The balanced scorecard is to business, what balanced diet is to the body. From time immemorial, we have always been told about the importance of a balanced diet. Obviously, having a balanced diet is the antidote for malnutrition of the body.
The holistic approach to the optimum state of your health isn’t determined by only the amount of carbohydrates you eat. You have to make sure that other classes of food are monitored and in the right proportion for the best result. The same applies to business.
What Is A Balanced Scorecard
As an entrepreneur, you want to track and monitor your progress and know how to navigate your way to the top with your business strategy. The best way to do this isn’t by monitoring your finances alone. What happens to your customers and the internal process of your organization? What about the department that’s in charge of your learning and growth – R&D? Are they are all integrated and functioning as a body? Now, this is where the balanced scorecard comes to play.
A balanced scorecard is a management system that is used in measuring the true health of your organization and gives you a big-picture as regards your strategic goals. Also, it monitors your progress and keeps you in check, in four cardinal points of your organization; whether you’re a Small Medium Enterprise (SME) or a Fortune 500 Company.
Most entrepreneurs judge the health of their company’s by their financials and how much money they make. The financial measure of your business is very important, but it does not give a comprehensive view of the business.
The term ‘balanced scorecard’ comes from the idea of looking at strategic ways to measure the performance of an organisation; financial and non-financial measures, which gives the entrepreneur a more ‘balanced’ view of the company.
What sets the balanced scorecard apart from other performance management methodologies is the focus on both high-level strategy and low-level measures. It breaks down your big, fuzzy strategic vision to specific, actionable steps to take on a day-to-day basis, to achieve the goals of the organisation.
Perspectives Of A Balanced Scorecard
There are four different perspectives to a balanced scorecard, that will help you measure the health of your company.
These perspectives focus on different cardinal points of your company. And, it helps the entrepreneur to have a balanced view of the company and make informed business decisions. These four pillars are:
- Internal Business Processes
- Learning and Growth
The balanced scorecard looks at the financial perspective from the following Key Performance Indicators (KPIs) – revenue, expenses, Return On Investment (ROI), and Net Income. Other indicators that are involved in this perspective are the cash flow, profit margins, and loans.
The finances of a company are very important and should be watched. Therefore, at every stage of the growth of the organisation, the business must be generating enough revenue to remain profitable.
What methods are in place that monitors expenses? What processes have you put in place to increase income and reduce expenses? These are some of the questions you should be providing answers to.
Key Performance Indicators (KPIs) in this perspective are customer satisfaction, sales revenue per customer, increased customer loyalty, customer retention, and customer preference compared to competitors.
The customer is king. I’m sure you’ve heard that before. So, as an entrepreneur, you should focus on what’s important to customers and stakeholders. How do you find new customers? How do you retain existing customers? What’s your customer acquisition cost? Do you spend money to get every new customer?
Here, you also focus on building your brand reputation and brand trust. The way you communicate and the channel you use in communicating with customers is also very important.
Moreover, the way you treat your customers today directly impacts how much money you’ll make tomorrow. Customer satisfaction is a great forward-looking indicator of success.
Internal Business Processes
The Key Performance Indicators (KPIs) in this perspective are the management of inventory, quality control, improved operational efficiency, working culture, hiring, and product lead time.
This aspect of the balanced scorecard focuses on the key activities you have to perform to ensure that you’re delivering value to your customers. Are there some changes you need to make to improve your services and increase customer satisfaction? Are there some cumbersome processes that can be made simpler? As an entrepreneur, your mantra should be continuous improvement.
Learning And Growth
This aspect of the balanced scorecard is important because it helps in monitoring the Key Performance Indicators (KPIs) in the following trends; employees’ skills, employee training, employee retention, and their satisfaction which is a key driver to how they discharge their duties.
Basically, you are looking at your performance as an organisation through the lens of human resources, technology, and infrastructure. Are you updated with new technologies in your industry? Are your employees embracing technology and growing so the company remains competitive? As an organisation, what steps are you taking to train and retain your best hands? When your human resource and technology align, you will remain competitive.
Benefits Of A Balanced Scorecard
- Gives you a structured approach to designing your strategy. With a balanced scorecard, you have a template for a strategy map.
- It helps you in communicating your strategy, both internally and externally. It gives you a one-page communication to or an interlink to your employees as well as stakeholders.
- You get a much better organizational alignment. Everyone will understand their roles and contribution to the organization’s goals.
- The balanced scorecard makes it easier to execute and deliver your strategy towards achieving the company’s goal.
- You’ll get better management information and improved performance reporting. More so, the balanced scorecard will help you easily design a template for your Key Performance Indicators (KPIs) and metrics, that will monitor how well you’re delivering your strategy.
- The balanced scorecard then becomes your template to align your finances and budgeting.
- Additionally, the balanced scorecard helps you to better manage your risks. Risk management is the flip-side of performance management; where you’ll identify the risk of not delivering your strategy.
- It aligns the business activities to the vision of the company and monitors business performance against strategic goals.
How To Create A Balanced Scorecard
The development process of the balanced scorecard for an entrepreneur involves several steps, which we will summarize here:
- Establish a clear vision of the future of the company in the four different perspectives of the balanced scorecard.
- Define the strategic objectives towards the objectives.
- Determine the critical success factors. What exactly is your goal as regards each perspective – your success benchmark.
- Choose a key performance indicator to measure and monitor performance in each perspective.
- Take actionable plans and initiatives towards achieving the goals and vision.
Business Is A Body
The balanced scorecard shows how each aspect of the business builds on each other. It’s like the body; each aspect of the body has to function properly for the whole to work. So, business units are aligned and are no longer treated as separate departments. Having this knowledge as an entrepreneur will help you make a more confident decision for your business.
In summary, If you train your employees and build a culture of information sharing (Learning and Growth), they’ll give their best to the company and improve your processes (Internal Business Processes). A business run by happy employees and operating in full capacity will take better care of its customers (Customer). And, happy customers buy more of what you’re selling (Financial).
At the end of the day, you win as an entrepreneur when you have a balanced view of every aspect of your business.
How have you been measuring the performance of your organisation as a business owner? Do you think a balanced scorecard is a tool that should be used by every entrepreneur? We will like to hear your thoughts in the comments.
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