Managerial Accounting – Balanced Scorecard

Since we are talking about methods of evaluating and rewarding performance, it seems fitting that we would use some sort of ‘scorecard’ to do so. However, the concept of a balanced scorecard is a little more complex than something you’d use at a golf course. At a very high level, it can be defined as the system where an organization breaks down its top level strategy into smaller, measurable and relevant milestones so that these become the goals that the smaller entities within the organization attempt to achieve.

If the high level organizational strategy for example is to achieve a 10% increase in market share by lowering the cost structure and hence price by increasing production efficiency in a manufacturing plant, this can be translated into specific mandates for the different entities within the organization. For example, manufacturing could be focussing on increasing output by reducing defective parts and reducing human errors leading to production line stoppage. The sales department could be tasked with leading the charge on increasing sales by a certain number using the lower pricing ability. Marketing could be tasked with identifying and targeting additional customer segments that now fall into the customer base due to lower pricing and so on.

An organisation will typically put KPIs (Key Performance Indicators) in place for all of these smaller mandates which will then be leveraged to measure individual entity level success in order to reward the management within said entity and some of the reward will invariably be linked with the highest level strategic success. So if manufacturing increases the efficiency increase to achieve lower pricing, they might have achieved their own individual mandate however if the sales department fails to hit their sales target, the high level strategic initiative cannot succeed. Hence it is vital that the balanced scorecard is in fact balanced in terms of the individual entity success, only then can the organizational goal be achieved.

While there are many other ways of measuring and rewarding performance, EVA and Balanced Scorecard are common measures we focussed on in class.

Leave me a comment if you have any questions and I will be happy to discuss it further.

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