Financial Metrics of a Business: Balanced Scorecard

Abstract

A Balanced Scorecard (BS) can be employed as strategic management to identify the factors that should be gauged to assess properly business goals within the organization. BS can help the CFO of an organization to relate present actions with future objectives, spotlighting the place where the” rubber meets the sky.” (Kaplan & Norton, 1996). This research essay analyses how a Balanced Scorecard helps a business to align the performance reporting measures with that of the business strategic goals of a business organization.

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Introduction

A Balanced Scorecard (BS) is being employed mainly for measuring of financial metrics of a business. It is also be used to measure operational measures on process improvement, customer value and another internal process that augmented growth in business and paved overall corporate development. According to Dr. Robert Kaplan and Dr. David Norton, BS can be employed as strategic management to identify the factors that should be gauged to assess properly business goals within the organization. Further, they argue that BS surmounts the disadvantages of customary systems in that it contains drivers or predictors of future financial performance. It aligns the performance reporting measures with that of business strategic goals.

Balance Scorecard

About three-fifths of Fortune 1000 companies are said to either already had implemented the BS or trying to implement the same. (Gautreau and Kleiner 2001). BS has given business managers a better knowledge of how their business is really performing. The non-financial metrics in BS are of immense value as it helps to estimate future financial performance rather than simply analyzing what had happened in the past. Thus, BS can help the CFO of an organization to relate present actions with future objectives, spotlighting the place where the” rubber meets the sky.” (Kaplan & Norton, 1996).

BS is now being extensively used as a strategic management and planning system in the industry, business, nonprofit organizations and government on a global scale to bring into line business activities to the strategy and vision of the business, to enhance internal and external communications and to supervise the performance of the organization against strategic aims. BS involves the creation and employment of performance indicators or measures. The success of any BS will be depending upon the recognition of financial and non-financial variables and their objective and accurate measurement and associating the performance to penalties and rewards. The supporters of BS assert that it lines up strategy resulting in enhanced motivation and communication which ends in superior performance. BS can be described as the “strategic chart of accounts” for a business.

Implementing a Balanced Scorecard

Implementing a Balanced Scorecard
Source: (Sharma Ashu, 2009).

Kaplan and Norton highlight that in BS, learning is given more priority than training. With help of metrics, managers can able to understand how their business is accomplishing and whether its products and services are in conformity to the requirements of its customers. In developing the metrics, customer satisfaction is being given topmost priority as unsatisfactory customers may lead to diversion of business to competitors.

Under BS, the major business goals are to be framed for each of the perspectives. Performance measurement shall be carried over to evaluate the progress made by the business towards its goals. The management should establish specific goals in the key areas which would serve as a benchmark for appraisal of performance. Then, the order of priorities in accomplishing the goals of the organization has to be set and hence, BS is also known as the blueprint of a company’s goals.

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Since the BS is being set with only one-fifth of scorecard implementation with financial values and the rest being set with non-financials metrics, the CFO of the business is normally not adequately involved in the preparation of BS metrics and this has been cited as one of the reasons why BS fails to bring expected results.

In the Hackett group, CFO is involved in the development of processes and people that will naturally increase the performance of the organization. With help of BS, a CFO can look not only at the financial results but also operational drivers, both leading and dawdling metrics and indicators that track a vast array of activities. For instance, now organizations are promoting the CFO as CEOs as they know well the organization’s processes, skills of the professionals and business acumen focused on enterprise performance management which is considered to be crucial to attaining a broader operational perspective. For instance, Indira Nooyi was previously CFO of PepsiCo and was now promoted as the CEO of the company. (Wulf Christian, 2006, p.81).

Companies Utilizing
Source: The Hackett Group

Success stories of BS through real case studies

Nova Scotia Power Inc, (NSPI) is a powerful utility that supplies electricity in the Nova Scotia province in Canada. As per the suggestion made by the CFO of the company, BS was introduced in 1999. At NSPI, BS was footed on the following four strategies.

  • To build customer loyalty.
  • To reduce the cost or manage the cost
  • To develop the business
  • To develop employee commitment

The results were outstanding as from 1996 to 1999, NSPI witnessed a 13% increase in sales volume and was able to minimize the employee’s cost by 20%. As the result, it was able to report higher revenues. Further, BS has helped to achieve an improvement in production up to 36%. As power breakdowns were minimized, the customer satisfaction rate was increased. Forbes in fact appreciated this as NSPI is a regulated utility that had to absorb compulsorily price escalation in fuel prices and also the government-mandated pension charges. (Kaplan and Norton, 1996 p.123).

Cigna Property and Casualty was incurring heavy losses in 1992. In 1993, the management introduced BS. Within 24 months, Cigna posted a profit. After 60 months, Cigna hived off its property and casualty division for $3 billion. Due to the introduction of BS, Cigna was able to turn around itself and could earn substantial profits by hiving off its division.

In 1993, Mobil’s US Marketing and Refining Division suffered heavy losses and occupied the last place in the industry. As a restructuring process, its monolithic organization was divided into 18 different business units. To convey the strategy to these new business units, the balanced scorecard was employed by Mobil. Due to this, Mobil had moved to first place in the industry within 24 months from the last place.

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Rockwater has two European subsidiaries namely Brown and Root. In 1992, these two companies were merged together. Immediately after the merger, the performance of the company deteriorated as the company failed to understand the fundamentals of the merger. Rockwater management introduced BS so as to get them to tow on the same line so that they had a common outlook. Within thirty-six months, the merged company was first in the industry both in profitability and growth.

Why CFO is to be involved in BS implementation?

For BS purposes, both the role of CEO and CFO of the organization are crucial as they play a key role in assessing the performance and evaluation of constituents for the business enterprise. The part played by the above is crucial in assessing the health of the business due to the following reasons.

  • The planning and development of a BS should commence with the active participation of both CEO and CFO as the CEO is regarded to be the process owner of the balanced scorecard. (Kaplan and Norton, 1996).
  • The CEO chooses business activities that are critical to obtaining value and very frequently needed in the management of businesses IC. (Sullivan, 2000).
  • CEO is the only top official who can be held accountable for the entirety of intangible resources from the company‘s goodwill to patents. (Zack, 1999).
  • The relationship between the CFO and CEO of any organization is more interrelated.
  • The majority of CEO is of the view that the CFO is responsible for moving BS toward its mission and one who is acting as guardian of information and performing as a steward as well as a compliance officer. (The International Federation of Accountants, 2002).
  • CFO assists to mould the future of the business and devotes it to the organizational mission. They assist in developing long-term plans for the organization and help to manage the future of the business. (Heidrick Struggles, 1998).
  • The role of the CFO has transformed substantially in recent days and the CFO plays a much more integrated role and performs as a strategic business partner to the CEO. (Hedrick Struggles, 1998).
  • CFO is a coherent curator of the balanced scorecard process in any business organization. (Kaplan and Norton, 1996, p.290). (Stankosky, 2005, p.291).

Conclusion

The BS facilitates a business to bring into line its management process and to spotlight the whole organization in implementing a long-run strategy. BS has become an inevitable planning tool without which the majority of the business organization may find it difficult to achieve analogs consistency of vision and action as they endeavor to change direction and initiate new procedures and strategies. Thus, BS offers a fundamental structure for controlling the establishment of strategy while also permitting the strategy itself to evolve in response to transformation in the company’s technological, competitive and market environments (Kaplan & Norton, 1996.p150).

References

Kaplan Robert S & Norton David P. (1996). The Balance Scorecard. Harvard: Harvard Business Press.

Sharma Ashu. (2009). Implementing Balance Scorecard for Performance Management. IFCI University Journal of Business Strategy, Vol VI (1).

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Stankosky Michael. (2005). Creating the Discipline of Knowledge Management. New York: Butterworth –Heinemann.

Wulf Christian C. (2006). CFO Insights. New York: Wiley Publishers.

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