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.1 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:
1. Financial – the strategy for growth, profitability, and risk, viewed from the perspective of
the stockholder.
2. Customer – the strategy for creating value and differentiation from the perspective of the
consumer.
1 1
Frye, Curtis D. “Improve budgeting using balanced scorecards.” http://office.microsoft.com/en-us/excel-help/improvebudgeting-using-balanced-scorecards-HA001192994.aspx?CTT=5&origin=HA001192991
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3. Internal Perspective – the strategic priorities for various business processes that create
customer and shareholder satisfaction.
4. 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
Goals
Increased Profitability
Increased Growth
Measures
Cash Flows
Gross Margins
Increased return on assets
Revenue Growth
Customer Perspective
Goals
New Customer Acquisition
Measures
Client’s Won/Lost
95% Client Retention
Customer Service
80% Satisfaction
# of New/Retained/Lost Customers
Internal Perspective
Goals
Improved Core
Competencies
Better Employee Morale
Streamlined Processes
Learning & Growth
Goals
New Product Development
Continuous Improvements
Training of Employees
Measures
Efficiency Improvements
Development/Lead/Cycle Times
Improved Sourcing/Supplier Delivery
Measures
Number of new products and percentage of sales
from each
Number of employees receiving training, training
hours per
Number of strategic skills learned
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
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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.
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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.
Balanced
Scorecard
Based
Budgeting
Perspective
Objecti
ve Type
Measur
es
Target
s
Finance
Increas
e
Recurrin
g
Revenu
e
Margin
(%)
Customer
Retain
custome
rs
Internal
Improve
Employ
ee
Satisfac
tion
Training
Custom
er
satisfacti
on rating
Employe
e
satisfacti
on rating
(%)
Courses
per
employe
e
5%
quarterl
y
growth
for
segme
nt A.
7 out of
10
Learning
Supporti
ng
Initiative
s
Hire 2
sales
reps.
Annu
al
5.00%
7
Retain
75% of
employ
ees
Satisfacti
on
surveys
75%
1 per
quarter
Incentive
bonus
4
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.
November Actions:
1. Answer the following questions for your company:
a. What measurements are currently taken to determine the budget?
b. How will a budget be determined if there is not a balanced view of the company?
2. If these cannot be answered, start listing key indicators that can be measured for the
upcoming budget year.
3. Create a table for each criterion above and start listing measures and goals.
4. Determine if these are measurable goals that will be effective for the company and the
budget going forward.
Articles for Further Reading
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1. 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/
2. 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-balancedscorecards-HA001192994.aspx?CTT=5&origin=HA001192991
3. 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
4. Bain & Company’s Management Tools section describing the Balanced Scorecard:
http://www.bain.com/management_tools/tools_balanced.asp?groupCode=2
5. Kaplan, Robert S., and David P. Norton. “The Balanced Scorecard: Measures That
Drive Performance.” Harvard Business Review, July 2005, pp. 71-79.
Jerry Condon is a Managing Director in the Midwest Office. Michael Leppellere is a former
Intern Associate in the Midwest office.
For more information, please visit Cathedral Consulting Group LLC online at
www.cathedralconsulting.com or contact us at info@cathedralconsulting.com.
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