Understanding the Balanced Scorecard (BSC): A Comprehensive Guide
1. Definition of a Budgetary System and Its Stages
A budgetary system is a financial plan that outlines an organization’s projected income and expenses for a specific period. It plays a crucial role in achieving financial control and aligning resource allocation with strategic goals. The budgetary process typically involves several distinct stages:
Planning Process
The planning process is the foundation of a successful budgetary system. It involves defining the organization’s mission, vision, goals, and strategies. The budget should be closely aligned with these elements to ensure that financial resources are allocated effectively and support the overall strategic direction.
Budget Formulation Process
During the budget formulation process, the organization translates its strategic plans into specific budget allocations. This involves identifying revenue sources, estimating expenses, and determining the financial resources required to achieve the defined goals. The objective is to create a realistic and achievable budget that minimizes contingencies and risks.
Budget Execution Process
Once the budget is formulated, the budget execution process begins. This stage involves implementing the budget plan, monitoring actual income and expenses, and making necessary adjustments to ensure that the organization stays on track to meet its financial targets. Effective budget execution requires clear communication, accountability, and regular performance reviews.
Management Control Process
The management control process runs parallel to budget execution and involves monitoring, evaluating, and taking corrective actions to ensure that the budget is being implemented as planned and that the organization is on track to achieve its financial and strategic objectives. This includes analyzing variances between actual and budgeted figures, identifying the root causes of deviations, and implementing corrective measures to address any issues.
2. Steps for Designing a Management Control System
Designing an effective management control system is essential for organizations to track their performance, identify areas for improvement, and ensure that they are on track to achieve their strategic goals. Here are the key steps involved:
1. Determination of the Unit of Analysis
The first step is to determine the unit of analysis, which refers to the specific areas or aspects of the organization that will be subject to control. This involves identifying key responsibility centers and aligning them with the organization’s segmentation strategy. By dividing the organization into manageable units, it becomes easier to establish clear lines of accountability and measure performance effectively.
2. Selection of Performance Standards
Once the units of analysis are defined, it’s crucial to establish clear performance standards or targets against which actual results will be measured. These standards should be specific, measurable, achievable, relevant, and time-bound (SMART). They should also be integrated with the organization’s planning process and aligned with its overall strategic objectives. Both financial and non-financial indicators should be considered to provide a comprehensive view of performance.
3. Development of Monitoring Capacity
To ensure that the management control system is effective, organizations need to develop robust monitoring mechanisms. This involves establishing systems and processes to collect, analyze, and report on relevant data. The information system should be designed to provide timely and accurate information on key performance indicators (KPIs), enabling managers to track progress, identify trends, and make informed decisions.
4. Influence on Desired Behavior
An effective management control system should not only measure performance but also influence behavior and motivate employees to achieve the desired outcomes. This can be achieved by aligning individual goals with organizational objectives, providing regular feedback, recognizing and rewarding good performance, and addressing performance issues promptly and constructively.
3. Definition of Management Control System
A management control system encompasses a set of procedures, tools, and techniques that organizations use to plan, monitor, and evaluate their performance. It provides a structured framework for setting objectives, allocating resources, tracking progress, and taking corrective actions to ensure that the organization is moving towards its strategic goals.
4. Understanding the Balanced Scorecard (BSC)
The Balanced Scorecard (BSC) is a strategic management framework that translates an organization’s vision and strategy into a set of actionable objectives and performance measures. It provides a balanced view of organizational performance by considering four key perspectives:
Financial Perspective
This perspective focuses on traditional financial measures such as profitability, revenue growth, return on investment (ROI), and shareholder value. It answers the question:”How do we look to our shareholders”
Customer Perspective
This perspective focuses on customer satisfaction, loyalty, and market share. It answers the question:”How do we look to our customers”
Internal Processes Perspective
This perspective focuses on the efficiency and effectiveness of internal processes that are critical to achieving customer and financial objectives. It answers the question:”At what internal processes must we excel to satisfy our shareholders and customers”
Learning and Growth Perspective
This perspective focuses on the organization’s ability to learn, adapt, and innovate. It considers factors such as employee skills, information systems, and organizational culture. It answers the question:”How can we continue to improve and create value”
Advantages of the Balanced Scorecard
- Aligns strategic objectives with concrete actions.
- Enhances transparency and accountability.
- Fosters a culture of measurement and continuous improvement.
- Promotes alignment and collaboration across the organization.
- Supports the implementation of other management tools and systems.
5. Differences Between the Traditional Model of Control and the Balanced Scorecard
Traditional Model of Control
- Focuses primarily on financial performance.
- Emphasizes short-term results over long-term goals.
- Often reactive and based on historical data.
- Can lead to a siloed approach to management.
Balanced Scorecard
- Provides a balanced view of performance, considering both financial and non-financial measures.
- Aligns short-term actions with long-term strategic goals.
- Proactive and forward-looking.
- Promotes a holistic and integrated approach to management.
6. Basic Tools of the Balanced Scorecard
Strategic Map
A strategic map is a visual representation of an organization’s strategy, showing the relationships between its strategic objectives, perspectives, and key initiatives. It helps to communicate the strategy clearly and concisely, ensuring that everyone in the organization understands how their work contributes to the overall goals.
Dashboard
Elements: Perspectives / / Objectives / / Indicators / / Goals / / Action Programs
3. Define the 4 perspectives of BSC, as an example of an objective perspective with its indicator.
Finance 1, this perspective seeks to answer the following questions: How should we appear to our shareholders or owners to be successful? / / If the financial part is really contributing to the formulation of the strategy?
Customers 2nd, what is sought is to identify those who are my clients, what is my market. How should we appear to our customers, to achieve our mission and vision?
3rd Internal Processes, answered the following question: At what internal processes must be excellent to satisfy our shareholders and customers? / / It takes into account everything that has to do with my value chain, the idea is that in all the processes taking place within the company will create value for shareholders and customers, all you have to do with the production process itself.
4th Formation and Growth: How to improve our skills and abilities to enhance our mission and vision? It has to do with all that is infrastructure, staff skills, technology, etc.. There are 3 sources: a. – People: Satisfaction and training / / b. – Systems: How the I collects information management system, all systems participating in the organization. / / C. – Politics: The improvement of incentives, infrastructure, technologies. Examples of the 4 perspectives: 1 Accounting: Examples of strategic objectives (increase sales revenue / / Increase the percentage of return / / Lower costs / / Strengthen policy of cost control / / Return the shareholder’s investment) 2nd Clients: Examples of strategic objectives (Increase customer satisfaction / / Improving policy customer loyalty / / Improving customer service / / Increase nuecero clients)3rd Internal Processes: Examples of strategic objectives (Decrease response time / / Raise the quality of product / / Maintaining and improving the equipment / / Expand the range of products / / Implement quality standards / / Improving the value chain) 4th Formation and Growth: Examples of strategic objectives (Increase training of staff / / Create policy incentives / / improve the security of staff / / improve internal communication channels.)
4. Point out that considerations should be taken into account when implementing the BSC in a company.
It needs to be implemented with an incentive system for employees, either by meeting the objectives, goals, etc.. / / The implementation period is 3 years to 5 years, the May issue is the time for enterprise deployment. / / The size of the organization is a tool too complex to be implemented in an SME, to them is a barrier to large organizations is easier. / / We must also take into account the costs / / Also how they are going to take people inside the company, organizational culture can be an impediment to the implementation of the BSC.