Issues of Balanced Scorecard in Management Accounting - Coursework Example

Critical Report on Balanced Scorecard Table of Contents Introduction 3 Balanced Scorecard 3 Utility of Balanced Scorecard 3 Issues of balanced Scorecard in management accounting 4 Recommendation 7 Conclusion 7 Reference List 9 Appendix 11 Introduction The business operations of a firm can only be successful if it is properly managed and is in line with the organizational goals and objectives. The organizational activities need to be constantly monitored in order to make sure if all the activities are being conducted in the desired manner and they are yielding profitable results. Monitoring organizational strategies and its management system is mostly conducted by using several performance monitoring tools and the Balanced Score card is one of them. The Balanced Score card has been introduced by Norton and Kaplan in the year 1992 and it has been widely used as a performance management tool ever since (Kaplan and Norton, 1992). This paper will highlight on the balanced score cards, its utilities and implications and will particularly focus on its issues in management accounting. Balanced Scorecard The balanced score card is primarily used as a performance management and strategic planning tool which allows the firms to align the business operations and organizational activities with the organizational objectives. It allows the higher management to ensure whether or not the current activities are progressing in the desired direction to yield the desired result. The balanced score card has evolved over the year. During its inception, the utility of the Balanced Scorecard was limited to the performance measurement only (Kaplan and Norton, 2007). However, it has been evolved as a complete platform of strategic planning management system. The balanced score card now offers a firm to convert their organizational planning to daily activities which if conducted will yield the desired results. The balanced score card is not only a monitoring system but it has also been utilized to plan future strategies of the company (Balanced Score Card Institute, 2015a). Utility of Balanced Scorecard The traditional approach of financial assessment as a measure of performance has somehow become obsolete, as it only provides an incomplete picture. In order to get a clear insight of the current status of an organization, a holistic view of its activities is required. Thus, the balanced score card reflects organizational status from the perspective of four key parameters, such as a) financial performance, b) the internal business process or the organization’s operational efficiency, c) the organizational capacity or its level of human capital and degree of innovation and d) the satisfaction level of the stakeholders including the customers (refer Appendix 1). The four parameters of the balanced score card indicates the four perspectives from which an organization is viewed. These parameters are measured by the following processes. The Financial parameter is measured by the organizational cash flow, sales growth, return on capital invested, etc. The internal business process is measured by the internal value chain for innovation, operational activities and after sales services. The innovation involves the different ways in which a company identifies the different needs of the customers. The operational activities involve the measurement of cost, cyclic time and quality level (Balanced Score Card Institute, 2015a). The after sales service includes the degree to which the firms address warranty and repairing of sold products. The third parameter, i.e., the customer parameter indicates the level of customer satisfaction fostered out of the organizational activities. The innovation or organizational capacity is the level to which the employees are retained in the organization and the level of human capital utilized by the firm (refer Appendix 2). Issues of balanced Scorecard in management accounting The balanced scorecard claims to have a strong relation between the different elements which are interconnected with the core strategies of the organization, which acts as the source. The financial parameter is only considered as a reflection of the past activities of the organization. The other three parameters which have a cause and effect relationship with the financial parameter should shed more light on the future of the organization and where it is headed (Kaplan and. Norton, 1992). However, Nørreklit (2000) mentioned that the balanced score card have not described the causal relationship in details. He further mentioned that the Balanced Score Card lacks practicality as it is a relatively static model without the time dimension. Therefore, the sequential setup of the measurement parameters is missing. Moreover, the strategic map designed based on the balanced scorecard also does not have any time factor to refer to, thus, leaving the cause and effect relationship to be subjective in nature. The balanced score card model indicates an interrelation between the four parameters stated in the balanced score card model. However, the model fails to indicate that whether or not this relationship is valid in all situations. The model explains that the customer parameter indicates the satisfaction level of the customers is a primary determinant of the revenue generation of the company. To put it simply, the model states that higher the level of customer satisfaction, the high will be the revenue generation for the company. However, Nørreklit (2000) contrasted with a relevant example that the company often try to satisfy the extremely loyal customers who bears extremely high expectation, but make a very low amount of purchase. This as a result reduces the profitability of the firms. These customers are often quite demanding but have a low budget. This fact have also been backed up by Olve et al (1998) who mentioned that there is a significant linkage between the strategic management and the customer satisfaction. The balanced score card model also does not hold fit for unique or unhealthy organizations. Toivanen (2001) have mentioned that this model is only relevant for the big firms who bear a traditional organizational structure and follow typical organizational activities. These companies have the necessary amount of human resources ready to complete projects or allocated tasks in the desired scale. The author have also mentioned that the several small and medium firms have implemented the balanced score card in their own way to yield desirable and rational outcomes. Moreover, the model is only fit for the firms which have a relatively good financial health though in real life there are several companies who are having unstable financial situations. In such cases, the traditional approach to the balanced score card does not yield the desirable result. Implementation of the balanced Score card can also come with certain issues. As described by Balanced Score Card Institute (2015b), the implementation of the balanced score card comes with the following key issues, thereby creating challenges for the accounting management. Organization: The balanced score card cannot be implemented by all types of organizations. In case of the matrix organizations, it does not follow the typical organizational hierarchy model, thus implementing the balanced score card system which is based on the traditional organizational structure can be challenging. In the top level metrics, the structure becomes quite generic thereby making it quite difficult to measure the quality of the strategic management. Cost: Implementing the traditional balanced score card system is characterised by low costs. However, using the modern balanced score card software can be quite expensive. This software allow the firms to handle the aggregation of data, organizational planning and displaying reports. Fear: In order to monitor the individual performance level of the employees, it would be appropriate to link the individual performances to the balance score card evaluation. However, too much focus on individual performance may transform the organization into a “management by objectives”. Toivanen, (2001) further added that these are the challenges of implementing a balanced score card. These challenges indicates that there are certain level of ambiguity in its implementation in the organization and the proposed model can only be implemented in certain types of organizations only, which follow a clear hierarchical structure and bears a good financial health. Thus, there are no standardized systems that can be implemented in any type of organization with any type of business operations. This as a result makes it difficult for the accounting department to quantify the performance of the firm. In order to at least implement the balanced score card system, it has to be modified in several ways to make it fit for the orgazanitions. This may be a challenge for the accounting department to quantify the new changes in the model (Kaplan and Norton, 2008). The accounting management also faces certain problems even after the proper implementation of the balanced score card. Among the four parameters of the balanced score card, apart from the financial aspects, the other three aspects of the firms are quite difficult to quantify. Traditionally, the performance measurement was only based on the financial data of the organization, which could be easily quantified by the accountants and determine the cost to the company (Hopf and Litman, 2010). After the inception of the balanced score card, although it has allowed the firms to have a more robust strategic management and planning, but it has made it challenging for the accountants to follow the traditional accounting process in the new strategic management system (Arora, 2002). The operational efficiency can be quantified by measuring the overall resource input including the raw materials, time spent and human resources against the output yielded from the manufacturing process (Nørreklit, 2003). However, the other two parameters such as the innovation level and the satisfaction level of the stakeholders cannot be measured in terms of absolute quantity. There are some indirect ways to measure them which however, becomes quite cumbersome to put into the accounting calculations. This as a result makes it quite challenging for the accounting department to incorporate all the factors into the accounting process (Figge et al, 2002). The level of innovation is subjective in nature and its potential cannot be predefined or measured in terms of finite numbers. Innovation allows the firms to meet the needs of the customers in various ways which has not yet been adopted by the rivals. The customers’ satisfaction is also cannot be reflected clearly by the sales figure, a satisfied customer may not make a second purchase but in turn my spread positive word of mouth. Thus, it can be clearly stated that the balanced score card involves several non-financial aspects of measurement of the performance of the organization and helps the management to design its strategic planning (Kaplan and Norton, 2001). Recommendation In terms of strategic planning, the balanced score card is one of the most effective tool in assessing the firm’s performance and devising new strategies for the firms. However, the balanced score card has been under several speculations in terms of its utility. From the accounting perspective, assessing the effectiveness of balanced score card has been a challenge. This can be solved by separating the accounting methods from the strategic planning. The accounting methods should be based on the financial performances only. The other non-financial aspects of the balanced score card should be utilized for strategic planning purposes. This as a result will help the firms to have a clear accounting system with no ambiguity. As the non-financial parameters cannot be shown in the financial statement directly or without finding a way to quantifying them, so they will not be considered in accounting management to ensure an unambiguous financial measurement of the performance. Conclusion The performance management and the strategic planning are imperative to the organizational success. It allows the firms to have a clear insight of the current organizational status so that the higher management can make the strategic decision to further improve the organizational activities based on the performance assessment. The balanced score card has been a popular performance and strategic management tool utilized by organizations all over the world. It ensures that the organization is progressing according to the organizational objectives. The balanced score card is based on four parameters on which the organizational performance is measured. These are financial, customer or satisfactions, organizational efficiency and innovation. Apart from the financial parameters, the rest of them are subjective in nature and cannot be quantified easily. This as a result, poses a problem for accounting management. In order to be measured in the books of accounts, the non-financial parameters need to be removed and they should only be considered while making strategic planning. The balanced score card has been developed over the years to increase its utility across a varying range of strategic performance and organizational assessment purposes. However, the traditional accounting system is not suitable for quantifying the system. Reference List Arora, R., 2002. Implementing KM-a balanced score card approach. Journal of knowledge management, 6(3), pp. 240-249. Balanced Score Card Institute, 2015a. Balanced Scorecard Basics. [Online] Available at: [ Accessed 4 April 2015] Balanced Score Card Institute, 2015b. Deployment of the Balanced Scorecard Measurement System. [Online] Available at: < http://balancedscorecard.org/Resources/Cascading-Creating-Alignment/Applications> [ Accessed 4 April 2015] Figge, F., Hahn, T., Schaltegger, S., and Wagner, M., 2002. The sustainability balanced scorecard–linking sustainability management to business strategy. Business strategy and the Environment, 11(5), pp. 269-284. Hopf, R.H., and Litman, D.J., 2010. Guide to a Balanced Scorecard Performance Management Methodology. [Online] Available at: [Accessed 4 April 2015] Kaplan, R. S. and Norton, D.P., 1992. The Balanced Scorecard: Measures that Drive Performance. Harvard Business Review, pp.71-79. Kaplan, R. S. and. Norton, D.P., 2008. The Execution Premium: Linking Strategy to Operations for Competitive Advantage, Boston: HBS Press. Kaplan, R. S. and Norton, D. P., 2001. Transforming the balanced scorecard from performance measurement to strategic management: Part I. Accounting horizons, 15(1), pp.87-104. Kaplan, R.S. and Norton, D.P., 2007. Using the Balanced Scorecard as a Strategic Management System. Harvard Business Review. July-August. Nørreklit, H., 2000. The balance on the balanced scorecard--a critical analysis of some of its assumptions. Management Accounting Research, 11(1), pp. 65-89. Nørreklit, H., 2003. The balanced scorecard: what is the score? A rhetorical analysis of the balanced scorecard. Accounting, organizations and society, 28(6), pp. 591-619. Toivanen, J., 2001. BSC: The implementation and current use in Finland. LUT. Appendix 1) Figure 1: Balanced Score Card Source: (Balanced Score Card Institute, 2015a) 2) Figure 2: Strategy mapping Source: (Balanced Score Card Institute, 2015a) Read More