Refinements To Balanced Scorecard System And Performance Evaluation

Framework of Balanced Scorecard

Balanced score card is a system of management that is used by organization to make the communication of the objective which the organization intends to achieve along with monitoring and measuring the progress toward strategic target. It enables the organization in aligning the day-to-day work and prioritizing the services, products and projects. Balanced score card is a framework for measuring the performance of organization by the application of balanced set of measures of performance. In order to better focus on long-term success of organization, some extra non-financial strategic measures have been added to the balanced scorecard. This particular system has evolved over the years and have added the fully integrated system of strategic management. The strategy of organization is translated into the operational objectives with the help of balanced scorecard (Cooper et al. 2017).

Traditional financial measures are retained by the balanced score card and financial measures of past performances having the measures of the driver of future performances are complemented by balanced scorecard. Vision and strategy of organization forms the basis of the measures and objectives of scorecard. Balanced scorecard was introduced in response to the incapability of the financial measures to achieve desired financial results and the concept incorporated the performance drivers while retaining the financial measures. It is tool of measuring the performance by translating the strategy and vision of company into a set of performance measures. An enterprise view of overall performance of organization is provided by integration of financial measures with other key measures such as growth, innovation, business processes, customer perspectives and organizational learning. In large companies, there is employment of performance measurement system such as balanced scorecard unlike small companies. Some of the financial measures employed by Balance scorecard for determining the organization performance is based on dimensions and indicators. Organization capabilities, customer relationships and core competencies are some dimensions to be listed.

Framework of balanced scorecard:

(Source: Nikolaou and Tsalis 2013)

Traditional financial measures depicts the past story and they are regarded as the lag indicators for measuring the performance of business. An insight into the capabilities and intangible assets that required to be developed for achieving desirable financial result is not provided by this traditional measure of finance. This can be explained by giving one particular instance, in a manufacturing set up, frontline workers are removed from the financial measures and they does not possess any idea about the what they work is being translated into financial results. Therefore, the intangible value created and possessed by organization could not be assessed using the financial measures. Such measures can treat the expense items as human capital as they fail in the knowledge based strategies.

Financial Perspective of Balanced Scorecard

The set of business unit objectives are expanded by balance scorecard beyond the summary of financial measures. Critical value creation activities that is created by motivated and skilled organizational participants are captured in the balanced scorecard. The value drivers for superior long-term competitive and financial performance are revealed by balanced scorecard by retaining the financial perspective.

The performance measurement system of many companies incorporates both financial and non-financial measures. Senior managers use financial measures and it helps in summarizing the result of operations. It is empathized by the application of balance scorecard that at all the level of organization; the financial and non-financial measures must be incorporated in the information system for all employees. Many organizations introduce the balance scorecard as the management tool for combing the financial control with improvement in quality. It has been depicted by many authors that balanced scorecard is a dashboard of measures mainly operational that is arranged under non-financial and financial categories.  Monitoring and performance improvement is an integral part of balanced scorecard that enable the organization to focus on collecting the data that required for decision-making.

Among all the other perspectives, financial perspective sis considered to be the most important in relation to assessment of performance of organization and implementation of strategy. The topmost part of balanced scorecard is occupied by financial perspective that is usually actualized through the financial issues transformation into minimal costs and sustainable goals and provision of mission and vision statement of organization. Financial index provides the case and effect trend irrespective of whether they are intangible or tangible. In addition to this, there should be way by which financial perspective can be used by organizations to expand the market, create long-term value for shareholders and reducing the costs. Financial perspective defines the measures of financial performance and financial objectives that helps in providing evidence whether the financial strategy of company is decreasing costs and yielding increased profits (Hoque 2014).

The financial perspective is retained in the balanced scorecard as it enables the organization in summarizing readily measures of economic consequences of the actions that have already been taken. The financial performance is indicative of the fact that whether the execution and implementation of the strategy of company are contributing to the bottom line improvement. Financial objective of the business is related to the return on capital employed, operating income and economic value added. Financial measures are considered inadequate for evaluating and guiding the trajectories of the organization through competitive environments. They are not able to capture much of value and are referred to as lagging indicators. Financial measurement is retained by balanced scorecard as a critical summary of business and managerial performance. However, it highlights an integrated and general set of measurements that links stakeholders of organization to long-term financial success. Drivers of future financial performance of organization are introduced by the balanced score card and the drivers comprised of internal business process, customers and learning and growth perspectives.

Balanced scorecard is embedded in the process of financial management and this particular process is the most important and innovative aspect of the balanced scorecard. Financial perspective depicts how the strategy map balances the short-term and long-term objectives. There are two fundamental concepts that are accomplished by the internal process perspectives by reducing the costs and improving the processes for the productivity component in the financial. The focus of balance scorecard in non-profit sector and public sector focuses on customer perspective rather than financial perspective.  However, the concept of balanced scorecard was initially originated for applying in the profit sector having the financials as the central objective. In order to achieve the financial objectives, there is a need to focus on performance drivers in perspective stakeholders and customers. Financial goals of balance scorecard in the public and private sector is different. In private sector, it intends to create innovation, market share, profitability and growth. In public sector, scorecard intends to reduce the costs and efficiency accountability to the public. In some case, balanced scorecard focuses on key performance indicator rather than just focusing on financial measures.

If we consider return on capital employees as one of the driver of financial perspective in the scorecard. Driver of such measurement could be expanded to sales to existing and new customers resulting from high degree of loyalty among customers. Therefore, scorecard includes customer loyalty and new customers in the customers perspective as it is expected to have string influence of the return on capital employed.  It is revealed by some market analysis that there is requirement of consultancy as it leads to new customers and higher customer loyalty and this in turn leads to higher financial performance.

Cause and effect relationship:

(Source: Perkins et al. 2014)

There is a case and effect relationship between different perspectives of the balance scorecard. Measures of organizational learning and growth are the drivers of the measures of internal business process and this in turn result in diver of measure of customer perspective and these are the measure of drivers of financial performance. According to Coe and Letza (2014), a balance scorecard should have an appropriate mix of leading indicators and lagging indicators in the unit of business strategy. A balance is stroked between the long-term and short-term objectives along with the performance driver and financial outcome and this lead to the introduction of continuous process of adoption of adaption and learning that lead to modification of strategies. Such strategy is broken down into desired financial result, customer value proposition and critical strategic operational objectives. However, there is a requirement of maintaining balance between the lag, lead, short-term, long-term and non-financial objectives. The creation of link between the strategic objectives about the perspective from the performance drivers to the outcome.

BSC is regarded as the revolutionary tool that encompasses both financial and non-financial measures. The chain of case and effect relationship results in establishment of indicators that helps in the measurement of past activity by way of most financial metrics. However, leading indicators are regarded as the powerful measures as managers are provided with more time for inflecting the outcome. There are three types of balanced scorecard and Type 1 scorecard gives a special multidimensional framework for strategic performance of management that combines the non-financial and financial strategic measures. One of the key factor in the employment of BSC is obtaining the balance between leading and lagging indicators. Financial measures are regarded as considered as inadequate for evaluation of long age companies in creating future value by making investments in various stakeholders. Therefore, an organization having a good balanced scorecard will have appropriate mix of all the indicators concerning strategy of company. When few measures are constructed in each perspective of scorecard, then in this case, organization fails to obtain the balance between non-financial and financial indicators.

The adoption of balanced scorecard in companies is observed through financial measures such as variance analysis, return on investment and budgetary control and there is minimal se of non-financial measures. In the event of implementation of BSC, the most important is financial perspective and there is difficulties in observing causal relationship between assigning suitable weights to the non-financial and financial measures. A clear description is provided by the Balanced scorecard about what should be measured by companies in order to balance their financial perspectives.

An organization should not try to make quantitative link between the expected financial outcomes and non-financial leading indicators. Financial measures are the retrospective measures and dependent variables and are lagging indicators and temptation of organization to make quantifiable linkage does not lead to the establishment of quantifiable links (Tjader et al. 2014). However, due to lagging time, it is difficult to predict the estimation and in addition to this, there are many factors that influences the financial results. Therefore, such linkage should not be made between the expected financial results and non-financial leading indicators. The fact that retention of traditional financial measures in the balanced scorecard does not help in creating value for long aged companies cannot be considered truly correct. However, the particular instance discussed above make the statement feasible to some extent.

In order to have a successful implementation of balanced scorecard in an organization, there is a need pot have top down approach employed. An organization can have effective balanced scorecard, then it is required to have strategy and supporting implementation that needs to be shared with the whole organization. It is required by senior management to lead and support defining the project as measurement of performance.

Conclusion:

It is required by organization to succeed and achieve the mission; they are required to look at the customers, as this in turn will help in achieving the strategic financial objectives. This is so because it is the principal means for recognizing the mission of organizations. BSC is regarded as one of the prominent tool for monitoring and strategizing the organizational performance by benchmarking with the strategic plan of key elements. Implementation of balanced scorecard is aimed at improving the performance of organization by contributing to the contemned learning based on information that is gathered by organization.  Traditional financial measures report on events of past period and it does not indicates what mangers can do for improvement in the future. The scorecard functions as corner stone in the future and current success of company. 

Balanced scorecard can be refined by designing and characteristic in such a way that it gives more strategic relevance and better functionality. There needs to be refinement in the areas of understanding the link between types of information required and management behaviors for facilitating management interventions in better way. The central fact to this development is the separation of strategic control and management. Scorecard can be used as successful strategic contracting and communication tool when it is cascaded through an organization. Benefits of balanced scorecard should be developed by attaching the capital values to post and pre case scenarios. It should be adopted by demonstrating value of organization. The design process adopted for balance scorecard should be done by appropriate ways for translating the concepts into measurement. The concept of scorecard should be extended to public sector and non-profit companies and strategy map for strategic objectives. It should be intended to create office for strategic management and communication should be incorporated for creating intrinsic motivation. In a new closed loop management system, there needs to be a link between operations and strategy. The support unit of corporate strategy and creation of synergies through the business alignment.

Balanced scorecard war originally developed as the performance management tool but, now day, it is increasingly associated with the strategy implementation. Scorecard is a reporting methodology and strategic planning that split the objectives of company into equally important perspectives that is financial, internal control process, customers and growth and learning perspectives. Effective measurement is regarded as integral part of process of management. Issues relating to the improvement of performance measurement can be done by evaluating the efficient use of resources. The core measure group includes the retention of customers, customer profitability, customer acquisition and satisfaction. Some of the measurement standard are as follows:

Measurement of internal process- This relates to the measurement of internal products, process and services that helps in creating more customer value. Four major processes that deals with managing the R & D portfolio new products and processes guide

Measurement of growth and learning perspective- Measures include variety of leading intangible and tangible assets that helps in depicting this particular feature. In this regard, a measurement needs to be adopted by organization for measuring the employees, organizational capital and knowledge system. Considering the measurement of this factor directly leads to internal skills and capabilities of organization. Employment of the strategy relating to the measurement and this result in transformation of behavior of a organization that is regarded as successful.

Measurement of customer perspective- It relates with two measurement standards and in the first measurement, it deals with the customer profitability, market share and satisfaction. Another include the performance driver guiding the customer value position that involves quality, attributes, relationship and lead times. Sometimes, this particular measurement does not include some of internal factors such as customer satisfaction and internal control of organization. A broad range of customer satisfaction is considered under this particular and this will be achievable with highest value propositions and right choice of customers.

Measurement of financial perspective- It leads to the provision of vision and mission statement of organization and financial issues transformation into minimization of cost and attainment of sustainable goals. This particular measure helps in assessing the financial position of organization by application of several financial metrics.

There needs to be the examination of the ways of integration of performance reporting with the performance management. It is often required that performance management system of an organization needs to incorporate complete business coverage. Performance evaluation system is viewed as the comprehensive system and that is particularly innovative. Such system should be designed by the organization at the regional, organizational and national level. That system should be used as external benchmarking purpose and internal evaluation. Refinement of the performance evaluation system should be done in a way that it helps in promotion of managed competition and evaluation of strategic options. An uniform evaluation cycle needs to be incorporated in the performance evaluation system so that all the evaluation are being done at the same time and it will help management in assessing the contribution of individual towards the organizational goals and  ensuring consistency between employees. Furthermore, the refinement of the performance evaluation system can be done by organization if they have identified proper performance measures. Standard performance measures will help organization in creating benchmark against which the actual performance can be evaluated as it can objectively measures some of the subjective performance areas. This will depict qualitative measurements and examine the historical pattern of volume.

Payback Period of the Project:

	Period
Particulars	0	1	2	3	4	5
Initial Outlay:
Cost of Machine Purchase	($59,872)
Net Operating Cash Flow:
Increase of Customers (nos.)		200	200	200	200	200
Contribution per Customer		$100	$100	$100	$100	$100
Increase in Sales Revenue		$20,000	$20,000	$20,000	$20,000	$20,000
Savings of Water per year (in ltr.)		2000	2000	2000	2000	2000
Cost per litre		$0.01	$0.01	$0.01	$0.01	$0.01
Savings of Water Expenses		$20	$20	$20	$20	$20
Increase in Total Operating Profit		$20,020	$20,020	$20,020	$20,020	$20,020
Less: Depreciation of Machine		$11,974	$11,974	$11,974	$11,974	$11,974
Net Increase in Operating profit		$8,046	$8,046	$8,046	$8,046	$8,046
Less: Tax		$0.00	$0.00	$0.00	$0.00	$0.00
Net Increase of Operating Profit after Tax		$8,046	$8,046	$8,046	$8,046	$8,046
Add: Depreciation of Machine		11974	11974	11974	11974	11974
Increase in Net Cash Flow		$20,020	$20,020	$20,020	$20,020	$20,020
Salvage Value						$0
Net Incremental Cash Flow	($59,872)	$20,020	$20,020	$20,020	$20,020	$20,020
Cumulative Cash Flow	($59,872)	($39,852)	($19,832)	$188	$20,208	$40,228
Payback Period (in years)	2.99

Average Accounting Rate of Return (ARR):-

	Period
Particulars	0	1	2	3	4	5
Initial Outlay:
Cost of Machine Purchase	($59,872)
Net Operating Cash Flow:
Increase of Customers (nos.)		200	200	200	200	200
Contribution per Customer		$100	$100	$100	$100	$100
Increase in Sales Revenue		$20,000	$20,000	$20,000	$20,000	$20,000
Savings of Water per year (in ltr.)		2000	2000	2000	2000	2000
Cost per litre		$0.01	$0.01	$0.01	$0.01	$0.01
Savings of Water Expenses		$20	$20	$20	$20	$20
Increase in Total Operating Profit		$20,020	$20,020	$20,020	$20,020	$20,020
Less: Depreciation of Machine		$11,974	$11,974	$11,974	$11,974	$11,974
Net Increase in Operating profit		$8,046	$8,046	$8,046	$8,046	$8,046
Less: Tax		$0.00	$0.00	$0.00	$0.00	$0.00
Net Increase of Operating Profit after Tax		$8,046	$8,046	$8,046	$8,046	$8,046
Average Accounting Profit	$8,045.60
Accounting Rate of Return	13.44%

Net Present Value (NPV) of the Project:

	Period
Particulars	0	1	2	3	4	5
Initial Outlay:
Cost of Machine Purchase	($59,872)
Net Operating Cash Flow:
Increase of Customers (nos.)		200	200	200	200	200
Contribution per Customer		$100	$100	$100	$100	$100
Increase in Sales Revenue		$20,000	$20,000	$20,000	$20,000	$20,000
Savings of Water per year (in ltr.)		2000	2000	2000	2000	2000
Cost per litre		$0.01	$0.01	$0.01	$0.01	$0.01
Savings of Water Expenses		$20	$20	$20	$20	$20
Increase in Total Operating Profit		$20,020	$20,020	$20,020	$20,020	$20,020
Less: Depreciation of Machine		$11,974	$11,974	$11,974	$11,974	$11,974
Net Increase in Operating profit		$8,046	$8,046	$8,046	$8,046	$8,046
Less: Tax		$0.00	$0.00	$0.00	$0.00	$0.00
Net Increase of Operating Profit after Tax		$8,046	$8,046	$8,046	$8,046	$8,046
Add: Depreciation of Machine		11974	11974	11974	11974	11974
Increase in Net Cash Flow		$20,020	$20,020	$20,020	$20,020	$20,020
Salvage Value						$0
Net Incremental Cash Flow	($59,872)	$20,020	$20,020	$20,020	$20,020	$20,020
Cost of Capital	5%	5%	5%	5%	5%	5%
Discounted Cash Flow	-$59,872.00	$19,066.67	$18,158.73	$17,294.03	$16,470.50	$15,686.19
Net Present Value	$26,804.12

Internal Rate of Return (IRR) of the Project:

	Period
Particulars	0	1	2	3	4	5
Initial Outlay:
Cost of Machine Purchase	($59,872)
Net Operating Cash Flow:
Increase of Customers (nos.)		200	200	200	200	200
Contribution per Customer		$100	$100	$100	$100	$100
Increase in Sales Revenue		$20,000	$20,000	$20,000	$20,000	$20,000
Savings of Water per year (in ltr.)		2000	2000	2000	2000	2000
Cost per litre		$0.01	$0.01	$0.01	$0.01	$0.01
Savings of Water Expenses		$20	$20	$20	$20	$20
Increase in Total Operating Profit		$20,020	$20,020	$20,020	$20,020	$20,020
Less: Depreciation of Machine		$11,974	$11,974	$11,974	$11,974	$11,974
Net Increase in Operating profit		$8,046	$8,046	$8,046	$8,046	$8,046
Less: Tax		$0.00	$0.00	$0.00	$0.00	$0.00
Net Increase of Operating Profit after Tax		$8,046	$8,046	$8,046	$8,046	$8,046
Add: Depreciation of Machine		11974	11974	11974	11974	11974
Increase in Net Cash Flow		$20,020	$20,020	$20,020	$20,020	$20,020
Salvage Value						$0
Net Incremental Cash Flow	($59,872)	$20,020	$20,020	$20,020	$20,020	$20,020
Cost of Capital	5%	5%	5%	5%	5%	5%
Discounted Cash Flow	-$59,872.00	$19,066.67	$18,158.73	$17,294.03	$16,470.50	$15,686.19
Net Present Value	$26,804.12
Internal Rate of Return	14.29%

The above tables depict that the payback period of the project is 2.99 years, which means that the project would take almost 1 year extra to recover the initial investment than the desired payback period of the company. However, the net present value of the project is positive and both the accounting rate of return and internal rate of return are higher than the cost of capital or the desired rate of return. Hence, it can be stated that the company should buy the machine, as it would provide more profit to the company.

There are many non-financial aspects, which can create high impact on the future performance of any project. Hence, the company should consider the following non-financial aspects also for the decision-making purpose:

• Quality of the output
• Change in the preferences of customers
• Limitations of the estimation process

A decrease in the contribution margin per unit would result in the increase in break-even point of Ice Cold Ltd.

As per the following table, the minimum price per unit for which So Hot Ltd. should sell the obsolete units is $0.40:

Computation of Scrap Value per unit:
Particulars		Amount
Cost of Scrappping	A	$2,000
Nos. of Units	B	5000
Minimum Selling Price p.u.	C=A/B	$0.40

The selling price per unit of Bella Boutique Ltd. is computed in the following table:

Computation of Selling Price per unit:
Particulars		Amount
Percentage of Variable Cost	A	50%
Contribution Margin	B=1-A	50%
Fixed Costs	C	$1,000,000
Expected Profit	D	$250,000
Expected Sales Volume (in Dollars)	E=(C+D)/B	$2,500,000
Sales Volume (in Units)	F	125000
Selling price per unit	G=E/F	$20

The contribution margin per unit, expected from the new order, is computed below:

Computation of Contribution Margin:
Particulars	Amount
Total Offering Price	$450,000
Order Volume (in units)	1000
Offer Price per unit	$450
Variable Costs:
Direct Materials	$200
Direct Labor	$150
Variable Manufacturing Overhead	$125
Variable Packaging Cost	$1.50
Total Variable Cost	$476.50
Contribution Margin per unit	($26.50)

For the new order, the company has to produce additional volume, which would help to reduce per unit fixed manufacturing costs and increase the revenue. However, it is clear from the above table that contribution margin per unit for the new order would be negative. It indicates that the company would not be able to recover the variable costs from the offered price. Therefore, it should not accept the one-time only special order.

The income statement of the company for the current scenario is presented below:

Income Statement:
Particulars	Unit	Cost per unit	Amount
Total Sales Revenue	10000	$60	$600,000
Variable Manufacturing Cost	10000	($54)	($540,000)
Contribution Margin	10000	$6	$60,000
Fixed Costs			($75,000)
Net Profit/(Loss)			($15,000)

The table suggests that the company is presently incurring loss of $15000 from the roller skates. Now, if the company would stop the production of the skates, then it would not have to incur the loss. Moreover, it can avoid the fixed expenses, incurred for the product, which would help the company to increase its overall net profit.

Therefore, considering the current situation, it can be stated that the company should discontinue the production of roller skates.

If the company would be able to increase the sale volume by incurring additional advertisement expenses, then the net income from the roller skate products, would be as follows:

b) Income Statement:
Particulars	Unit	Cost per unit	Amount
Total Sales Revenue	14000	$60	$840,000
Variable Manufacturing Cost	14000	($54)	($756,000)
Contribution Margin	14000	$6	$84,000
Fixed Costs			($75,000)
Advertising Costs			($5,000)
Net Profit/(Loss)			$4,000

The statement denotes that by increasing the sales volume to 14000 units and incurring additional fixed expenses of $5000, then company can generate net profit of $4000. Hence, in such scenario, the company can continue the production of roller skates.

The income statement, given below, narrates that if the company would increase its sales volume to 12000 units by reducing its selling price per unit to $58, then its contribution margin per unit would also fall to $4 from $6. It would increase the amount of net loss, currently incurred by the company.

c) Income Statement:
Particulars	Unit	Cost per unit	Amount
Total Sales Revenue	12000	$58	$696,000
Variable Manufacturing Cost	12000	($54)	($648,000)
Contribution Margin	12000	$4	$48,000
Fixed Costs			($75,000)
Net Profit/(Loss)			($27,000)

Hence, the company should not continue the production in this scenario also.

Reference:

Coe, N. and Letza, S., 2014. Two decades of the balanced scorecard: A review of developments. The Poznan University of Economics Review, 14(1), p.63.

Cooper, D.J., Ezzamel, M. and Qu, S.Q., 2017. Popularizing a management accounting idea: The case of the balanced scorecard. Contemporary Accounting Research.

Hoque, Z., 2014. 20 years of studies on the balanced scorecard: trends, accomplishments, gaps and opportunities for future research. The British accounting review, 46(1), pp.33-59.

Perkins, M., Grey, A. and Remmers, H., 2014. What do we really mean by “Balanced Scorecard”?. International Journal of Productivity and Performance Management, 63(2), pp.148-169.

Tjader, Y., May, J.H., Shang, J., Vargas, L.G. and Gao, N., 2014. Firm-level outsourcing decision making: A balanced scorecard-based analytic network process model. International Journal of Production Economics, 147, pp.614-623.

Nikolaou, I.E. and Tsalis, T.A., 2013. Development of a sustainable balanced scorecard framework. Ecological indicators, 34, pp.76-86.

Tjader, Y., May, J.H., Shang, J., Vargas, L.G. and Gao, N., 2014. Firm-level outsourcing decision making: A balanced scorecard-based analytic network process model. International Journal of Production Economics, 147, pp.614-623.