Balanced Scorecard and Financial Control - Essay Example

?BALANCED SCORECARD BALANCED SCORECARD A balanced Scorecard is a system that bases on the strategic and management aspects of businesses, non-governmental organizations and even governments to execute their missions, objectives and operational strategies. Moreover, Balanced Scorecard helps in the establishment of effective internal and external communication in these institutions to facilitate efficacy in organizational performance. This is a system invented by Harvard Business School lecturers by the names Robert Kaplan and David Norton. It is mainly a measurement framework that adjoins measures that are not financial to conventional financial methods to offer a balanced feature of organizational performance. However, there has been a disbelief of this system in implementing it in small-medium manufacturing enterprise (SME). The disbelief concludes that Balanced Scorecard requires an organization with an advanced strategic planning process to realize its whole benefits. In demystifying that idea, this paper digs into the feasibility of applying the Balanced Scorecard process in the small-medium manufacturing enterprises (SMEs), its prospective benefits, the principal management process and the application of costing systems in SMEs. Introduction Businesses always establish a strategic planning that has connection with the performance of the business. This means that for a business to develop there must be growth in the planning of strategies to realize a better management system. It is at this point that essential strategic management tools must be applied to a business (Brown, 2007, p.5). One of the tools in management processes of strategic planning is the Balanced Scorecard. However, it is important to understand that large organizations often exude a series of challenges in the application of the Balanced Scoreboard. This is because of the extensive coordination, communication and regulations operations in the organizations. The complex nature of large organizations always entangles the institutions in complex organizational operations that make it hard for the Balanced Scorecard to produce effectiveness (Biazzo & Garengo, 2012, p.40). The Application of balanced Scorecard system in SMEs SMEs always have similar objectives, missions and concerns in their operations. Primarily, the strategic management tenets of these SMEs are numerous. However, the crucial ones include the direction where the organization is headed. This is important since it challenges the SME on the achievements of the firm after a stipulated period of time. The other is the manager’s ability to understand business models. It is important to have a manager who is circumspect on the application of business models to maximize profits without exploiting consumers. The final one is the agility of the SME to adapt to new strategic management planning tools in the improvement of the enterprise. Lastly, an SME should be flexible to integrate fresh knowledge and skills into its strategic planning process (Blokdijk, 2008, p.10). Perspectives By digging into these issues, one realizes that there is a common goal of identifying, pursuing and achieving strategic goals and objectives. This is the recipe for the success of the SMEs’ performance and fulfilling their stakeholders’ expectations. The realization of the strategic goals is achievable by using four perspectives of the Balanced Scorecard as a component of a strategic management framework in an SME. These perspectives help the SME in viewing the organization in a broader way to execute the collection of data, analysis and development of financial metrics in the SME (Blokdijk, 2008, p.11). The first perspective is the learning and growth perspective. This perspective entails the training of employees in an organization integrated with the corporate cultural attitudes of improving oneself. It is important for the employees to acquire knowledge through training and developing of their attitude since they are the holders of knowledge in the organization. The workers are thus the main resource of an organization and should be always in a perpetual process of learning and acquiring knowledge. Workshops can also form part of the training of employees in the organization. This is essential since the technological development in the modern world is growing at a fast rate. It is thus important for the employees to be updated on the changing trends of business. For an SME, this is important since the target market is always the average people. The population of average people in the society makes a bigger part of the entire population. This means that SMEs can use this perspective to ensure that their employees are always up to date with the trends of business. It will boost their innovation power and hence lead to the production of better products and services over time (Biazzo & Garengo, 2012, p.63). Business Process perspective is the second perspective that an organization can view the organizational performance as per the Balance Scorecard system. This is a perspective that involves internal business operations that give the managers an overview of the organization’s financial performance. Moreover, through this perspective, the managers get to know their product’s conformity with the customers’ requirements. If there are any flaws in the organizational performance as per this perspective, it is only wise to fill the loopholes using inside workers. The application of this perspective to an SME would be in the manufacturing bit of the business. An SME must ensure that the metrics are good so that it does not operate under losses. The loopholes in the SME should be fixed by the internal employees to ensure that the business produces quality goods and services. By using this perspective, an SME can change the production of their products by incorporating various skills that will meet the new demands of customers’ requirements (Blokdijk, 2008, p.16). The customer (external) perspective is the third perspective of a Balanced Scorecard. In business, customers are the most important people in the whole venture. This is because customers are the buyers of the products. If the products do not impress the customers then they will not buy them and hence bringing losses to the businesses. This implies that an SME can use this perspective to determine the future of their business. The present state of an SME can be great but if there is a declining trend in the quality of products, then in the long-run the products will not meet the customers’ needs. In effect, the business will incur losses. This is a perspective that an SME can use to determine its success and failure in terms of the customer base (Pham-gia, 2009, p.53). The last perspective of a Balanced Scorecard is the financial perspective (revenue). In this bit, the management of an organization analyzes its financial data. An organization must always know the revenues and costs to determine the profits and losses that the organization is making. However, there is need to analyze other information on finances excluding the financial data. Such information includes the risk assessment and cost-benefit data details of the organization. For SMEs, this perspective is important in the analysis and insight into the financial information of the business. This will help to weigh the costs of the business and make sound decisions on the ways to maximize revenue while minimizing the costs (Henschel, 2008, p.56). Measures Large enterprises always have a clear process of identification and description of measures that are of help to the management for the awareness of the organization’s progress. Balance Scorecard is the system responsible for the execution of this process in the large enterprises. However, in SMEs, the level of measurement of performance in the organization is always minimal. This means that there are measures that go well with SMEs in the implementation of the Balanced Scorecard (Kaplan & Norton, 1996, p.9). The measures that SMEs should use in their operations as an adoption of the Balance Scorecard fall under deployment. In most cases, Balanced Scorecard fails when an organization does not use information to transform the organization even with the set strategic goals and performance measurements. This means that an SME must ensure that the manager is not only forming the strategic goals and analyzing the performance tools but also using the existing information to implement the same. The full benefits of Balanced Scorecard will only accrue to an SME if there is proper use of information in the implementation of strategic goals (Andersen et. al., 2001, p.43). According to Niven, the SMEs should also instill an aspect of focus to give the organization directions (2008, p.21). The support of the manager and the rest of the organization should implement a well-defined feasible strategic plan to define the organization’s direction. It is important to involve the whole organization in the execution of the plans in the organizations since the employees and managers could have different ideas that can better the organization. This will enable the organization to form holistic strategies that will give the organization longevity (Biazzo & Garengo, 2012, p.67). It is also essential for an SME to have a flexibility aspect in its plans and operations. This involves the agility of the organization to respond to changes in the external environment. There are trends that organizations cannot escape in the market, and so an organization should always be ready to adapt. It means that the strategic plans that an organization forms should conform to the dynamic nature of the external business world. This is an important aspect of Balanced Scorecard system and thus an SME should apply this to realize full-value benefits (Kaplan & Norton, 1996, p.10). In addition, the Balanced Scorecard will not be in full implementation if an SME does not consider its costing systems. The main function of costing systems is to focus on the expenditures that an organization is making for the general financial analysis of the company especially by the senior management. Costing systems enable an organization to understand the level of operational and performance costs that it incurs. There are different types of costing systems across different organization, which include absorption, marginal, activity-based, target, backflush and throughput costing system (Niven, 2008, p.28). In the Balanced Scorecard application, an SME must ensure that the pricing of the product is not discriminative cost as per the absorption costing system. This system is used to incorporate the fixed and variable costs of the organization in the pricing of the product. An SME must ensure that the strategic plan is aware of the moderation in the pricing of the product so that the customers are not subjected to exorbitant prices. The marginal costing system involves the analysis of the fixed costs since it is used as a short-term decision-making tool. This also helps an SME to weigh the costs and returns of their products. Activity-based costing system entails the measurement of the day-to-day costs of an organization. This helps to determine the areas that have deficiencies in the organizational performance and fill them up (Andersen et. al., 2001, p.47). Moreover, this system detects surplus expenditure that can be channeled to other areas in the organization with deficits. Target costing system, is essential in the finding of the market price of the products by determining the costs of production for the products in the organization. The backflush costing system caters for the recording of the costs of finished products. This helps in the determination of the product’s prices. The last costing system is the throughput system that focuses on the level of production and the costs involved in the normal and legal working hours of an organization. This is important since it provides an organization with the necessary information involving the production costs and the decisions to be made. If the costs are surpassing the revenue, then the organization should repeal the strategic plans and goals to curb the deficit. This is important for SMEs since they will not be vulnerable to huge losses if these systems are used occasionally. It is an important aspect of the Balanced Scorecard and the SMEs can apply them for the improvement of their business (Kaplan & Norton, 1996, p.12). Conclusion The application of the Balanced Scorecard in SMEs can be efficient since the nature of SMEs is simple. The strategic plans, perspectives, measures and the costing systems can be applied with less effort in SMEs compared to large organizations. This is because the large organizations have complex operations that are not easy when incorporated with Balanced Scorecard. As explained, SMEs can get a complete overhaul if they use the Balanced Scorecard effectively. The application of this system in SMEs is feasible and the potential benefits are numerous as discussed. It is a system that every SME should to improve their business and maximize their profits. References Andersen, H., Cobbold, I., & Lawrie, G. (2001). Balance Scorecard Implementation in SMEs: reflection in paper and practice. 2GC Conference Paper, (1), 1-9. Biazzo, S., & Garengo, P. (2012). Performance measurement with the balanced scorecard a practical approach to implementation within SMEs. Berlin, Springer. Retrieved from: Blokdijk, G. (2008). Balanced scorecard 100 success secrets. [S.l.], Gerard Blokdijk. Brown, M. G. (2007). Beyond the balanced scorecard: improving business intelligence with analytics. New York, Productivity Press. Henschel, T. (2008). Risk management practices of SMEs: evaluating and implementing effective risk management systems. Berlin, Erich Schmidt. Kaplan, R. S., & Norton, D. P. (1996). The balanced scorecard: translating strategy into action. Niven, P. R. (2008). Balanced scorecard step-by-step for government and nonprofit agencies. Hoboken, N.J., J. Wiley & Sons. Pham-gia, K. (2009). Balanced scorecard - Solving all problems of traditional accounting systems? Mu?nchen, GRIN Verlag GmbH. Retrived from: Read More