This is from the “Accounting Makes Cents” podcast episode #4 released on Monday, 10 January 2022.
In today’s episode, we will be discussing a performance management tool that’s been around for a very long time, one that is certainly quite popular in CIMA exam circles. And that is the Balanced Scorecard or BSC for short. We’re going to look at how to use it in a simple everyday scenario. Stay tuned till the end as I’m also going to discuss some of the criticisms around its use.
Jump to show notes.
So, let’s break it down and I’ll let you guys imagine a scenario on how a Balanced Scorecard can be used:
Missy the Barista
Once there was a teen named Missy. Missy recently got a part-time job working for a coffee shop in town as a barista. Whenever Missy is on her shift, she gets allocated a cash register, a till to manage. She takes orders and makes coffees for customers. At the end of her shift, the cash register’s money is tallied up and whatever the total balance is is the revenue that Missy has made for the company that day. Now we know as baristas, and most customer service-oriented fast food roles, the employees are paid based on the hours that they worked. The longer you work, the more pay you get. In this scenario, Missy gets paid the minimum wage rate at however much hours she’s worked. Missy takes orders and makes coffees; the company pays her a salary – a very financial but straightforward transaction.
What isn’t included in this deal is the fact that Missy is quite a personable barista. Customers find her pleasant and attentive to their orders and needs. Because of this, some of the regulars often line up to be served by Missy. Some even specifically choose to come to this coffee shop because of the nice barista. As evidence, we can see the effect that non-financial factors can have on a business. Non-financial aspects like having a friendly personality offering a warm welcome to the customers can ultimately lead to loyalty and following, which then leads to higher revenue.
This is where the Balanced Scorecard comes in handy.
A balanced scorecard, as mentioned earlier is a tool used in performance management. It’s actually a great tool used by managers to keep track and monitor the achievement of objectives and goals. And the goals don’t need to be just about financial performance and numbers as it incorporates a mix of non-financial measures as well. You can have many assortments of non-financial objectives. The BSC focuses on 4 perspectives.
The first perspective is financial. In business, this is a given. Companies will always look at margins and the bottom line to ensure that profit is still being made. Making profits is singularly still the greatest sign of success for any company. The measures that a company can use to monitor financial perspectives vary. Measures could include return on investments (ROI), revenue growth year-on-year, financial ratios like inventory turnover, and many others.
The second perspective is customer. In our barista example, Missy’s actions and personality entice customers to buy coffee and stay as loyal customers. This is essentially what customer perspective looks at. How much of the market does the company hold? How satisfied are the customers with the products or services? How many new customers are coming in for the coffee or for Missy specifically? You see, Missy personifies a brand and in turn this representation looks good on Missy’s coffee shop. So if we are looking at it from a customer perspective, we can even say which coffee shop yields the highest revenue.
Internal business perspective
The third perspective is the internal business perspective, which focuses on internal processes. We didn’t really get to elaborate a lot about this in our barista example. But to expand, I would say that internal business perspective could cover the process and productivity of the coffee-making operations. How productive are the baristas? How much coffee does Missy serve during her shift? How often does the wrong coffee order get done, meaning how many mistakes? How often does the coffee or espresso machine go down?
Learning and growth perspective
The fourth perspective is learning and growth, which focuses on growth potential of the company and within the company. This includes the employees and their growth. In our barista scenario, learning and growth would cover measures such as employee turnover, how often do we hire or lose employees? How often do we send the baristas to Health and Safety Training? And how long do we train them for? Growth will also cover the discovery of new coffee product. Perhaps the creation of a new taste – an apple crisp Macchiato or a pumpkin spice Frappuccino or a cinnamon oat latte.
I think the usual – dedication, hard work, determination. The thing here is that ultimately, no one will be As you can see, the Balanced Scorecard is a nifty tool that can be used by any kind of business and for any level within the company. There’s a plethora of measures to choose from. But of course, even though it’s a good tool, there are criticisms against it.
The first issue, as you can probably see, are the measures. Since there are so many to choose from, it can get pretty daunting and overwhelming to find the right ones. And sometimes, companies may also choose too many that it loses sight of the real objectives. The key is to ensure that the measures you choose contribute to the achievement of the overall goals and objectives of the company. And you also have to be realistic when you choose because while there’s a lot of measures, there is also only so much a company can do within a timeframe. If you choose too many, the company can become inundated with data that is deemed irrelevant. Plus not to mention, you’re going to drive poor Missy mad.
The second issue is that BSC needs the support of higher management. Since BSC affects a lot of areas within an organisation, it’s going to be difficult to gather any kind of information on all these areas if you do not have the proper support. Higher management may sometimes need more convincing as to the benefits that BSC can bring to the table. It shouldn’t be seen as just another expensive exercise with no purpose. It’s obviously clear that Missy won’t be able to do this alone.
The third issue is that BSC does require a lot of data. Hence, compiling the information, reports and results for BSC will take a lot of time and resources from the company. Even once you’ve already put BSC in place, it can still cost the company money because it needs a steady flow of information being fed to it to stay relevant and updated. Don’t make it that Missy will have to be on BSC duty all the time, she loves serving the customers!
The list of concerns is not exhaustive. And I’m sure if you really want to, you can probably come up with some other problems that BSC brings about. The important thing to remember here is that both financial and non-financial performance metrics could be beneficial to the company. It shows that the company has a short- and long-term view of strategies, because ultimately, deep down, every company wants to succeed.
And that is it for me. I hope you enjoyed today’s episode of Missy the Barista and the Balanced Scorecard.
Thank you for listening to Accounting Makes Cents. I am your host, MJ the tutor. If you’re keen to connect to be updated with the arrival of the next episode of this podcast or find CIMA resources online, please head on over to my website, www.mjthetutor.com. You can also hit subscribe on whichever platform you are using to listen to this podcast. If you want to connect with me on social media, I’m on Facebook, Twitter and Instagram under the name, mjthetutor. And I hope to see you again next time. Ciao for now.
Show notes simplified
In this episode, MJ the tutor tackles the topic of a popular performance management tool like Balanced Scorecard, considering its 4 perspectives and its various limitations. She also applies BSC to your favourite neighbourhood barista from the coffee shop around the corner.
“Ding Ding Small Bell” (https://freesound.org/s/173932/) by JohnsonBrandEditing (https://www.youtube.com/channel/UC1RImxnsbfngagfXd_GWCDQ) licensed under CC0 Licence.