Identify and explain the key areas of the Balanced Scorecard that inform financi
ID: 2804081 • Letter: I
Question
Identify and explain the key areas of the Balanced Scorecard that inform financial decision making.
What are some of the benefits and costs of a Balanced Scorecard for performance measurement?
Based on your evaluation of the benefits and costs of the Balanced Scorecard, determine whether you would recommend that the organization you work for (or one you have worked for in the past) implement a Balanced Scorecard as a performance measurement tool. Provide a rationale to justify your recommendation.
Explanation / Answer
In practice most of the organisation balance financial perspective with other (non financial) one. The most successful organisation do not rely fully either on financial or non financial performance measures. They know that financial performance measures reflect the results of the past action. No doubt these measured are important for shareholders as well as all other stake holders. They must monitored continuously by manager.non financial performance measures focus on current activities that could drive future financial performance. Thus an organisation needs a balanced view on various perspective of performance.thisview point referred as balance scorecard. The balance scorecard aim at improving the performance measurement system which focus dominantly on past financial performance and did not consider other perspective and area for strategic change and improvement.
The key areas of balance score card that informs financial decision making are-
1. Tracking financial performance. It covers the revenue and profit targets of commercial companies as well as the budget and cost-saving targets of not-for-profit organisations.
2. Data evaluation- The accurate and timely financial data are necessary for the efficient and smooth direction of the organization. The provision of the right and timely financial data to the right person in the organization helps much in the process of making the right decision in the right moment. Under this perspective the most common performance measures incorporated are: Return on Investment (ROI), Cash Flow, Net Operating Income, and Revenue Growth. The financial perspective looks at how the investors or the shareholders see the firm in terms of dividend payout ratio, improvement on the cost structure, profit after tax, return on capital employed (ROCE)
3. Cost Reduction- It evaluates the profitability of the strategy and considers cost reduction relative to competitors’ costs and sales growth (a strategic initiative) while the financial perspective focuses on how much of operating income results from reducing costs and selling more units of the product
4. Asset Utilization: this theme measures financial performance such as: Return on investment and Economic value added
5. Revenue Growth: A revenue growth deals with every action/activity that can increase the revenue base of an organization
Balanced Scorecard (BSC) is an innovative approach that considers the financial and non- financial perspectives in determining the performance level of organization, and not only represents a measurement tool, but it is also a multi dimensional system of performance management. Some of the benefit of BSC for performance measurements is-
The balance sore card looks at organisational performance from four prospective and requires s developing appropriate measures for all perspectives-