created in Excel are prone to accuracy issues, version control errors, and formatting problems. Although Excel is free, there are often hidden costs involved in making them, such as data entry charges, manual processing fees, and hourly wages charged by employees. If a balanced scorecard calculation goes wrong, it must be redone repeatedly. This can get increasingly expensive over time for organisations that are not using automation, and the costs add up.

4. May Not Be Flexible

Some organisations find it hard to suddenly shift to using balanced scorecards. Too many variables are involved, and a company may discover that transitioning is not as easy. People may not respond well to the changes, and process overhauls are required. If the balanced scorecard structure looks cumbersome, it may not get implemented.

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Balanced Scorecard Framework Explained

A balanced scorecard is not used for processing data but a metric that implements the right strategies and applications for improving performance. It is about adding value to processes, prioritising goals, and completing projects on time. Balanced scorecards make monitoring and real-time analysis easy, and companies can grow their wide range of products, customers, and services.

Here are some example scenarios of how it works:

Example #1

Jai runs a videogame store and sells the latest gaming titles. He has in-depth gaming industry knowledge, promotes new releases, and offers the best times. But Jai's sales have been dwindling, and he is starting to lose customers, despite the fact he has a great store.

So how does he use a balanced scorecard? He creates a questionnaire and distributes it to his customers, asking them for opinions on how to improve his services. Some of them say his store timings are unreasonable or customer service is poor. Many customers say that their gaming consoles' prices are too high and need to be adjusted. By looking at survey responses, Jam now has an idea of how to boost sales. He can now get to work on his business goals, set up a budget, and cut down prices for some games. Soon his store makes profits, and business seems to get better.

Example #2

The Waxahachie ISD Board of Trustees presented its four key initiatives - finances, staff support, growth, and customer outcomes. Its aim is to help students learn, succeed, and become the best in academics. Waxahachie released a balanced scorecard survey where it focused on performance objectives and business goals. It contained several interview questions and helped establish various learning targets for students.

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Tips for Building Balanced ScoreCards

1. Start Slow and Go Easy

Don't expect big changes, and take small steps. Keep your Balance ScoreCards framework simple and create a strategy map. Collect feedback from employees, describe your organisation, and set realistic goals. Your framework should support your business decisions and not work against them.

2. Talk to Your Upper Management

Not all balanced scorecards work for organisations. Having a word with your upper management and talking to your team before getting started is important. If your organisation is doing fine and doesn't need a strategic framework yet, you shouldn't waste your money on implementing balanced scorecards.

3. Use Software to Make Your Job Easier

Don't try to create balanced scorecards from scratch. It can get daunting, and a software application will save you plenty of time. Do some research on what the best programs available are and select a software solution accordingly. If you are unsure, talk to balanced scorecard software vendors and ask them about what key features your enterprise needs.

4. Don't Be Rigid

Your organisation's perspective, mission, and values may change over time. When implementing balanced scorecards, it's crucial to remember this. Take a flexible approach to use balanced scorecards, and don't be attached to specific methodologies.

Conclusion:

Now that you know how a balanced scorecard helps, its pros and cons, and how to use it for your organisation, you can take the necessary initiatives and work on your projects. Keep in mind that there's no one-size-fits-all approach, and you may find yourself readjusting metrics to create more improved versions. Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: Can I improve my company performance without a balanced scorecard?

Ans:

Yes, you can. But it may be challenging to find out your organisation's vulnerabilities and gauge performance, and you'll miss out on opportunities to derive actionable insights from the process.

Q: What are some famous companies that use balanced scorecards?

Ans:

Top companies like Philips Electronics, Volkswagen, Borealis, and Wells Fargo are among many global players that incorporate balanced scorecards.

Q: What are the four main aspects of balanced scorecards?

Ans:

The four main aspects of balanced scorecards are - customers, financials, internal processes, and finally, learning and growth.

Q: Why is a balanced scorecard "balanced"?

Ans:

A balanced scorecard is considered balanced because it gives an overview of the key metrics used in an organisation to drive revenue, growth, and performance. It's strategic, measurable, smart, and provides a bird's-eye-view of all the measures a company takes to manage various processes and operations.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.