What is the Balanced Scorecard?

Purpose

Within accounting, we often focus only on the financial side of a company by performing ratio analysis and testing balances, etc. Yet to effectively analyze a company, we need to also consider its non-financial elements. For example, imagine a company is healthy from a financial perspective yet its customers are not happy with its products. 

Because of this need for non-financial analysis too, we have the Balanced Scorecard. The Balanced Scorecard separates a company into four different areas: Financial, Customer, Internal Business Processes, and Growth.

4 Parts

The financial component might be the most familiar because it simply involves analyzing a company from a financial perspective (e.g. ratio analysis). The customer component analyzes a company through the lens of the customer. In this area, we ask questions such as, “How happy is the customer with our products?” and, “How good is our customer retention?”

The internal business processes component focuses on how a company operates from an internal process perspective. In this section, we ask questions such as, “How efficient are the company’s internal controls?” Lastly, the growth component focuses on the future of the company. It’s not enough to simply consider how a company is currently performing. Rather, a company must invest in innovation to still remain relevant in the future. For this area, we could ask, “How much is the company investing in research and development?”

In summary, the Balanced Scorecard analyzes a company beyond just its finances. Once we break out the company into four separate areas, we can analyze whether a company is truly meeting its goals.