Linking the Budget to the Balanced Scorecard

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Building a balanced scorecard

A Strategic Management System using the Balanced Scorecard references and refines the Balanced Scorecard as it cycles through the following steps: Translating the strategic vision, communicating the vision and linking it throughout the organization, business planning or budgeting, and listening to feedback and learning from it. (Adapated from Kaplan and Norton, The Strategy-Focused Organization)

To build a balanced scorecard, managers follow these steps:

  • Develop goals and measures for critical financial performance measures. In other words, develop a budget as a financial action plan.
  • Develop goals and measures for critical customer performance variables. Managers first identify the target market, and then they develop ways to measure variables such as customer loyalty through repeat buying, response rates, new customer referrals, customer complaints, price sensitivity, and so on. The focus is on identifying ways to retain current customers, increase levels of customer purchases, increase levels of profitability per customer, and acquire new customers.
  • Develop goals and measures for critical internal process performance variables.

    Managers look at the three areas of internal process:

    1. The innovation cycle or research, development, and design of products and service
    2. The operations cycle in which the products are manufactured and delivered or services are rendered
    3. The post-sale service cycle in which customer service is the primary activity. Each of these internal process areas relates directly to both financial performance and customer satisfaction.
  • Develop goals and measures for critical learning and growth performance measures. Here managers step back to consider the infrastructure and capabilities needed for the organization to create the long-term growth the strategic mission envisions. Growth will occur through human resources, systems, and organizational procedures. This perspective clarifies the investment decisions management has to make to achieve its goals. Will the organization have to invest in training people, in hiring more people, in improving technology systems? Empowering employees—encouraging employee loyalty—and aligning organizational structures to meet changing organizational needs simultaneously enhance the ability of the organization in the other three critical areas.

The key to linking the balanced scorecard is to develop the performance measures or drivers that can help predict future outcomes. The balanced scorecard provides the guidance for planning—the budget—which, in turn, provides feedback and allows for course correction as the time period advances. This provides information for translating the strategic vision into reality, which in turn provides learning and communication for the development of the budget planning process.

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