Foundations of the Balanced Scorecard, Part 1

Without diminishing the originality of the Balanced Scorecard (BSC) methodology, it gains validity in my mind as an innovative synthesis of well-established traditions in business thought: managerial accounting (in particular, activity based costing) and Michael Porter’s writings on strategy. In this post, I’ll point out the importance of managerial accounting to BSC. I’ll explore the connections to activity based costing and Michael Porter in subsequent posts.

Managerial accounting contrasts with financial accounting. Financial accountants analyze and record financial transactions, maintain accounts, and prepare financial statements (balance sheets, income statements, and cash flow statements) in accordance with GAAP, which enforce consistency and conservatism. Financial accountants prepare reports that look backwards at past performance and that are geared primarily for external stakeholders such as investors, lenders, and government regulators. As such, these reports are less than ideal for internal decision makers who need to make decisions based on expectations of future cash flows.

In contrast, managerial accountants provide information to internal decision makers, project future costs and revenues, and generate reports based on the information needs of business managers rather than the constraints of GAAP. Because it focuses on the future, managerial accountants need not strive for the same level of precision as financial accountings; any reduction of uncertainty regarding key variables has value. And while financial accountants report for business entities (usually corporations as a whole), managerial accountants create reports relevant to specific business units and departments.

Managerial accountants analyze the relationships between sales revenue and profit, create and monitor periodic budgets, engage in capital budgeting decisions, and contribute to pricing decisions. Managerial accounting (meaning accounting for managers) is also referred to as cost accounting as much of its work involves breaking down costs: fixed and variable costs, relevant and sunk costs, the costs of products, customers, batch jobs, and processes, and cost allocations across departments.

While folks in IT circles think of BSC as a topic within business intelligence (KPIs, scorecards, dashboards), BSC is also a topic within managerial accounting. Robert Kaplan published textbooks in managerial accounting prior to the publication of The Balanced Scorecard: Translating Strategy into Action in 1996. And since BSC has gained popularity, many textbooks on managerial accounting (including recent editions of Kaplan’s textbooks) include a chapter on BSC.

The fundamental assumption of BSC derives from a key proposition of managerial accounting: business cannot just look into the rear view mirror of financial statements representing past performance but must manage according to metrics that are forward-looking and predictive of future financial performance. And there is much within the field of managerial accounting that can guide businesses in determining which metrics to track in a balanced scorecard for the attainment of strategy.

Advertisements

I’m a solution engineer for Shape Security, an awesome web security startup in Mountain View that defends some of the worlds largest web sites from bot attacks. I see this blog as a learning tool. It gives me a chance to collect my thoughts on topics of interest and to share with others. If you see a mistake or think I’m on the wrong track, please let me know. I appreciate comments. See my LinkedIn profile at http://www.linkedin.com/in/jamesdowney and follow me on Twitter at http://twitter.com/james_downey.

Posted in Balanced Scorecard

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: