The ultimate goal of any business owner is to build a successful and profitable business. That is, after all, why many of us decided to get into business in the first place, right?
An effective management tool to achieve our goal of optimal profitability and building a successful business is the Balanced Scorecard—a strategic framework for optimising a business’s performance.
Rather than looking at just the financial performance of a business, the BSC (Balanced Scorecard) suggests looking at a company from four different perspectives to create achievable goals, performance indicators (KPIs), targets, and action plans based on those perspectives.
In this article, we’ll discuss two important aspects of the Balanced Scorecard (BSC): customers and finances. Otherwise known as the lagging perspectives of the BSC.
The BSC has both leading and lagging perspectives. The leading perspectives serve as a foundation for the lagging perspectives. Think of it as a pyramid, where the leading perspectives are at the bottom.
The leading perspectives are within the business’s control and can be proactively optimised to set the tone for the higher levels. The lagging perspectives take longer to display the effects of the optimised foundation but are often the most scrutinized aspects of the business.
For example, to achieve customer satisfaction and improve financial performance, businesses should focus on optimising their internal processes and upskilling or training their people. When these internal aspects function at their best, customers are more likely to be satisfied with the company’s products or services. This will then inevitably lead to better financial outcomes.
To ensure a profitable business, business owners should understand how leading indicators can influence the lagging perspectives of the BSC. By leveraging these indicators effectively, they can steer their business in the right direction.
Once the foundation is established with good people and processes, we can focus on improving the customers perspective by measuring KPIs and implementing improvements back into the foundation.
The customer perspective provides valuable insights into a business’s ability to attract and retain customers and their satisfaction levels.
Are customers’ expectations being met?
Are they coming back for more?
Would they recommend your business to friends?
Key performance measures in this domain typically include:
- Customer retention rates
- Customer satisfaction scores
- Customer complaints
These can be discovered by how long clients stay with your business if they convert to other services or sales, or through satisfaction surveys.
To optimise the customer-related perspective, business owners can implement specific strategies such as:
a. Innovation and Product Development:
By investing in continuous product innovation and development, businesses can stay ahead of the curve and meet evolving customer demands. For instance, a small fashion retailer can introduce new designs to attract a broader customer base and retain existing customers.
Furthermore, they could place strategic objectives on each new design, such as selling a certain amount.
b. Customer Relationship Management (CRM):
Implementing a robust CRM system enables businesses to track customer interactions, personalise communication, and identify potential upselling or cross-selling opportunities. For instance, a local restaurant can utilise a CRM system to offer discounts to frequent customers, enhancing customer loyalty.
This could be implemented from the internal business process perspective and might require staff training.
c. Service Excellence:
Delivering exceptional customer service can significantly impact customer satisfaction and retention rates. A hotel, for example, can offer free upgrades or amenities to enhance the guest experience and promote positive reviews and referrals. Businesses can foster strong customer relationships by training staff in effective communication and providing prompt and personalised assistance.
Financial indicators in the BSC encompass revenue growth, profit margins, return on investment (ROI), and overall financial health. These indicators reflect a business’s ability to generate sustainable profits and manage its resources effectively.
Finances can be the most highlighted element in business. However, as previously stated, true success from the finance perspective relies on optimising all previous perspectives of the BSC.
To optimise financial performance, business owners can leverage leading indicators such as:
a. Sales and Marketing Strategies:
Implementing effective sales and marketing strategies helps drive revenue growth. A small e-commerce business can use various methods to grow its customer base and boost sales. These include targeted advertising, social media campaigns, and SEO.
b. Cost Management:
Maintaining tight control over operational costs and optimising resource allocation can positively impact profit margins. Business owners can analyse their expenses, negotiate better deals with suppliers, and explore automation opportunities to streamline operations and reduce costs.
Streamlining processes and increasing employee effectiveness will result in more time that could be utilised for quality improvement. The extra time can also increase revenue that could be reinvested into the business’s longevity.
c. Financial Forecasting and Planning:
Developing accurate financial forecasts and setting clear financial goals provide a roadmap for success. A consulting firm can use financial forecasting to determine the optimal pricing for its services. By regularly reviewing and adjusting financial plans based on performance, businesses can proactively identify potential shortfalls and make informed decisions.
Boosting Customers and Finances for Optimal Business Performance
The BSC allows business owners to evaluate the performance of their business in critical areas such as customers and finances. Businesses can proactively influence their outcomes and optimise overall performance by complementing these lagging indicators with leading indicators.
However, it’s important to remember that these strategies require continuous monitoring and adaptation to changing market dynamics. By regularly reviewing and refining leading and lagging indicators within the BSC, businesses can drive sustainable growth for long-term success.
If you want to optimise your business with the Balanced Scorecard, contact one of our business advisory specialists today. We can tailor the framework for your business and provide a roadmap to success.