The primary purpose of this paper is to focus on the problems of management accounting and discover the principles, benefits, and issues of the balanced scorecard system, and how the implementation of it into the working process can foster the development of the business and improve effectiveness and productivity. The paper is divided into six parts that focus on certain aspects of the topic.We will write a custom The Balanced Scorecard Concept specifically for you
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Introduction aims to provide some insights regarding the modern condition of the market economy and significance of the discovery of the balanced scorecard and management accounting. The next section of the paper is focused on management accounting, some problems that are associated with it, background information of the term, management accounting skills, and strategic management. The section about the balanced scorecard highlights the significance of implementation of this system. Moreover, it is devoted to explaining how the balanced scorecard can address some problems of the management accounting.
Four aspects that are essential to be taken into consideration in the balanced scorecards are explained as well. In order to get deeper involved in the issue, the history of the creation of the balanced scorecard is essential. In this section, the accent is made on the companies that have already successfully implemented the balanced scorecard in the business process. The balanced scorecard addresses the issues of management accounting, and the relation between two concepts is described in the next section.
The balanced scorecard system evolved because of the desire to improve the system of management taking into consideration the interests of different groups, namely shareholders, customers, partners, and lenders. The multi-vector policy of the business management demands the complex system of strategic goals, objectives, and key indicators.
In the conditions of the market economy, an urgent issue that has become evident is centered on the need to conduct scientific research in the sphere of management accounting and in the overall management of the organization system. The degree of rationality of management accounting system in organizations plays an important role, as well as the degree of objectivity reflected in its economic activity, since it affects not only the process of good governance but also the successful functioning of the organization in modern conditions.
Every management begins with gathering, obtaining, and analyzing of the information. The realization of all these functions is impossible without the use of management accounting systems in the enterprise. However, it is worth noting that the manager should take into consideration some issues that can be associated with the management accounting and focus attention on the balanced scorecard.
Management accounting can be considered as the result the development of accountancy that emerged in the 15th century because of the industry development. The necessity to calculate revenue and the price for the goods consequently led to the creation of accountancy (Wiersma, 2009). Although accountancy was capable in dealing with the information previously, it should be stressed that with the development of the digital era and information flood, the managers realized that it is essential to create a new system in order for the business to be modern and enter a new level of functioning.Get your
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The problem of new system creation and implementation of it into the business sphere is evident. The implementation of the management accounting is a difficult task, which demands the reorganization of the entire company. Management accounting is an integral part of ruling the company that contributes to optimization of the quality and effectiveness of the managerial decisions.
As for the management accounting skills, is should be noted that five fundamental skills are essential for development, namely:
- Commercial awareness. It means that is essential to understand how the business works in order to reach success. In addition, the knowledge regarding the role of the external environment of the company is vital;
- Technical skills;
- Communication skills and ability to collaborate;
- Skills of critical thinking;
- Organizational skills (Wiersma, 2009).
The definition of the term should be taken into consideration. Managerial accounting is considered to be the process of “identifying, measuring, analyzing, interpreting, and communicating information for the pursuit of an organization’s goals” (Marquez, 2013, p. 6). Being a socio-economical phenomenon, the managerial accounting is experiencing a constant development. The functions are expanding; the problems that should be dealt by the organization expand as well as the tasks and approaches that are used by the managerial accounting.
Nowadays, the majority of the managers are actively using traditional strategic management. Strategic management is believed to be the process that involves the definition of targets, the strategic analysis (including the evaluation of internal and external environment of the company), strategy development, implementation of the strategy and strategic control. Moreover, according to the financial analyst John Law, the ability of the organization to effectively implement its strategy is a key intangible asset that determines the value of the company.
However, the enterprises usually face the challenges while implementing and realizing the strategies, namely the gap between the strategic goals and regular, everyday actions of the employees as well as the gap between the vision of the top management and the vision of the ordinary workers. The question arises, if the strategy of the company is formed and approved for the action, why is there a gap? Reasons for this are as follows:
- By the virtue of the fact that the leadership in most of the cases does not share the strategy with all the levels of the company, most employees do not understand the strategy adopted in the organization, and as a result, they do not understand how their actions affect the achievement of strategic objectives.
- Most of the compensation is tied to the achievement of short-term results, however, not long-term strategic initiatives. Thus, most of the managers (and staff) are encouraged to achieve certain current financial regulations.
- In the vast majority of the organizations, the processes of budgeting and strategic planning do not function as the united organism. But human and financial resources are not tied to long-term strategy, achievement of the strategic goals of the enterprise, and the short-term objectives – it is considered the main drawback of this method (Modell, 2009).
In the strategic management, control is a tool that should reduce the gap between strategic goals and daily actions of employees. However, most of the operational and management control in the organizations is built around the financial indicators and goals that have little value to the achievement of its long-term strategic goals. Financial indicators focus on the ongoing effects, and the decisions are not linking short-term actions to a strategy in the long run.
The system that can overcome stated above problems is considered to be balanced scorecard. It is a system of strategic management of the firm which entails the precise assessment of its effectiveness based on a set of particular indicators. They, in turn, are selected in a way that takes into account all crucial aspects of its activities closely related to strategy, for instance finance, production, marketing, etc.We will write a custom
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In applying the balanced scorecard strategy four fundamental aspects are usually taken into consideration, namely the following ones:
- Financial aspect;
- Aspect of customer relations;
- Aspects of internal business processes;
- Aspects of learning and development.
Every aspect should include the needed information, namely the following one:
- Objectives, which were chosen by the organization to accomplish;
- Indicators that help to measure the success of the accomplishment of the objectives;
- Interpretation of the indicators that show the achievement or failure of the set objectives;
- Strategic initiatives. The initiatives are the set of measures that are directed to elimination of the gap between actual values of the indicators and their target values. Each strategic initiative should be provided with sufficient resources, namely human, financial, and technical. Strategic initiatives should be defined for each indicator and contribute to the achievement of the target value. According to the developers of the balanced scorecard, the initiatives contribute to the results, and the implementation of the strategy is possible due to the realization of the initiatives (Seal & Ye, 2014).
With the consideration of the information presented above, the conclusion can be drawn that the balanced scorecard helps organizations to solve two key problems, namely to effectively evaluate the performance of the organization and implement the strategy.
The balanced scorecard system evolved because of the desire of the top management of the Western companies to improve the system of management taking into consideration the interests of different groups, namely shareholders, customers, partners, and lenders. In order to create such multi-vector policy of the business management, the complex system of strategic goals, objectives, and key indicators was needed. David Norton and Robert Kaplan contributed to solving the problem and created the balanced scored system (Seal & Ye, 2014).
In 1990, they researched twelve companies that aimed to develop personal measurement systems that included non-financial indicators in order to expand the informational database for taking managerial decisions (Seal & Ye, 2014). The researchers realized that financial elements cannot provide the top managers with a full picture, and thus, the decision was made to expand the informational database. The created system took into account four primary factors, namely finance, internal business processes, education, and growth.
The system of the balanced scorecard is successfully used not only in the private sector but in public as well. The following enterprises implemented the balanced scorecard, namely Wells Fargo, Philips Electronics, UPS, Verizon, and other (Costantin, 2012).
Since the balanced scorecard is not based on financial indicators as the only indicator of the company, it provides an opportunity to create a link between organization’s strategic long-run aims with short-term business activities by means of four processes. In order to get deeper involved in the issue and understand the beneficial advantages of the balanced scorecard system in the relation to the management accounting and improvement of the business, four processes should be examined and explained.Not sure if you can write
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The first process is the clarification of vision and transformation of this vision into a strategy. It helps managers to reach agreement on issues regarding the organization’s vision and strategies, by transforming complex and often vague statements (for example, the desire to become the “best in the market”, “best supplier” and so on) into operational terms, which could determine and direct the activities of the performers at a lower level (Costantin, 2012). For lower-level performers, such statements should be expressed in the form of a system of goals and indicators, approved by senior management, which describes the long-term success factors.
The second process involves connection and communication. This process allows the applying of the strategy to all levels of the organization (from highest to lowest) by managers and linking it with the goals of departments and personal objectives of the employees. Traditionally, the departments are assessed according to their financial results and individual initiatives related to short-term financial goals (Hirsch, Seubert, & Sohn, 2015).
The balanced scorecard provides managers with the opportunity to ensure that all levels of the firm have adopted the strategic approach. The balanced scorecard is mobilizing all the staff members in order to take actions towards the achievement of the corporation’s objectives. Focus on cause and effect in the preparation of balanced scorecard ensures that each employee understands how his or her work affects colleagues and, ultimately, the entire company.
Communication is performed through the consistent involvement of all departments and employees in the process of developing strategies and balanced scorecard, making an accent on the evaluation its achievements. It is of paramount importance to stress that mid-level managers are involved in the process of developing strategies for learning and growth, facilitating internal business issues, developing requirements for the technologies used in the working process, as well as identifying key elements and unleashing potentials of the employees. In addition, they delegate infrastructure development model at lower levels of the hierarchy. Certain measurements for the evaluation of the performance of departments are created in order to measure the effectiveness and productivity not only of the department but of the individual employee as well. It should be noted the system of motivation and support is one of the fundamental factors that unites the organization and helps every employee to function as one organism according to goals and objectives of the company.
The third process is focused on planning and goal setting (Hirsch, Seubert, & Sohn, 2015). This process allows companies to develop and improve business and financial plans. Nowadays, almost every company aims to perform organizational changes and programs that are directed to the improvement of the efficiency in general or making specific processes more productive.
It is rather difficult for the managers to reconcile these disparate initiatives to achieve the strategic goals of the company. This situation consequently leads to frequent disappointment in the results of these programs. However, when managers use the ambitious goals that are included in the balanced scorecard indicators as the basis for resource allocation and priority positioning, they can select and coordinate the initiatives that lead the company to the achievement of its strategic objectives.
The fourth process consists of feedback and learning in a firm. It makes an opportunity for strategic learning come to fruition. Control and feedback system that usually exists in enterprises is focused on the company functioning, the departments of the organization, or individual employees, and the process corresponds to the financial targets.
With the balanced scorecard serving as a core of the management system, the company can monitor its short-term outcomes from three additional perspectives, namely, the relationship with customers, learning and development, internal business processes,. In addition, it brings a possibility to assess the current strategy considering recent business activities.
Balanced Scorecards in Relation to the Management Accounting
Two the most critical roles of management accounting are determining the condition of the organization based on certain indicators and making decisions concerning the way the work of the company should be organized in order to improve effectiveness and optimize the working process. The chosen topic for this paper, namely the balanced scorecard, is related to the management accounting in a significant way.
The balanced scorecard solves numerous issues of the management accounting and can be considered as a source of the information regarding internal processes in the organization. Moreover, it describes how the external environment influences the performance of the company. Modern enterprises should deal with the information flood and catch up with the development of the society, and thus, balanced scorecard offers new visions in management and approaches that help the managers to control the company better and take needed decisions.
There are a number of problems in management accounting that were stated above. My recommendations regarding the improvement of the situation are the implementation of new, modern, and innovative systems into the working process. The society develops every day, and it is impossible for the business to follow old models. The implementation of the balanced scorecard and business intelligence will help in dealing with the information flood, and will contribute to finding new ways of the business development. In addition, these methods will be beneficial for estimating effectiveness and productivity.
In conclusion, it should be pointed out that the balanced scorecard framework helps to identify a lot of processes that are crucial for the management, namely the following ones goal-setting of the departments and individual employees, business planning, capital allocation, strategic initiatives, feedback, and training. Stated above elements are often uncoordinated and focused on the achievement of the short-term operational objectives. Using the balanced scorecard in the strategic management the company will increase the efficiency of strategic management at all stages, precisely at strategic analysis, strategy development, implementation of the strategies, and at the implementation of strategic control.
Costantin, R. (2012). Management accounting in decision-making. Valahian Journal of Economic Studies, 3(2), 7-20.
Hirsch, B., Seubert, A., & Sohn, M. (2015). Visualisation of data in management accounting reports. Journal of Applied Accounting Research, 16(2), 221-239.
Marquez, L. (2013). The impact of management accounting systems on international markets: Theory and evidence using the balanced scorecard approach. Journal of Applied Management Accounting Research, 11(2), 5-27.
Modell, S. (2009). Bundling management control innovations. Accounting, Auditing & Accountability Journal, 22(1), 59-90.
Seal, W., & Ye, L. (2014). The balanced scorecard and the construction of a management control discourse. Journal of Accounting & Organizational Change, 10(4), 466-485.
Wiersma, E. (2009). For which purposes do managers use Balanced Scorecards? Management Accounting Research, 20(4), 239-251.