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Tip of the Week: A quick guide to balanced scorecards

Balanced scorecards are a fantastic tool for businesses of all sizes. They were revolutionary in the early nineties, when Kaplan and Norton introduced them, and they are just as useful today. Essentially, balanced scorecards allow you to track the most important KPIs in your business, KPIs that are determined by your strategy, so you can track how effectively the strategy is being implemented.

The balanced scorecard splits the business into four different perspectives or views: and this is an incredibly useful way to think about a business. I'll often make notes using these four headings or when sketching out a business plan.  

The four perspectives are:

1) Financial: sales volumes (markets etc), margins (efficiency), overheads and capital use (ROI etc)

2) Customer: engagement and satisfaction, SLAs, core groups (early adopters, champions)  

3) Process: core internal processes that drive the business and touch the customer (sales, marketing, operations, billing, etc)

4) People: efficiency, learning, staff engagement, management

balancedscorecards

You can see that it calls for a mix of financial and non-financial KPIs and they should focus on the important-to-know not just the easy-to-measure. Qualitative measures are fine even if they are subjectively obtained. Some KPIs should be forward looking, for example your sales pipeline.  

One of the great advantages of Balanced Scorecards is the discipline they bring to management reporting. Often organisations try to measure KPIs but, after an initial flourish, commitment falls away because of the lack of a conceptual framework.

Best practice is to have a one page Balanced Scorecard on the front page of your monthly management reports. That makes it an important one-page place for people to see across the business. To give you an example of what that might look like, say for a professional services firm, it would include utilisation, margin by practice area, client events, marketing activities, and professional development hours. 

Using Spotlight Reports is a great way to build your scorecard and include it with your monthly reports. 

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It not only gets it data directly from WorkflowMax and Xero accounting software but also consolidates the different businesses/offices in a group, even if they're in different currencies. To do all this by spreadsheets would take days and days each month!

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Thomas Taylor CPA
Thomas is a CPA qualified accountant, business advisor and on-demand CFO with over 20 years experience running businesses. Having worked in senior finance roles with some of Australia's biggest companies & best business leaders, he has been a part of a lot of success stories - and seen what to avoid. He works with businesses - from start-ups to large companies - to help them grow and make the right decisions.

Thomas Taylor CPA