BSC and the systems of management (Part 3)
BSC and the Budgeting system
Balanced Scorecard system might be cooperated with the subsystem of budgeting on tree different levels. First of all BCS could set up the basic parameters for the budgeting model of the company. In this case the Scorecard’s indicators are going to become a starting point, the basis for the determination of the budgeting model for the whole company.
Also the system of budgeting could cooperate with the Balanced Scorecard by importing the exact values of its indicators’ performance to the BSC as target values for it. The practical examples show the high risk of usage of financial indicator’s as a key targets for the whole company’s Scorecard if those indicators were not tested on financial and economic model. Sometimes it is possible for the financial organizations to artificially increase values of profitableness by “inflating” the volume of assets. But the risk grows this way even more. The process of monitoring of the financial indicators on the financial and economic model (which is one of the common functions of the budgeting subsystem of the company) allows management to perform a “sensitivity analysis” (the test aimed to define what exact factors will affect achievement of one or another indicator).
The third level of systems’ cooperation is referring to the distribution of financial resources of the company between the different strategic goals. In order to link the budgeting subsystem with Balanced
Scorecard it needs every budgetary demand or the item in the budget should be linked with one of the strategic targets. According to practical examples is usually performed the following way: in any budgetary demand (except for the “Costs” item) the strategic target, which is linked with it, needs to be noticed along with the indicator that is going to grow when it will be performed and the result that is going to be gained. In this case, the estimation of expediency of the budgetary demand will be guided not by some abstract importance or personal sensations of the committee of supply participants, but it will be based on quite real indicators. And the main benefit of such cooperation of systems is the possibility of management to estimate the amount of financial resources necessary to spend for achievement of the given strategic target. Certainly, the amount of money will still be approximate but accuracy of the forecast will be increased manyfold. It is also important to separate the investment outlay (long time investments which will not gain profitable returns immediately) from the operative expenses (those which are referring to a regular operations of the company) for the system to work successfully.
A practical example
The absence of any stable linking between the subsystem of budgeting and the strategic management (or BSC if it is implemented) causes the errors in setting up priorities while financing different activities of the company. Mostly such activities as “development of employee’s skills” or “customer satisfaction” do not receive enough money to be performed well. The example of one of the manufacturing companies where BSC was implemented showed that before the new system began to work the activity of learning was almost forgotten by the budgeting system. Certainly the all the operational processes were done through inertia which caused a huge decrease of the performance. The situation with the company could be described as the “Cash Cow” position in the Boston Consulting Group matrix (a well known strategic management concept): the company with high market share in a slow-growing industry. That is why implementers needed to find the way to continue the growth. While setting up the BSC system, implementers reached their goal: after the review of the whole company’s strategy the top management started to pay attention to the learning as well as to the other non material activities which fixed the situation significantly.
Summary
The system of budgeting as an important part of the company needs to understand what strategic purpose it works for. The only proper way of distribution of financial resources is that every dollar from the company’s budget needs to be spent only to reach one or another strategic goal. Also all the four perspectives of Balanced Scorecard system help not to forget any activity which could be considered useless by short sighted concept. BSC needs to show to every department and employee their role and importance for the company’s strategy. In this case budgeting subsystem could be considered as an important tool that is performing the linking between operational and strategic subsystems by the only of the clearest way to every employee – giving money.
The map of the article
- Part 1: This part is the intro, the first part of the whole article. It also contains the pyramid of management systems;
- Part 2: BSC and the Strategic Management system;
- Part 3: BSC and the Budgeting system;
- Part 4: BSC and the motivation system;
- Part 5: Balanced Scorecard and the subsystem of Organization Design. This part also contains the conclusion and summary for the whole article.
