By Curtis D. Frye

Every year, companies across the nation undergo heated budget discussions that often turn into a form of intramural trench warfare. Managers argue and plead with executives to allocate as much money as they can to their departments. Months of haggling drains corporate resources and brings managerial productivity to a standstill.

What's worse is that the final budget is usually based solely on past financial performance, such as total revenue, profit, and return on investment. As a result, the budget doesn't always help managers implement the organization's stated goals in areas not governed by finances, such as customer satisfaction, process efficiency, innovation, and employee retention.

One way to improve the budgeting process is to use the balanced scorecard. This performance management method was developed in the 1990s by Harvard professor Robert Kaplan and management consultant David Norton and popularized in their book The Balanced Scorecard (Harvard Business School Press, 1996). The balanced scorecard approach identifies and measures key performance indicators that align not only with a company's financial performance but also with all of the company's goals. Developing a balanced scorecard based on this broad performance evaluation can help your organization's budget development process.

The budget development process

The budget development process can be broken down into four steps:

• Information gathering   Before you can assign money, you need to collect past performance results for your company, including operational expenditures, overhead costs, and revenue.
• Planning   You need to determine what level of detail is required for the budgeting process. For example, is it acceptable to assign a single amount to research and development, or should planners break out the dollar amount given to each project?
• Preparation   By far the most time-consuming step, preparation encompasses the process of negotiating among managers, as well as developing financial projections and writing budgets.
• Control   Throughout the fiscal year, managers determine whether capital expenditures are in line with the budget. With constant monitoring, managers can fix the problem if expenditures exceed the budget.

The disconnect between budget and strategy

Once an organization has a budget in hand, it can implement the corporate strategy, right? That's the best-case scenario.

By some estimates, however, more than 60% of organizations do not tie their budget to their corporate strategy. That means that nearly two-thirds of organizations don't reward their employees and managers for implementing practices that the company claims are important.

Think about it: Wouldn't it be frustrating if your bonus was tied to profits, but your corporate vision called for you to maximize customer satisfaction? You'd probably receive a disappointing bonus if you spent $1 million to attain 100% customer satisfaction, but you gained only $100,000 in additional sales because of that effort.

Balanced scorecards can't overcome executive reluctance to back up visionary talk with action. But they can act as a springboard for organizations with strong leaders to implement tough changes.

The balanced scorecard method

Balanced scorecards measure company performance in four broad areas, known as perspectives. In addition to financial indicators, these perspectives include other factors that drive a company's strategy. Perspectives help managers across an organization translate strategy into tangible objectives and measurements.

The four perspectives of a balanced scorecard, along with examples of performance measurements, are summarized in the following table.

No single balanced scorecard works for every organization. Depending on the industry, some companies may need to use one or more additional perspectives to create a competitive advantage.

For-profit corporations might use a balanced scorecard that's different from the one used by not-for-profit organizations. For-profit businesses exist to maximize shareholder value, while not-for-profit organizations must manage their resources wisely to deliver value to their constituents. Let's say that customer satisfaction in a for-profit company is at a record high, but the company is spending all of its potential profits to reach this goal. To align with the company's need to maximize shareholder value, the company needs to cut costs, even if it means that customer satisfaction declines.

Benefits of balanced scorecards in budgeting

Balanced scorecards support and enhance the four steps used in a traditional budgeting process:

• Information gathering   Balanced scorecards guide the collection and summarization of all data required for a robust budget. Scorecards help focus information gathering and pinpoint the information that budgeters must know in order to make decisions about past performance.
• Planning   Balanced scorecards expose internal and external challenges, such as increased competition, slowed production, or employee complaints. The scorecards encourage budget planners to reconsider existing measures or to propose new measures that will do a better job of meeting challenges for the next year.
• Preparation   Organizations can require managers to tie budget requests to specific measures on the balanced scorecard. For example, let's say that a company's goal is to derive 15% of its revenue from the sales of products introduced during the fiscal year. The product division head could justify a request for funds to develop products targeted for release two and three years in the future.
• Control   Balanced scorecards offer a uniform way for departments across an organization to meet their goals in the finance, customer, internal business process, and learning and growth perspectives. As a result, managers can use a scorecard to monitor company-wide progress toward achieving corporate goals. If necessary, they can change how the organization goes about meeting objectives.

Incorporating the balanced scorecard methodology into your budgeting process can lessen the pain of this yearly ordeal. Balanced scorecards help managers align their company's financial goals with corporate strategy. This alignment enables your managers to develop budgets that empower their workers to meet those goals.

About the author   Curtis D. Frye is an industry analyst and author of Microsoft Office Excel 2003 Step by Step and several other books from Microsoft Learning.