Using the Balanced Scorecard as a Budgeting Tool
Many business owners assume that the budget process is simple and can be easily estimated. However, it is important to understand your business and the factors that reflect your strategic growth plan. Next year’s budget should spark some questions:
- What measurements are currently taken to determine the budget?
- How will a budget be determined if there is not a balanced view of the company?
In the fourth quarter businesses often utilize the simplified approach to budgeting by reviewing past performance--whether it be revenues, profits, or return on investments--and use those factors as key indicators for forecasting the next year. As recent years has shown us, the reality is that there are many factors that can affect what is going to happen next year, or even tomorrow. While developing a budget cannot take months to complete for the small business, a little time should be spent understanding the factors that will play into the next year beyond historic financial records. We encourage business owners to complete this process in the month of November. Larger companies too often waste time and energy fighting over who gets the money, and do not have an understanding of where the company is going.
One tool for use in the budgeting process is the Balanced Scorecard. The Balanced Scorecard identifies and measures key performance indicators that align a company’s performance with all of their future goals. The Balanced Scorecard makes budgeting an efficient process, which is important for every small business owner.
What is the Balanced Scorecard?
The key to the success of any business is knowing the key indicators that measure primary activities within a company’s operations. The Balanced Scorecard is defined as a strategic management and measurement system that measures performance and links strategic objectives to comprehensive indicators. The Balanced Scorecard allows a company to integrate different measures and assess their progress toward achieving their goals.
The Balanced Scorecard takes into account goals along with quantifiable measures of success, which include the customer’s perspective, internal perspective, and innovation and learning perspectives. The Balanced Scorecard is broken into 4 sections for implementation:
- Financial – the strategy for growth, profitability, and risk, viewed from the perspective of the stockholder.
- Customer – the strategy for creating value and differentiation from the perspective of the consumer.
- Internal Perspective – the strategic priorities for various business processes that create customer and shareholder satisfaction.
- Learning and Growth – the priorities to create a climate that supports organizational change, innovation, and growth.
It is the role of owners and management to decide which areas are most important in determining the next year’s budget and creating a Balanced Scorecard that reflects these priorities. These can be derived from past performance, or the strategic plan, but it is important to reflect on 10 to 15 of the most important indicators that can be used for budgeting purposes.
A Balanced Scorecard helps bridge the gap between a simple budget and a budget driven by strategy. A business needs to determine its own strategic goals and indicators to be measured.
Deciding on the Key Indicators
Based on the four perspectives mentioned above, a list of goals and measures need to be determined for each. Here are some examples:
Financial Perspective
Customer Perspective
Internal Perspective
Learning & Growth
Each of the goals and measures above provide examples of how the small business goals can be simply measured based on attainable data. The next step is to determine if these measures are attainable and how the business will accomplish these goals to effectively develop a budget.
Implementing the Scorecard
These indicators must be measured to be efficient and accurate. The frequency will depend on the size of the business and the rate of growth. For a business with steady growth, the measurements may only need to be adjusted once or twice a year. If the business is experiencing increasing sales and growth, it will be necessary to implement changes on a quarterly basis, or even monthly.
It is the role of management or ownership to implement the Balanced Scorecard before the budget is set. The scorecard will force these key individuals to take a look at their business to determine priorities for effectively moving forward. The amount of indicators that are measured, again, is dependent on the size of the business. The decision maker should understand their time, and the appropriate measures to take on for the size of the small business. A small business should set a goal of 5 measures if the Balanced Scorecard is going to be management’s tool for the annual budget for the upcoming years.
Without analysis of the Balanced Scorecard, the budget will not be effective, and will not be realized. Produce an implementation plan and make sure everyone in the organization understands the goals. An owner can have a vision of the upcoming budget year, but without a staff onboard with the Balanced Scorecard, the goals are unattainable. It must be understood that everyone has a part in the goals and measurements of the scorecard.
Transitioning the Scorecard into the Budget
The Balanced Scorecards primary role is to be a springboard for the leaders of an organization to determine, and then implement the changes necessary. The benefit of the Balanced Scorecard is that it highlights and enhances areas of the common budgeting process.
The 4 areas of the budgeting process are:
- Information Gathering – Balanced Scorecards guide the collection of all data required for the budget. Information gathering is simplified and specific areas are targeted and require management to make tough decisions on what occurred in the past.
- Planning – The Balanced Scorecard exposes the weaknesses and threats of the business. The Balanced Scorecard pushes management to reconsider previous measures or proposes new measures that will help with achieving goals for the future.
- Preparation – Management will be required to tie budget requests to the measurements on the scorecard.
- Control – Balanced Scorecards offer a uniform way for a business to meet their goals in the 4 areas of the scorecard; financial, customer, internal, and learning & growth.
The budgeting processes above can be more difficult for a small business owner that may not have the resources available or support in the decision making. Here it remains important to remember the Balanced Scorecard will focus on the important areas of the business that need to be measured. The Balanced Scorecard will simplify the decision process in upcoming budget years.
The table below shows how the Balanced Scorecard begins to shape the thinking around the budget. Companies can use the Balanced Scorecard in parallel with their financial budget. The rationale for this is to link the cause and effect relationship.
Conclusion
Balanced Scorecards do not work for every business. Depending on the industry, some companies may need to use more criteria beyond the four discussed above to develop a competitive advantage. Having a Balanced Scorecard can help streamline the budgeting process on an annual basis.
Actions
- Answer the following questions for your company:
- What measurements are currently taken to determine the budget?
- How will a budget be determined if there is not a balanced view of the company?
- If these cannot be answered, start listing key indicators that can be measured for the upcoming budget year.
- Create a table for each criterion above and start listing measures and goals.
- Determine if these are measurable goals that will be effective for the company and the budget going forward.
Articles for Further Reading
- The Balanced Scorecard Institute website, a strategy management group company that provides training, certification, and consulting in applying best practices in balanced scorecard management. http://www.balancedscorecard.org/
- Frye, Curtis D. “Improve budgeting using balanced scorecards.” This article describes the methodology of incorporating the balanced scorecard into the budgeting process. http://office.microsoft.com/en-us/excel-help/improve-budgeting-using-balanced-scorecards-HA001192994.aspx?CTT=5&origin=HA001192991
- Paladino, Bob. “Realizing Business Strategies through Balanced Scorecard Based Budgeting.” This article focuses on understanding why companies fail to implement their strategies and how to overcome barriers by deploying Balanced Scorecard Budgeting. http://paladinoassociates.com/parts/asmibudget.pdf
- Bain & Company’s Management Tools section describing the Balanced Scorecard: http://www.bain.com/management_tools/tools_balanced.asp?groupCode=2
- Kaplan, Robert S., and David P. Norton. “The Balanced Scorecard: Measures That Drive Performance.” Harvard Business Review, July 2005, pp. 71-79.
