Balanced Scorecard

Loading the player...

What is a 'Balanced Scorecard'

A balanced scorecard is a performance metric used in strategic management to identify and improve various internal functions of a business and their resulting external outcomes. It is used to measure and provide feedback to organizations. Data collection is crucial to providing quantitative results, as the information gathered is interpreted by managers and executives, and used to make better decisions for the organization.

BREAKING DOWN 'Balanced Scorecard'

The balanced scorecard was first introduced by accounting academic Dr. Robert Kaplan and business executive and theorist Dr. David Norton. It was first published in 1992 in a Harvard Business Review article. Dr. Kaplan and Dr. Norton took previous metric performance measures and adapted them to include nonfinancial information.

Purpose Behind the Balanced Scorecard

The balanced scorecard is used to reinforce good behaviors in an organization by isolating four separate areas that need to be analyzed. These four areas, also called legs, involve learning and growth, business processes, customers, and finance. The balanced scorecard is used to attain objectives, measurements, initiatives and goals that result from these four primary functions of a business. Companies can easily identify factors hindering company performance and outline strategic changes tracked by future scorecards. With the balanced scorecard, they look at the company as a whole when viewing company objectives. An organization may use the balanced scorecard to implement strategy mapping to see where value is added within an organization. A company also utilizes the balanced scorecard to develop strategic initiatives and strategy objectives.

The Four Legs of the Balanced Scorecard

Information is collected and analyzed from four aspects of a business. First, learning and growth are analyzed through the investigation of training and knowledge resources. This first leg handles how well information is captured and how effectively employees utilize the information to convert it to a competitive advantage over the industry. Second, business processes are evaluated by investigating how well products are manufactured. Operational management is analyzed to track any gaps, delays, bottlenecks, shortages or waste.

Third, customer perspectives are collected to gauge customer satisfaction with quality, price and availability of products or services. Customers provide feedback regarding if their needs are being met with current products. Finally, financial data such as sales, expenditures and income are used to understand financial performance. These financial metrics may include dollar amounts, financial ratios, budget variances or income targets. These four legs encompass the vision and strategy of an organization and require active management to analyze the data collected. Therefore, the balanced scorecard is often referred to as a management tool, not a measurement tool.

RELATED TERMS
  1. Balanced Score Card - BSC

    A strategic planning and management system used extensively in ...
  2. Strategic Management

    The management of an organization’s resources in order to achieve ...
  3. Strategic Financial Management ...

    Managing an organization's financial resources so as to achieve ...
  4. Metrics

    A wide variety of tools that managers and executives can use ...
  5. Average Balance

    The balance on a loan or depositary account. A simple average ...
  6. Average Collected Balance

    The average balance of collected funds (less any uncleared or ...
Related Articles
  1. Markets

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  2. ETFs & Mutual Funds

    Scoring Risk-Return Data

    By Richard Loth (Contact | Biography)This is the entry we need to complete in the Fund Investment Quality Scorecard for an analysis of a fund's risk-return profile: Obviously, ...
  3. ETFs & Mutual Funds

    Fund Investment Qualities

    By Richard Loth (Contact | Biography)Investment research firms use data provided by the fund sponsor to generate a variety of analytical perspectives. These are used by professional and non-professional ...
  4. Managing Wealth

    Scoring Fund Management Data

    By Richard Loth (Contact | Biography)This is the entry we need to complete in the Fund Investment-Quality Scorecard for an analysis of a fund's management tenure and structure: ...
  5. ETFs & Mutual Funds

    Are the Best-Performing Funds Always Your Best Bet?

    Consistently being the best performer is hard.
  6. ETFs & Mutual Funds

    Scoring Fund Size and Style Data

    By Richard Loth (Contact | Biography)This is the entry we need to complete in the Fund Investment Quality Scorecard for an analysis of a fund's size and style compatibility: ...
  7. Investing

    Reading The Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  8. Investing

    Understanding Management by Objectives

    Management by objectives is a process in which a manager and an employee agree on specific performance goals and then develop a plan to reach those goals.
  9. Investing

    Common Size Balance Sheet

    Investopedia explains: A common size balance sheet is a valuable tool for tracking and analyzing the changes and performance of a business over multiple time periods.
  10. Investing

    The Importance Of Analyzing Accounts Receivable

    While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
RELATED FAQS
  1. What role do core competencies play in a balanced scorecard?

    See how some businesses can combine the concepts of core competency and a balanced scorecard in an attempt to build sustainable ... Read Answer >>
  2. How many mutual funds beat the S&P 500 on a percentage basis after operational fees?

  3. How do companies identify and manage business risk?

    Learn what risks businesses can be exposed to during any phase of the business life cycle, and how these risk can be identified ... Read Answer >>
  4. What are some common functions of business intelligence technologies?

    Understand the common functions of business intelligence technologies, and learn how business intelligence is used to increase ... Read Answer >>
  5. What's the difference between a trial balance and a balance sheet?

    Discover what is included in a trial balance and a balance sheet, and learn about what sets these two accounting reports ... Read Answer >>
  6. Does the balance sheet always balance?

    Yes, a balance sheet should always balance. The name "balance sheet" is based on the fact that assets will equal liabilities ... Read Answer >>
Hot Definitions
  1. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  2. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  3. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  4. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  5. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
  6. Security

    A financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship ...
Trading Center