There is history behind how and why balanced scorecard was developed and gained popularity. To know that it is essential to know about Financial Measurement policies and its limitations.
The usage of financial measurement has been in existence since thousands of years. Accounting and book keeping have been the essential tools in formulating the strategies. As the science of accountancy advanced, so did its methods. The double-entry system was introduced in the accounting management. The innovations in accounting field played an important role in measuring the growth of organizations that flourished after the Industrial Revolution, like steel, machinery and tools, retail organizations, railroad etc. In the twentieth century, concepts like return on investment, operating profits and cash budgets became the measuring scales for deciding the success of organization. The strategies were framed depending upon these accounting points.
After the World War II, the financial measurement policies were highly developed and were being used by almost all the companies all around the world. Companies like General Motors and Harold Geneen at IT&T got a lot of success following the strategies designed depending on the financial aspects. However, many scholars criticized the use of financial measurements in business exclusively and extensively. They argued that these policies were helpful to form only short term strategies and achieve short term goals. The policies made the companies invest in only those avenues which could give them instant returns, without taking into consideration the long term requirements.
Focusing on long term requirements with constant short term earnings was the base for why balanced scorecard was developed. A balanced scorecard keeps financial measurement as the critical part of management and business performance. Besides looking into financial aspects, balanced scorecard also looks into other aspects like building employee and system efficiency for better results not just in short term but also in long run, and how to focus on retaining existing customers as well as attracting new customers.
Balanced Scorecards look into four perspectives ; Financial Perspective, Internal business processes perspective, customer perspective, and learning and growth perspective. Realizing the value of financial measurements, the financial perspective focuses on returns on investments and capital employed, cash flow statements and fund flows, balance sheets and other financial reports that are prepared either on quarterly basis or annual basis. The internal business processes perspective takes care of every function carried on in every activity of the business. It works on improving the functioning if an organization on internal basis. The customer perspective looks into aspects in relation to customers. It looks into the satisfaction levels of customers by improving the products and services, retaining old customers and attracting newer ones, and achieve a high target market share. The final perspective is the main reason why balanced scorecard has gained its popularity in today’s world. Learning and growth perspective focuses on helps the organization in deciding the strategies relating to long term gains as well as maintaining short term profits. The organization has to focus on training employees by re-skilling them, invest in infrastructural and technological developments and all other areas which can yield long term gains.
Focusing on all these areas is essential for any organization to survive in this competitive globalized world and achieve long term gains.