Most small businesses focus on the traditional financial reporting systems such as increases in revenues, costs, sales volume for new products/services, profitability of assets, revenue per employee, cash flow, return on assets, return on equity and many more to evaluate their success or lack thereof.
Many of these measures and ratios are backward-looking and are not focused on where the company wants to be in the future. They are short-term. The key performance indicators of a company are strongly skewed on the financial goals and indicators.
The balanced scorecard originated in 1992 by Drs. Robert Kaplan (Harvard Business School) and David Norton and was developed as a performance measurement framework that added nonfinancial performance measurements to give employees and managers a more "balanced" view of the company's performance and to identify long-term goals and strategies.
Kaplan and Norton explain in their article, Using the Balanced Scorecard as a Strategic Management System, that managing strategy (goals) must have four processes: financial, customer, internal business processes and learning and growth. Each must be focused on the mission and goals of the company.
The essence of the balanced scorecard is to translate the vision into goals, communicating and linking the vision with employees and customers, obtaining feedback and learning from the information, evaluating the internal business processes and then conducting business planning to meet the needs of the customer.
Each of the above must have their own objectives that are measurable with targets and initiatives. For example, a company can measure collection rate of receivables or inventory turnover.
From a customer perspective, a company's objective could be to reduce customer turnover or to reduce the response time of customer inquiries. Metrics can me established to measure and compare this information with the past.
In the business process perspective, objectives could be to reduce the complexity for customers to get service or products or to simplify the process of payments. From an innovation and growth perspective, a company could established an objective to encourage new and innovative ideas of new products/services or more efficient or/and effective methods of operating.
One must understand that every objective established must have a metric to evaluate its outcome and must be consistent with its mission and vision.
In conclusion, small businesses must think about the world outside their comfort level. They must understand the competitive environment for not only customers but also for employees. The old way of doing business by measuring all success by the past financial statements and financial metrics is becoming obsolete.
Companies must look at nonfinancial goals and objectives and metrics that show the outcomes of success or lack of success. These nonfinancial metrics will help the small business understand customer needs, focus on value-added processes and aid in the innovation of new ideas and allow them to be more competitive in the market place.
Neil Shnider, MBA, CPA, is a special projects consultant that focuses on business growth through finding new markets and new products/services, increasing profits and trimming costs, for the Small Business Development Center at Florida Gulf Coast University. He can be reached at the SBDC center or at email@example.com Go to www.theshnidergroup.com for more small business information and tools.
The SBDC provides small business consultants, at no cost, to guide you through many of the business processes. These are experienced professionals who are working to benefit small businesses. The service is free. Call 239-745-3700 for an appointment.