Summary
In this article – the first of a four part series – author, management consultant and Balanced Scorecard expert Paul Niven discusses the need for a Financial Perspective in a Balanced Scorecard. The other three parts focus on the Customer, Internal Process and Learning and Growth perspectives.
Typically, the mission and vision statements of organisations do not refer to their financial aspirations. However, companies need to have a Financial Perspective so that they can answer shareholders who require a return on their investment.
Companies must ensure that a focus on customers also leads to improved financial results. Financial performance also enables investment in people, processes and technology so that customers can be served successfully.
So, how do companies know if they are performing well financially? The Financial perspective of the Balanced Scorecard gauges financial success from the perspective of a company’s shareholders and gives the company the tools to track success over time.
The author then provides a look inside the Financial Perspective, highlighting the critical elements that companies focus on. The foremost measure is value created for shareholders. Performance management focused on value creation for stakeholders leads to measures like revenue growth, maximizing productivity, lowering costs and asset utilisation. In essence, the Financial Perspective focuses on objectives and measures relating to a company’s effectiveness in delivering shareholder value. Here, the author cautions management that they must take a balanced view of all the objectives and measures, even if they are competing measures. Only then can companies succeed at performance management, create the value shareholders demand, focus on customers, execute their strategy and achieve their vision.
Why you need a Financial perspective?
When crafting mission statements which outline their core purpose, and vision statements that create a word picture of the desired future, the vast majority of organizations eschew direct financial aspirations and focus, rightly, on their core purpose; their contribution to society. So, if our mission and vision statements reflect our true north values, why do we need a financial perspective of performance within the Balanced Scorecard? Can’t we simply focus on our customers and assume the money-making will take care of itself?
Every business committed to success will always be 110% committed to their customers and intent on achieving their vision and fulfilling their mission. However, as for-profit companies that answer to shareholders requiring a return on their investment, you must ensure that an unrelenting focus on customers - whether through new products, great service, or an industry-leading technological infrastructure (or maybe all three) - leads to improved financial results. It is only by performing well financially that you are able to invest in your people, processes, and technology to continue helping all of your customers achieve their goals. But how do you know if you are performing well financially? The Financial perspective of the Balanced Scorecard gauges financial success from the perspective of your shareholders and gives you the tools to track your success over time. Let’s now take a look at what might comprise the Financial Perspective.
A look inside the Financial perspective
Did you know that one of the world’s oldest banks, founded in 1472, is an Italian entity called Banca Monte dei Paschi di Siena? Good thing there was no radio or television back then – imagine trying to come up with a jingle for that mouthful! While much has changed in banking and every other human endeavor since 1472, when it comes to monitoring their financial performance most companies still focus on just a few critical elements.
First and foremost, all companies must create value for their shareholders, those who provide the capital required to manage operations efficiently and effectively. As long as people have been lining up at the Banca Monte dei Paschi di Siena there have only been two ways to make money, and hence create that highly sought after shareholder value: sell more and spend less. Thus, the Financial perspective is typically populated with objectives and measures relating to driving revenue growth; selling more products and services to customers or creating entirely new products and services to market, and maximizing productivity; lowering costs and utilizing assets under the firm’s control as efficiently as possible.
Some companies will see these options of revenue growth and productivity enhancements as an either/or proposition, with a focus on one relegating the other to obscurity. They do so at their peril. In today’s highly competitive environment all companies must balance these competing demands, constantly surveying the horizon for new revenue opportunities while simultaneously driving out costs and enhancing value for customers. Only then will they create the value shareholders demand and possess the financial resources necessary to focus on customers and achieve their vision and strategy.
So if the Financial perspective focuses on objectives and measures relating to a company’s effectiveness in delivering shareholder value, growing revenue, and enhancing productivity, what do you suppose the Customer perspective focuses on? You got it, customers!
Other Balanced Scorecard Perspectives
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