By using financial and HR measures it is possible to recognize the impact on business performance. These areas of Balanced Scorecard are Accounting and HR Performance.
Management recognize that measurements are a necessary strategy to an effective management process. In order to implement new strategies there needs to be improvement in manufacturing processes as well as the level of performance of workers. HR is instrumental in providing the resources to raise the skillset of workers by providing training opportunities. Oftentimes management introduces new requirements and quotas for workers without examining the affect of the past guidelines for improvement as to relevancy or even necessity. A balanced scorecard combines an operative measurement guideline that allows SAC to define strategic goals that align to helping drive change in key areas. Some of these areas include production, process improvement, customer satisfaction and market development.
The scorecard supplies management with four different angles in order to select the right balance of each that will complement another. The key financial indicators examined in BSC will allow for tweaks to be made based on traditional accounting indicators that can measure not only financial progress. It can show how productivity influences customer, internal processes, even innovation produced by workers through improvement activities.
The measurements shown by the balanced scorecard can assist SAC in realizing a shared vision that encourages system thinking to impact present and future success. While balancing the internal and external measurements based on performance and accounting ratios.
Such measurements will allow management to explore the tradeoffs that are required to impact key success factors. By analyzing the results from the BSC it is possible to determine how well SAC is aligned to meeting the goals of the corporate strategy.
Balanced Scorecard Objectives
Assumptions about HR Firms are that increasing training and mentoring opportunities will produce highly skilled employees. This will improve the level of efficiency and create better solutions for day-to-day job functions, that result in improved business processes.
Assumptions about Business Processes
Internal business process improvement will then lead to better results for the manufacturers as products are built with higher quality and customers report greater satisfaction. With happy customers come more sales this means more demand for the products manufactured. With higher revenues more people can be hired to produce products faster to meet demands. The increased advertising and marketing will draw new customers and new market opportunities. The increased labor force will raise productivity levels. With increased revenues comes more attention from investors willing to invest capital. These investors expect a higher Return on Investment (ROI). With more capital being invested, more advertising, marketing, and investments in better equipment will require hiring. With highly skilled workers new innovations and better quality products are produced and so the cycle starts again. It will also lead to improvements in customer satisfaction. This will lead to higher sales and profits that improves the financial implications for the company. All of this activity can be tracked using accounting and ROI.
Using Accounting as a BSC Measurement
Executive management's financial perspective is to map out achievable financial goals. One way to achieve this is to set realistic timelines to complete financial objectives. Then align an objective to each financial goal. Choose performance measures that align with top management's financial goals by applying a time table to each performance deliverable.
Take Time to Gather Measurable Results
This is done by defining the tasks or requirements necessary to meet each performance measure. Allow for a measurable alternative for each performance measure. This provides an award for based on creativity as well following managerial requirements. Set a target level of performance. Lastly there must be a feedback loop at a predetermined interval.
Phase 1 Select Measurements of Performance
These are measurements of accounting performance such as:
Return on Investment
Economic Value Added
Return on Sales
Operating Income is not the best choice for a metric. Operating Income as a metric is too broad an area to realistically use as an indicator for financial success. Instead the use of ROI will result in a balance of each accounting input from income to sales and costs.
Understanding Return on Investment
Takes into account all financial inputs such as costs, investment and reduces to a simple metric ratio. As a BSC metric easy to compare to other industry leaders related to SAC and outside competitors. ROI is the result of dividing the investments of SAC by income and an excellent way to measure financial success.
BSC and ROI
How Return on Investment uses accounting measurements. Income divided by revenues multiplied by investment divided by revenues measures total investment of capital.
ROI = Return on Sales X Investment Turnover
Sales investment multiplied by repeated investment presents the total Return on all
investment in SAC (Pearson, 2009).
Phase 2: Decide what type of Measurements for Financial Performance
ROI is used to measure a single point in time, however it can be used to measure multiple or performance for periodic points in time.
Phase 3: Determine Level or Grade of Performance for BSC
Select goals that map to targets set in Corporate Goals. A long-term measurable for ongoing or continuous Improvement that maps to the Goals.
Phase 4: Determine reporting of BSC
BSC Reporting is needed:
Based on the criticality of the reports to the firm.
The stakeholders involved in reviewing the BSC. Investors, Executive Board, etc.
How complex the firm's Information Technology and business components (Pearson, 2009).
When using ROI and accounting with BSC there is the potential to inflate the numbers to reflect increased sales, demand or revenues. However there is usually safety in numbers.
Corporate governance is one of the most important requirements within a company to protect stakeholders and draw new investors. Requiring executives and employees to review policies and sign off disclosures does not guarantee sincerity or guarantee ethical oversight. Even legislation by the SEC and FTC requiring adherence to regulations does not always mean that leadership is in compliance. It is next to impossible to guarantee that every facet of the financial and business governance is reviewed and properly audited. There has to be a level of trust among managers and their sub-subordinates to perform in adherence to policy and accounting regulations. Those that audit the systems, processes and finances within the company can only review what is given them by those in charge of various departments (Averson, 2002). Investors must trust the executive board in reporting the financial health of SAC.
The balanced scorecard focuses on opportunities for developing employees as individuals skilled in their job functions and equipped with the knowledge to contribute to the growth of the organization. Management must recognize their employees as assets to the company and allow them to develop in order to receive a Return on Investment in the training and performance level they bring to the business (Averson, 2002).
Instilling business ethics into the BSC is crucial to strengthening the longevity of the company and the use of solid business ethics has to be an everyday practice to instill trust. A healthy company must reflect good will, be open to scrutiny (transparent), and employ ethical behaviors at every level of the organization. A component of the BSC related to HR training should be ethics and business behavior as an added measurement or perspective (Averson, 2002).
There is a tradeoff for setting up incentives. Incentives should be tied to performance and corporate goals. The incentive should be directed to fulfilling corporate objectives.
Advantageous Performance Measures
Performance Measures must map back to managerial performance which must be controlled or empowered by management. Performance measures should give motivation to gain support of management. They can also be compared or benchmarked against others manufacturers in the industry.