What is a Balanced Scorecard?

A balanced scorecard is a way to measure business performance.

How Does a Balanced Scorecard Work?

To make a balanced scorecard, company leaders select a set of measurements. These measurements evaluate a variety of things, all of which are meant to provide an indication of whether the company is improving. David Norton and Robert Kaplan, of Harvard Business School, developed the concept in the 1990s.

Balanced scorecards evaluate four general areas: customer metrics, business process metrics, training metrics and financial metrics. The customer metrics typically measure how often customers complain, cancel orders, ask for refunds or offer certain kinds of feedback. Business process metrics evaluate how efficiently teams accomplish certain tasks. Training metrics evaluate how thoroughly and often companies train employees and whether that training pays off. Financial metrics provide information about financial performance.

These measures often break out into several separate, smaller measures, and they trickle all the way down to setting targets and key measures for every employee in the organization.

Why Does a Balanced Scorecard Matter?

Many companies are tempted to measure performance solely via the income statement, balance sheet and cash flow statement. Although the financial statements are the ultimate show of how well a company operates, there are dozens more ways to measure how well a company is doing things that drive those financial results. In turn, balanced scorecards are a way to connect everyday activities to financial performance. This helps managers and employees focus on customers and coworkers, as well as the bottom line.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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