What Is a Balanced Scorecard? (Plus How to Use One)

Successful business organizations often set objectives, decide on a strategy to accomplish them, and track their progress in measurable ways. The balanced scorecard is a planning and management system that company leaders use to evaluate their organization and plan for the future. Learning about a balanced scorecard can help you understand how managers assess company progress and make decisions. In this article, we define a balanced scorecard, list its benefits, explain the four balanced scorecard aspects, and share tips for using a balanced scorecard.

What is a balanced scorecard?

If you want to understand how different priorities affect a company internally and externally, it is essential to know the answer to, "What is a balanced scorecard?". Organizations usually focus on financial information to measure their success. The balanced scorecard system suggests that organizations can measure success from other aspects as well, such as a customer service perspective and employee satisfaction perspective.

A balanced scorecard is an essential performance indicator that helps determine which areas of your business require improvement. It is a framework a business can use to create strategic plans to help them meet its goals and measure its performance.

The four balanced scorecard aspects

Here are the four significant aspects of a balanced scorecard system:

Financial data

Financial data, including earnings reports, expenses, revenue, and any other numeric measurement of the financial health of a business, is still important within the balanced scorecard system. To keep their finances in order, businesses can start by examining their financial records. Ensure that all records are accurate and double-check the numbers to get a clear idea of the accounts of a business. Consider the short term, quarterly numbers, and metrics that track profits and losses over time if possible.

Related: Consolidation of Financial Statements (Definition and Example)

Customer perspectives

Customer perspectives refer to how the public perceives and interacts with a business. When a manager employs the balanced scorecard method, they consider brand loyalty, customer satisfaction, and metrics that track how people interact with the company website or behave in physical company locations. Managers can learn about customer perspectives by issuing surveys or speaking with them in person. If customers have a positive opinion about a business and a solid knowledge of their products, it suggests that the business might have a strong foundation for growth.

Related: What Is Customer Satisfaction and Why Is It Important?

Business processes

Business processes are how the different branches of an organization interact with one another. This can refer to the relationship between departments, between management and employees, or between a design team and a manufacturing location. When managers consider the strength of an organization's business processes, they evaluate how different departments communicate and work together to achieve common goals. Metrics that track efficiency and productiveness can suggest healthy or deficient business processes.

Organizational capacity

Organizational capacity is usually the human capital of a business, the individuals who have the ability to learn, grow and adapt to meet new challenges. If a business has a strong organizational capacity, it usually has a team of committed employees. These employees might suggest new ideas, improve old processes, and quickly incorporate management requests for change. Managers can consult with their human resources department to learn more about the organizational capacity of their business. If managers hire excellent candidates, train them effectively, and encourage a productive work culture, they can strengthen organizational capacity.

How to use a balanced scorecard

Once you have evaluated a business according to the four aspects, you can use the information to develop a plan to make positive changes. Instead of considering each aspect of the business as a separate issue, you can think about a strategy and develop plans that may strengthen every aspect of a business. Some managers make a strategy map, a diagram that shows the relationship between the four aspects and how they affect each other. When you understand the overall state of a business, you can develop strategic objectives to make improvements. Here're the ways to use the scorecard method:

1. Highlight performance metrics

Performance metrics are observable, numerical measurements of the success of a business across the four key aspects. After evaluating a business and considering its financial data, customer relationships, processes, and organizational capacity, you can determine what areas you can improve and develop metrics to determine if you are successful. For example, if you notice that your business has an uncertain relationship with customers, you may create a scale for measuring customer satisfaction. You can use performance metrics to improve aspects of your business and track your progress.

2. Develop strategic initiatives

Strategic initiatives are long-term projects that an organization decides to pursue. When you use the balanced scorecard method to analyze a business, you can gain the insight necessary to create, develop, and fine-tune these tasks. Try to develop an understanding of the financial state of a business, the abilities of employees, the relationships between departments, and the way customers see a business. This can help you understand what makes a business function and what projects might ensure future success. The balanced scorecard method allows you to develop strategic initiatives and implement them throughout an organization.

Related: How to Develop a Strategic Business Development Plan

3. Create multi-level strategic alignment

Multi-level application in the balanced scorecard method refers to using this method of analysis at every level of an organization. Management uses the balanced scorecard method to understand the overall state of the business and set strategic initiatives. Individual department managers can use the balanced scorecard method to achieve targets and understand how their work matches the mission of the company. As the analytical, data-driven approach of the balanced scorecard is communicated through an organization, separate aspects of a business work together to implement initiatives.

Benefits of a balanced scorecard

Here're some benefits of a balanced scorecard system:

Develop ideas

The balanced scorecard method helps you consider a business in several different ways and understand its success. If a manager considers the different dimensions of a company, they can immediately notice what areas require improvement. Then they can understand how different areas of the organization interact and set goals for the future. The balanced scorecard method can help you develop innovative ideas for improvements.

Promote cooperation

Using a performance scorecard method helps to encourage cooperation across an organization by focusing on working together to achieve goals. Managers who use the balanced scorecard method take the time to understand the needs and talents of their employees and consider how their department can best work with others to implement initiatives. Businesses that use the balanced scorecard method consider the needs of their customers and think about their work from the perspective of a customer. The balanced scorecard method suggests that every aspect of an organization is important and that every individual matters.

Promote collaboration

The balanced scorecard method usually promotes collaboration between management objectives, company processes, individual employees, and customers. It suggests that the complex relationship between these four factors determines business success and encourages you to bring different aspects of a business into alignment. The balanced scorecard method can help you recognize and promote the talents of your employees, improve business processes, strengthen your relationship with customers, and deploy your financial capital effectively. By promoting collaboration across a business you can increase productivity and efficiency.

Set goals

You can set more relevant and accurate goals for an organization using the balanced scorecard method. By understanding the relationship between the different aspects of a business, you can notice what to improve and determine how different factors come together to affect overall success. The method encourages you to widen your focus and consider the complex cause and effect relationships that determine the path a business takes. You can use the insight you gain from applying this method to set reasonable, actionable, and effective goals for an organization.

Look forward

Use the balanced scorecard method to ensure that you prepare a business for an uncertain future. Technology advances at a rapid pace, and the world is constantly changing. Businesses that adapt quickly and innovate can become successful in this environment. The scorecard method encourages you to strengthen key aspects of your business that promote future success.

For example, you can consider the organizational capacity and develop the talents of your employees. You can anticipate the needs of customers and ensure you satisfy them. The method gives you the opportunity to correct weaknesses within a business and aim your strategy towards the future.