Importance of Balanced Scorecard in Small Businesses

Executive Summary

The balanced scorecard is a powerful management tool that is being used to help change organizational culture. Before its development, many companies were relying on strictly financial data. This only allowed them to look at past data and not the company as a whole. The balanced scorecard revolves around the use of four perspectives, (financial, customer, internal business process, and learning and growth) to help translate strategy into measurable indicators of future growth. This helps employees focus on and accomplish the company's mission. It has seen frequent use in large companies, but not much in small companies. Small business can benefit just as much to have and follow a performance management tool. When the balanced scorecard is implemented correctly, it can enhance small businesses by helping them reach the ultimate goal, financial value creation.

So much more is needed in today's company when it comes to measuring performance. Financial statements alone cannot provide the meaningful information necessary to forecast future financial performance. To overcome this challenge, the balanced scorecard (BSC) was developed by Robert Kaplan and David Norton in the early 1990s to complement traditional financial indicators and provide criteria that would "enable companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth" (Kaplan and Norton, 2007). Because of our recent conditions, so many businesses have gone under, not only due to a lack of financial resources, but perhaps due to a lack of performance management strategies, which makes it all the more important to have meaningful information. The balanced scorecard approach uses financial as well as nonfinancial indicators within four perspectives: Financial, Internal Business Process, Learning and Growth, and Customer, to focus on strategy.

What is the balanced scorecard?

The balanced scorecard "translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system" (Paiyo, K., n.d.).

Figure 1: Basic design of a balanced scorecard system

(Davig, Elbert, Brown, 2004)

The financial perspective defines the shareholder's view of the company's performance. The internal business process perspective lets the company know what is working well and what needs to be fixed. The learning and growth perspective deals with how well the company's vision is being achieved. The customer perspective is geared toward achieving customer satisfaction (Gumbus and Lussier, 2006).