Traditional Measures of Financila Performance and The Balanced Scorecard

“I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind. If you can not measure it, you can not improve it.” –Lord Kelvin [1], a prominent British Scientist, who inspired the work of Robert Kaplan and David Norton on Balanced Scorecard.

Introduction:

In rapidly changing environments faced by mist industries today, organizations face intense competitive pressure to do things better, faster and cheaper. The business environment is undergoing rapid changes with lot of complexity and uncertainty. Markets are dynamic and organizations can no longer rely on the traditional financial approach to measure its effectiveness. Organizations have to keep track of customer preferences, changes in technology, competitions that are not directly captured by financial measures [2].

The importance of intangible assets is higher than physical assets and performance measures must capture this new reality. Balanced Scorecard (BSC) is one such approach to consider financial and non-financial perspectives in determing the performance level of organizations.

Importance of Measuring Performance:

As per Harvard Mentor Review, measuring performance of companies is important for the following reasons:

• Improvement: By tracking performance, companies can spot and address problems such as declining sales, flattening revenue and profit, increase in fixed, variable costs.

• Planning and forecasting: Performance measurement serves as a progress check—enabling companies to determine whether they are meeting their goals and base their forecasts and budgets on past perform...

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... and innovation. Financial metrics do not capture the early problems or opportunities with customers, employees or quality of products.

2) Lagging factors: Financial factors provide excellent view of what happened in the past in the organization. However, the detailed past view on finance has no predictive power for future.

Balanced Scorecard: During 1980s, executives across organizations were convinced that traditional measures of financial performance didn’t let them manage effectively and wanted to replace them with operational measures. Arguing that executives should track both financial and operational metrics, Robert Kaplan and David Norton suggested four sets of parameters.

Balanced Scorecard –The Strategic & Practical Performance Measurement Tool:

Relationship between Balanced Scorecard and Traditional Financial Measures: